FIDLEG SOLUTION - News 5/2019

Client segmentation according to FinSA

Similar to MiFID II, art. 4 para. 1 of the new Financial Services Act (FinSA) stipulates that all financial service providers under FinSA, including asset managers, have to classify their clients, for whom they provide financial services, such as investment advice or asset management, as follows:

  1. Private clients
  2. Professional clients
  3. Institutional clients (subgroup of professional clients)

The table below provides an overview of the client categorization under FinSA.

WHY IS THE CLIENT SEGMENTATION IMPORTANT?

Client segmentation is of central importance for the scope of information duties as well as documentation and accountability obligations according to FinSA. The highest level of protection should apply to private clients and the lowest for institutional clients. With regards to the appropriateness and suitability tests, FinSA assumes that professional and institutional clients should have the necessary knowledge and experience and that the risks associated with financial services are financially acceptable. The information requirements have been reduced accordingly.

REDUCED RULES OF CONDUCT FOR PROFESSIONAL CLIENTS

For clients who qualify as professional clients, a lower level of protection applies, especially in the following areas:

  • Reduced rules of conduct pursuant to art. 7 et seq. FinSA and art. 6 et seq. FinSO;
  • Exemption from the obligation to register certain foreign client advisors subject to prudential supervision in the register of advisors (art. 28 para. 2 FinSA, art. 31 FinSO);
  • No obligation to publish a prospectus when offering financial instruments to the public (art. 36 FinSA);
  • No basic information sheet when offering financial instruments (art. 8 para. 3, art. 58 FinSA).

Professional clients may also expressly waive the financial service provider's obligation to comply with the following obligations (art. 20 para. 2 FinSA):

  • Duty to provide information (art. 8 and 9 FinSA, art. 6 to 15 FinSO): The asset manager informs his client about himself and his organisation as well as about the risks associated with asset management, any economic ties with third parties (which are particularly important for retrocessions) and the market offer taken into account.
  • Documentation and accountability (art. 15 and 16 FinSA, art. 18 and 19 FinSO): The agreed financial service, the information obtained about the client and any recommendations (including the recommendation not to do anything) must be documented in writing. A copy of this documentation needs to be disclosed to the client upon request as well as the account of the portfolio managed.

However, the following rules of conduct must also be observed for professional clients – with the exception of those professional clients, which qualify as institutional clients:

  • Suitability and appropriateness test (art. 10 to 14 FinSA, art. 16 and 17 FinSO): Asset managers have to conduct a suitability test for their clients. This means that the asset manager must inquire about the client's financial circumstances, investment objectives, knowledge and experience. However, this does not apply to each individual transaction, but to asset management as such. If an asset manager or another financial service provider only provides investment advice for individual transactions according to FiNSA (without taking the entire client portfolio into account), it shall be sufficient for the investment advisor to inquire about the knowledge and experience of its clients and check whether these are appropriate for the client before recommending financial instruments (so-called appropriateness check). For professional clients, the financial services provider may assume that they have the necessary knowledge and experience and that the investment risks are acceptable.
  • Transparency and diligence in client orders (art. 17 to 19 FinSA, art. 20 and 21 FinSO): Asset managers must always act in the best interest of the client and must comply with the principles of good faith, equal treatment and best execution of client orders, etc. The FinSA specifies this, but also makes it clear, that it is not always in the best interest to have the cheapest option. In addition to the price, time and quality must also be taken into account.
NO SPECIFIC FINSA RULES OF CONDUCT FOR INSTITUTIONAL CLIENTS

The FinSA rules of conduct (art. 7 to 19 FinSA) generally do not apply to transactions with institutional clients (art. 20 para. 1 FinSA).

OPTING-OUT AND OPTING-IN

Depending on the client category, the client can declare that it does not wish to remain in its assigned category, but that it wishes to increase customer protection (so-called opting-in) or that it wishes to reduce client protection (so-called opting-out). These declarations must be in writing or in another form verifiable by text (art. 5 para. 8 FinSA).

The financial service provider must inform its client, who is not considered as a private client, about the possibility of opting in before providing financial services (art. 5 para. 7 FinSA).

Pension institutions and institutions which, according to their purpose, serve the purpose of occupational benefits with professional treasury (art. 4 para. 3 lit. f FinSA) as well as companies with professional treasury (art. 4 para. 3 lit. g FinSA) can declare that they wish to be regarded as institutional clients (opting-out) (art. 5 para. 3 FinSA).

Swiss and foreign collective investment schemes and their management companies that are not already considered as institutional clients may declare that they wish to be categorized as institutional clients (opting-out) (art. 5 para. 4 FinSA).

Professional clients who are not institutional clients may declare that they wish to be treated as private clients (opting-in) (art. 5 para. 5 FinSA).

Institutional clients may declare that they only wish to be treated as professional clients (opting-in) (art. 5 para. 6 FinSA).

An overview of the options for opting out or opting in can be found in the table below.

WEALTHY PRIVATE INDIVIDUALS IN PARTICULAR

Art. 5 para. 1 and 2 FinSA provides the following with regards to wealthy private clients:

1 Wealthy private clients and private investment structures established for them may declare that they wish to be regarded as professional clients (opting out).

2 For the purposes of paragraph 1, a person shall be deemed to be wealthy if he or she credibly declares that he or she is wealthy:

  1. has, on the basis of personal training and professional experience or comparable experience in the financial sector, the knowledge necessary to understand the risks of the investments and has assets of at least CHF 500,000; or
  2. has assets of at least CHF 2 million.

Art. 5 FinSO specifies which assets are eligible for the above thresholds.

TRANSITION PERIOD

The obligation of client segmentation must be implemented and fulfilled within one year of the FinSA and FinSO coming into force, i.e. probably by 31 December 2020 (art. 103 FinSO). This also includes the obligation to comply with the rules of conduct pursuant to art. 7 to 16 FinSA (art. 105 FinSO).

OVERVIEW OF THE CLIENT CATEGORIES

The following table shall provide an overview of the clients segments and the various opting-in and opting-out options. The following applies

  • X denotes the statutory division into a client segment.
  • Opting-in means the legally provided possibility of increasing client protection.
  • Opting-out means the legally provided possibility of the reduction of the client protection
 Private clientProf. clientInst. client
Bank according to banking law   Opting-in X
Asset managers according to FinIA   Opting-in X
Trustee acoording to FinIA   Opting-in X
Manager of collective assets according to FinIA   Opting-in X
Fund management according to FinIA   Opting-in X
Securities house according to FinIA   Opting-in X
SICAV according to CISA   Opting-in X
Limited partnership for collective investment schemes according to CISA   Opting-in X
SICAF according to CISA   Opting-in X
Representatives of foreign collective investment schemes pursuant to the CISA   Opting-in X
Insurance according to Act on the Supervision of Insurance Undertakings   Opting-in X
Foreigners under prudential supervision   Opting-in X
Central bank   Opting-in X
National / supranational public corporation with prof. treasury   Opting-in X
Cantonal / communal public corporation with prof. treasury Opting-in X Opting-out
Pension fund with prof. treasury Opting-in X Opting-out
Company with prof. treasury Opting-in X Opting-out
Large company pursuant to art. 4 para. 5 FinSA Opting-in X Opting-out
Private investment structure for wealthy private clients with professional treasury management Opting-in X Opting-out
Wealthy private clients X Opting-out  
Private investment structure for wealthy private clients without prof. treasury departments X Opting-out  
Swiss collective investment schemes that are not considered institutional clients themselves or through their fund management company   X Opting-out
Foreign collective investment schemes which are not themselves or through their management company regarded as institutional clients   X Opting-out
All others X    

 

THERE IS MORE TO COME…

The next issue of FIDLEG SOLUTION – News will deal with the suitability test according to FinSA, which under FinSA will be mandatory for every asset manager.

Your FIDLEG SOLUTION Team
www.fidlegsolution.ch


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