FinSA: Fundamental changes for the cross-border provision of financial services

The financial services industry will see some new regulations and requirements in 2020. For the first time, investment advisors will have to be entered in a client advisor register. They will also be required to affiliate themselves with an ombudsman. These and other changes are coming with the Swiss Financial Services Act.

Scope of application of the Swiss Financial Services Act (FinSA)

The Financial Services Act (FinSA) will likely enter into force on 1 January 2020. It intends to comprehensively regulate the provision of financial services in Switzerland or to Swiss clients for the first time. Financial services are the following activities provided to clients (Art. 3 Abs. 1 lit. c FinSA.):

• Acquisition and sale of all financial instruments, e.g. of participations and obligations, structured products, funds, derivatives, bonds, and structured deposits (Art. 3 Abs. 1 lit. a FinSA.).This includes every activity that is specifically targeting the acquisition and sale of financial instruments, such as but not limited to, the distribution of financial instruments.
• Reception and transmission of orders related to financial instruments,
• Management of financial instruments (asset management),
• Provision of personal recommendations related to transactions in financial instruments (investment advice),
• Granting of credit for the execution of transactions in financial instruments.

Financial service providers are persons who provide financial services in Switzerland or to the benefit of clients in Switzerland (Art. 3 Abs. 1 lit. d FinSA.). Financial service providers are now also explicitly investment advisors related to financial instruments. They are for the first time comprehensively regulated under Swiss law. All financial services providers and in part also the client relationship managers, meaning the natural persons that provide in the name of the financial service provider or independently financial services, (Art. 3 Abs. 1 lit. e FinSA.) are subject to comprehensive obligations. These obligations are in particular:

• Obligation to segment customers (Art. 4 FinSA)
• Behavioural obligations (Art. 7 et seq. FinSA)
• Appropriateness and suitability test related to investment advice and asset management (Art. 10 et seq. FinSA)
• Obligation to document and render of account (Art. 15 et seq. FinSA)
• Transparency obligations and duty of care (Art. 17 et seq. FinSA)
• Creation of prospectus for the public placement of securities (Art. 35 et seq. FinSA)
• Creation of Key Information Documents for private investors (Art. 58 et seq. FinSA)
• Entry into the register into the register of advisors (Art. 28 FinSA)
• Affiliation to an Ombudsman (Art. 74 et seq. FinSA)

The consultation period related to the draft Ordinance of the Financial Services Ordinance will run until February 2019. It is thus probable that the final version of the Financial Services Ordinance will be different.

New regulations for the provision of cross-border financial services from abroad to Swiss clients

FinSA applies thus explicitly only to the cross-border provision of financial services from Switzerland or from abroad to Switzerland, meaning from client advisors not permanently located in Switzerland and engaging in professional financial services activities by means of calls or email communication. Such cross-border provision of financial services from abroad into Switzerland was unregulated prior to the entry into force of FinSA, unless such financial services provider had permanently employed personnel in Switzerland that was active on a professional basis.

FinSA sets forth, however, that in particular the provision of financial services, meaning, for example, the distribution of financial instruments, asset management, and the provision of asset advice to clients through banks, asset managers, etc. that are domiciled in the EU, fall within the scope of application of the FinSA. These activities are thus subject to the obligations under FinSA, meaning in particular the behavioural and information obligations, but also other obligations. European banks and asset managers must already comply with similar obligations under MiFID II. Such banks and asset managers must comply, however, with Swiss specificities like the entry into the client advisor register or the affiliation to an Ombudsman. However, it is  also possible in Switzerland, as it is in Europe, to provide financial services without becoming subject to the regulatory rules, if the client has expressed an explicit request to receive such financial services by email or phone. Any service going beyond the initially requested service are deemed as provided in Switzerland (Art. 2 et 3 D-FidleV.).

Willful non-compliance with these provisions can result under the FinSA to a fine of up to CHF 500,000 or even result in an investigation of the enforcement department of the Swiss Financial Market Supervisory Authority FINMA for breach of financial laws. The financial service provider can in a worst-case scenario be prohibited from being active in the Swiss financial market or from pursuing the function of a manager of a financial service provider (Art. 33 FINMAG.).

Obligation to enter client advisors of a Swiss financial service provider into the client advisor register respectively of client advisors of non-Swiss financial service providers that provide financial services in Switzerland

Client advisors of non-Swiss domiciled financial service providers that provide financial services to Swiss-based clients (e.g. in the form of distribution of financial instruments) must, like client advisors of Swiss-based financial service providers, be entered in a client advisor register. The obligation to be entered in the client advisor register will likely also apply to non-Swiss client advisors of non-Swiss financial service providers that are part of a group supervised by FINMA if they do not provide financial services exclusively to professional clients and institutional clients (Art. 31 E-FidleV.). The client advisor must be entered into the client advisor register prior to the provision of any financial services in Switzerland or prior to the provision of financial services from outside Switzerland to Swiss-based clients (Art. 28 FinSA.). The entry into the client advisor register is thus a non-negotiable requirement for the access to the Swiss market. The client advisor register, which itself must have a license from the Swiss Financial Market Supervisory Authority FINMA, conducts a material examination of each application of each client advisor. Each affected client advisor must by law be entered into the client advisor register no later than until 30 June 2020 (Art. 95 Abs. 1 FinSA.). It is foreseeable that many client advisors will enter into the client advisor register voluntarily and prior to 1 January 2020, because of the great marketing effect of such an entry and the fact that the client advisor register will be the first public register of client advisors in Switzerland.

The requirements for entry are sufficient knowledge of the behavioural rules under FinSA, required knowledge related to the executed financial services, a professional liability insurance or equivalent security, the affiliation to an Ombudsman, no entry in the penal register regarding wealth under the Swiss Penal Law Act and no ban on being professionally active issued by FINMA (Art. 29 FinSA.). In particular, the requirement to have sufficient knowledge about the behavioural rules imposed under FinSA might be problematic for non-European client advisors that must register with the client advisor register. The client advisor register has the discretion to decision whether a specific client advisor has sufficient knowledge about the behavioural rules under FinSA and the required knowledge for the execution of financial services.

The client advisors must prove at the time of application, based on documents and eventually also by means of an oral interview, that he/she has the required know-how and capabilities. The client advisor register contains as a minimum the following information about client advisors (Art. 30 FinSA.):

• Name and surname;
• Name or firm and address of the financial service provider for which they are active;
• Function and position of the client advisor within the organization;
• Activities;
• Education and continuing professional education;
• The name of the Ombudsman, to whom the financial service providers are affiliated with;
• Date of entry.

Even after the initial registration, the client advisor has additional obligations. Client advisors have to report to the client advisor register within 14 days the following changes (Art. 41 E-FidleV.):

• Change of name and address of the financial service provider for which they are active
• Any change of function and position within the organization and the activity
• Finalized education and continuing education
• Change of Ombudsman
• Complete or partial termination of the professional liability insurance
• Termination of the activity as client advisor
• Issued loss certificates (Verlustscheine)
• Verdicts related to criminal acts against Swiss and non-Swiss financial market laws
• Swiss and non-Swiss prohibitions to be active as client advisor

Obligation to be affiliated to the Ombudsman

An additional obligation to which non-Swiss financial service providers are also subjected is the obligation to be affiliated to an Ombudsman (Art. 74 FinSA.). The Ombudsman allows clients of financial service providers that have alleged claims against financial service providers an additional means of alternative dispute resolution. The proceedings before the ombudsman must be straightforward, fair, quick, impartial and inexpensive or free of charge for the client (Art. 75 Abs. 1 FinSA.). It is a mediation procedure that should enable an alternative method to settle potential claims of clients of financial service providers. Filing a mediation request with an Ombudsman does not rule out civil action and does not prevent such from being initiated. After bringing proceedings before an Ombudsman, the plaintiff may unilaterally waive a conciliation procedure under the Civil Procedure Code. The Ombudsman shall terminate the procedure once a conciliation authority, a court, a court of arbitration or an administrative authority begins dealing with the case (Art. 40 FinSA.).

Financial service providers have extensive obligations related to the Ombudsman. They have an obligation to affiliate with an Ombudsman in principle no later than at the time when they become active in Switzerland or related to Swiss based clients. There is transition period applicable related to the obligation to affiliate with an Ombudsman, presumably until 30 June 2020 (Art. 95 Abs. 3 FinSA.). The Ombudsman is obliged to accept any financial service provider that applies. Financial service providers that are affected by a mediation request to an Ombudsman for dispute resolution must participate in the proceedings. They must respond promptly to the summonses, requests for comments and any information enquiries from the Ombudsman (Art. 78 FinSA.). Financial service providers shall inform their clients about the possibility of mediation proceedings through an Ombudsman upon entering into a business relationship in accordance with the duty to provide information, in the event of the rejection of a legal claim asserted by a client, and at any time upon request. The information shall be given in an appropriate form and contain the name and address of the Ombudsman to which the financial service provider is affiliated.

When FinSA enters into force in 2020, market participants in Switzerland will be confronted with various new obligations. Some of these obligations will have to be fulfilled by new public services. The following service are at the centre of this:

• Prospectus inspection office / review body pursuant to Art. 35 FinSA: In Switzerland there will probably two possible prospectus inspection offices offered by both of the two Swiss stock exchanges: SIX Swiss Exchange and BX Swiss.
• Client advisor register pursuant to Art. 22 FinSA: It is becoming apparent that there will also be several providers in this area. For example, in its comments on the FinSO, BX Swiss publicly announced that it would apply to FINMA for a licence for a client advisor register.
• Ombudsman office pursuant to Art. 74 FinSA: To supplement the exisiting ombudsman service for Swiss banks, there will probably be at least one further Swiss ombudsman office for financial service providers from 2020.