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FIDLEG SOLUTION - News 02/2020

When do I have to do a suitability test and what does exactly need to be assessed?

The new Financial Services Act (FinSA) and the implementing Financial Services Ordinance (FinSO), which entered into force on 1 January 2020, contain several new duties of conduct for those providing financial services. During the legislative process, of all these new duties, the duty to run a suitability test and the duty to run an appropriateness test caught the most attention. For this reason, our FIDLEG SOLUTION - News 10/2019 dealt with the appropriateness test. This FIDLEG SOLUTION News 02/2020 explains in detail, when a suitability test needs to be done, what exactly needs to be assessed and what the consequences are if this duty is violated.

THE STATUTORY BASIS OF THE SUITABILITY TEST

The duties of conduct to be observed when providing financial services are set out in art. 7 - 20 FinSA (here) and are specified in art. 6 - 22 of the draft FinSO (here).

For its part, the suitability test is based on art. 11, 12 – 14 FinSA (here) and art. 16 and 17 FinSO (here).

Of the legislative materials, the pp. 8920, 8921, 8932 and above all 8956 – 8959 of the message of the Swiss Federal Council are relevant (here), also for the appropriateness test. It should be noted here, however, that the explanations on duties of conduct in the final version of the FinSA differ substantially from those in the draft FinSA. The message of the Swiss Federal Council, thus, only serve partially for the interpretation of the final legislative text.

As we all know, the suitability test is by no means a helvetic invention. Like many other aspects of FinSA, it is an adoption from MiFID II (Directive 2014/65/EU), where it is regulated in whereas-clause 71 and in art. 25 (here).

As the financial services set out in art. 3 letter c FinSA principally qualify as agency agreements in the sense of art. 394 ss. Swiss Code of Obligations (CO), the duties of loyalty of the financial services provider also find their roots in the duties of loyalty of any agent (art. 398 CO). Agency law continues to be applicable next to FinSA even in the cases where the duties of FinSA fall away due to art. 20 FinSA.

WHEN IS A SUITABILITY TEST TO BE PERFORMED?

Pursuant to art. 12 FinSA, the suitability test is to be carried out in two instances:

E contrario, the suitability test is not to be carried out in case of all other financial services falling under FinSA, i.e.

This does not mean, however, that in such cases there is no need to carry out any duty of conduct at all. Rather, in these cases, the financial services provider must also act in the interest of the client (art. 398 CO). Accordingly, he must clarify these interests and align his actions with them in order to ensure that the services are appropriate.

Likewise, no suitability test is required if the counterparty is an institutional client pursuant to art. 4 para. 4 FinSA (art. 20 para. 1 FinSA). Professional clients, however, cannot waive the suitability test (art. 20 para. 2 FinSA e contrario). For information on institutional and professional clients, see FIDLEG SOLUTION News 5/2019 here.

WHAT EXACTLY IS TO BE ASSESSED UNDER THE SUITABILITY TEST?

In accordance with art. 12 FinSA, the financial services provider must verify the following four points in the course of the suitability test:

The financial situation and investment objectives are generic points that are not directly related to the financial service offered.

The information on the financial situation has to include the income, the assets including real estate ownership and the financial obligations. This requires the financial services provider to be familiar with the customer's family and professional situation, age and liquidity requirements.

The information on the investment objectives shall include the time horizon of the investment, risk awareness, risk capacity and the willingness to take risk as well as the purpose of the investment and any investment restrictions.

The client's knowledge and experience relate to the financial service offered. The financial service offered is portfolio management or investment advice taking into account the client's portfolio (see above). Knowledge and experience are, therefore, not to be assessed in relation to each individual financial instrument acquired in the context of portfolio management.

Based on the findings of these verifications, the financial service provider must ensure that the financial service offered as a whole is suitable for the client. This is probably the case if the risks taken with the financial service can and want to be borne by the client.

If it turns out that a specific financial services is not suitable for the client, this does not mean that the financial service provide cannot offer this service to the client at all. The financial services provider has the opportunity to inform the client about the risks and opportunities. The advice provided can, therefore, make up for the lack of knowledge and experience. However, the financial services provider is obliged to provide evidence of this, i.e. he or she must be able to prove that it has made up for this lack of knowledge and experience.

It is also possible that the financial services provider cannot make up for the lack of knowledge and experience, but the client still wants a specific financial service. In this case, the financial service provider has no other option than to abstain from offering the service. This is e.g. the case of the client does not have the financial situation for the services offered.

It is not uncommon for the client to be additionally represented, e.g. by a custodian, a lawyer or another advisor. In this case, the knowledge and experience of the representing person may also be taken into account and can be attributed to the client (art. 16 para. 1 draft FinSO).

On the basis of this information, the financial services provider draws up a client profile on which an investment strategy is based.

As stated above, unlike institutional clients, professional clients cannot waive the suitability test. Nevertheless, art. 13 para. FinSA provides for a massive simplification of the suitability test for professional clients: Thus, the financial service provider can assume that these clients have the necessary knowledge and experience and that the risks associated with the desired financial service are financially acceptable. Thus, out of the four points mentioned above, only the investment objective needs to be verified.

WHEN DOES THE SUITABILITY TEST NEED TO BE DONE

The suitability test must be carried out before providing the financial service. This is because, on the basis of the findings of the suitability test, the financial service provider can only determine whether the desired financial service can be provided or whether it must be changed in such a way that it becomes suitable.

The suitability test must be repeated regularly. The financial situation may change, as may the investment objectives. The latter, for example, may change with increasing age or changes in family circumstances. However, the client's knowledge and experience do not tend to change. If the repeated suitability test shows that the client's situation has changed, the financial service offered must be adjusted accordingly.

WHAT IS THE RISK IF THE SUITABILITY TEST IS VIOLATED?

The question arises as to what threatens to result from a violation of the suitability test, i.e. if no suitability test is made or if the suitability test is not made correctly.

On the one hand, the financial services provider has violated the FinSA, i.e. regulatory law, and there is a risk of enforcement proceedings and, if necessary, that the person responsible does not meet the fit and proper test any more.

In addition, art. 89 FinSA contains a penal provision that sanctions precisely this conduct: According to art. 89 letter b FinSA, a fine of up to CHF 100,000 will be imposed if the obligation to conduct a suitability test is intentionally violated in a serious manner.

Finally, the suitability test is "only" a regulatory duty (art. 7 para. 1 FinsA) and not a civil law duty, which means that in the event of a breach of the duty to run a suitability test, the financial services provider is not directly liable for damages. Nevertheless, it must be assumed that the financial service provider, in the event of such a breach, also breaches its contractual obligations arising from the underlying contractual agency relationship and, thus, becomes liable to pay damages to the client.

THERE IS MORE TO COME…

The next issue of FIDLEG SOLUTION will deal with the transitional provisions according to FinSA.

Your FIDLEG SOLUTION Team
www.fidlegsolution.ch