A long way to investor protection – treatment of FinSA and FinIA in the Parliament’s summer session

in Financial Services, 29.05.2018

On 29 May 2018, the National Council discussed the remaining differences between the two parliamentary chambers in the FinSA and FinIA legislative package. For most of the differences an agreement could be found and the National Council followed the propositions made by the Council of States. However, some differences still remain open and will have to be treated in a final discussion between the two parliamentary chambers.

The political process aiming to introduce stronger investor protection rules and a level playing field for the different kind of Swiss financial service providers goes back a long way. The European Union (EU) already implemented such rules in 2007 in the form of MiFID I. In Switzerland the discussion was launched with FINMA publishing its report on the “Regulation of the production and distribution of financial products for retail clients – status quo, deficit and course of action” in fall 2010. In June 2014 the Swiss Federal Council then launched the consultation on both the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA). The consultation caused an intense political discussion, which resulted in major adjustments in the two legislative bills between the consultation draft and the dispatch, which was finally published in November 2015.

From the consultation draft to the dispatch

In many aspects the provisions of the initial consultation draft were still very close to the provisions prescribed by the European MiFID II, which was enacted in the EU as of 3 January 2018. This, among other reasons, was motivated by the hope that Swiss financial intermediaries could gain EU market access by implementing equivalent requirements. However, MiFID II did not foresee free access to the EU market based just on equivalency, so there was a significant amount of industry criticism, which found the proposed new legislations too strict and too far reaching. As a result, the subsequent dispatch moved away from many of the key principles introduced by MiFID II and suggested looser legal requirements compared to the initial proposal of the consultation draft. This included amongst many other changes the removal of the concept of independent advice and the abolition of the reversal of the burden of proof regarding information and disclosure duties.

Overview of the on-going parliamentary process

In December 2016, the Council of States, as the first of the two parliamentary chambers, discussed the two new legislative acts and approved the legislative drafts with some significant changes compared to the dispatch draft. Those changes included amongst other changes:

  • A harmonization of client categorization and opting out criteria with MiFID II and existing CISA requirements;
  • A removal of insurance companies from the scope of the FinSA; and
  • Significant alleviations regarding information, documentation and reporting duties.

A treatment of the legislative bill by the National Council followed in September 2017. The main differences compared to the version of the Council of States related to

  • the client categorization criteria;
  • education requirements for financial service providers;
  • the requirement to provide a basic information sheet for execution-only transactions;
  • prospectus requirements;
  • the provisions on prospectus liability;
  • the proposed grandfathering according to Article 70 FinIA; and
  • a limitation of the right to revoke consumer contracts concluded away from business premises.

In March 2018, the Council of States discussed the differences between its version and the version of the National Council and eliminated many of the existing differences. However some controversially discussed differences remained, relating to client categorization, prospectus liability, grandfathering and the right to revoke consumer contracts.

Main elements of the discussion of the National Council as of 29 May 2018

In its discussion of the still open differences as of 29 May 2018, the National Council decided to follow the proposition of the Council of States in the following points:

  • Client categorization: The National Council agreed to delete the right of the Federal Council to define further client categories as “professionals”;
  • Fulfillment of duties according to civil law: The proposed provision stating compliance with the supervisory requirements of the FinSA also means the fulfillment of the civil law requirements was deleted. Initially, both chambers of Parliament were in favor of such a provision. However, the legislators came to understand that technically speaking, the introduction of such a provision is rather complicated and might cause some unwanted effects.
  • Provision of a basic information sheet: The National Council followed the proposition of the Council of States regarding the duty to provide a basic information sheet also for execution-only transactions if it is available and also regarding the duty to provide this free of cost before the actual trade has taken place.
  • Compensation of a lack of knowledge and experience: The National Council has agreed to the proposition of the Council of States, which states that a client’s lack of knowledge and experience can be compensated with informing the client accordingly.

Nevertheless, there remain some sticking points, where no agreement was found as the National Council insisted on its differing proposal. The points, still subject to discussion between the two chambers are:

  • Education requirements: The National Council is in favor of industry-specific minimum standards for education requirements, while the Council of States wants to eliminate this provision.
  • Information duties: The National Council is in favor of deleting the duty to inform clients on any significant changes, where the financial service provider has an initial information duty while the Council of States wants to retain this provision as it was initially proposed in the dispatch of the Federal Council.
  • Prospectus liability: the National Council proposed a new wording for the planned prospectus liability. This wording is a compromise between the Federal Council’s initial version (constituting a reversal on the burden of proof in favor of the client) and the former version proposed by the National Council. The new wording proposed by the National Council features a liability for onerous information in prospectuses and basic information sheets if the producer did not apply the required diligence in compiling those.
  • Amount of sanctions: no compromise was found on the amount in Swiss francs to be levied if someone deliberately provides wrong information in the basic information sheet.
  • Limitation of the right to revoke consumer contracts concluded away from business premises: the majority of the National Council is in favor of excluding banking contracts and contracts on financial services from the right to revoke consumer contracts concluded away from business premises according to Article 40 Swiss Code of Obligations, while the Council of States is against changing the existing law regarding this provision.
  • Grandfathering: The dispatch of the Federal Council proposes a grandfathering clause for independent asset managers who have been performing their activity for fifteen years or more. The Council of States is in favor of this grandfathering clause, while the National Council wants to delete this exception.

The remaining differences will now be treated in a final discussion between the two chambers.

Recommended next steps

Now that many uncertainties and open points regarding the FinSA and the FinIA have been clarified and a political consensus seems to be on the horizon, we recommend that Swiss banks and external asset managers start assessing the impact of those regulations on their business models. Key questions will include potential new licensing requirements and the impact of the new rules on core processes along the entire client life-cycle. Furthermore, institutions should identify, evaluate and take key strategic decisions in order to plan a concrete implementation.

Performing a regulatory impact assessment is a good way to address all of these topics. This is also relevant for banks who have implemented MiFID II principles in their Swiss organization already.

For the actual implementation the still outstanding ordinances to the two legal acts will be essential. A consultation draft for the ordinances is expected for autumn 2018.



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