On 14 December 2016, the Council of States discussed the Swiss Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) and approved the legislative drafts which proposed some major changes compared previous drafts. What are the key changes and next steps?
Overview and timeline
After repeated postponement, the Economic Commission of the Council of States finally took up detailed consultations on the FinSA and the FinIA during its October and November sessions. On 3 November 2016, the Economic Commission finalized its consultations on the legislative draft proposing several substantial amendments. In particular, the Commission removed insurance companies from the scope of the FinSA and subjected the currently self-regulated independent asset-managers to supervision by independent supervisory organizations.
The Council of States treated the drafts in its winter session, concluding the debate on 14 December 2016. The Council has approved most of its Economic Commission’s version and did not make any significant changes. As a next step, the Economic Commission of the National Council will discuss the drafts of FinSA and FinIA, before the National Council treats the two legislative proposals.
Main changes proposed by the Economic Commission and approved by the Council of States (compared to the dispatch draft published in November 2015)
Besides a range of minor or mere editorial changes, the following key changes to the original draft of the Federal Council were proposed by the Economic Commission and have now been approved by the Council of States:
- Taking insurance companies out of the scope of the FinSA: Insurance Companies have now been explicitly removed from the scope of the FinSA. Any investor protection provisions that shall also be applicable for insurance companies will be included directly in the Insurance Supervisory Act (“Versicherungsaufsichtsgesetz”), which is currently subject to revision. This decision satisfies a key demand from the Swiss insurance industry to avoid creating new overlaps and interfaces of applicable regulation and rather sets forth relevant provisions for the insurance industry within its specific legal acts.
- Supervisory organization to oversee independent asset managers: It was decided that, going forward, independent asset managers are to be supervised by independent supervisory organizations. The supervisory organizations will perform ongoing supervision as an extended arm of the FINMA. However, the responsibilities of public administration and sanctioning powers remain with FINMA.
- Harmonization of criteria on client categorization and opting-out: The criteria for categorizing a client as a professional client has been harmonized to the segmentation criteria prescribed by MiFID II by adding threshold criteria (identical to those prescribed by MiFID II). However, companies will also classify as professional clients if they have a professional treasury function. With this adaption, convergence to MiFID II has been created—avoiding significant procedural inefficiencies for Swiss financial intermediaries implementing both MiFID II and FinSA. At the same time, compared to MiFID II rules, a potential alleviation was maintained by classifying all companies with a professional treasury function as professional clients.
The uncertainty regarding the exact criteria for an opt-out of wealthy private individuals was also removed. Instead of leaving the discretion for setting these criteria with the Federal Counsel, the Council of States decided to follow its Economic Commission and therefore include similar criteria as used within Swiss fund law.
With these harmonization challenges relating to the differences in client categorization, criteria between FinSA, MiFID II and CISA will be significantly less onerous.
- Suitability and appropriateness: The provisions of Federal Council’s draft have remained largely unchanged. However, some alleviations have been made regarding the appropriateness assessment (knowledge and experience only to be demonstrated on the financial service provided and not on single transactions), requirements for professional clients and the duties arising if an investment is deemed unsuitable for a client.
- Information duties: Requirements regarding information duties have been significantly lowered and simplified. A requirement is no longer foreseen for informing clients on the specific risks of a single financial instrument offered. Conversely, a rather generic requirement has been stipulated to disclose such risks in general. Also, the client’s right to obtain details on demand about the education of his advisor was removed. Finally, a duty to provide basis information sheets and prospectuses (as far as required in general) on any personally recommended financial instruments was inserted. Regarding the basis information sheet, an option has been stipulated to provide this only after the execution in the case of advice provided in distance and explicit consent of the client.
- Documentation and reporting duties: The documentation requirement regarding the suitability assessment performed has been removed for portfolio management and is now only required in the case of investment advice. Furthermore, documentation must only be provided to clients at their explicit request. Compared to the European regulation, where under MiFID II an “advice protocol” has to be provided to the client for any advice and generally before execution of the transaction (except for limited specific cases), this requirement is relatively business friendly.
- Education requirements: The proposed delegation to self-regulation organizations for determining industry specific minimum standards on education requirements as well as the responsibility of financial intermediaries to ensure that their client advisors have an appropriate level of education was removed. The remaining provision on education constitutes only a generic requirement that client advisors have the necessary knowledge of the FinSA and their relevant business activities to adequately perform their function.
- Burden of proof: Whilst the Economic Commission proposed to leave the burden of proof in the case of legal proceedings with the client, the Council of States decided to follow the Federal Council’s proposition. Henceforth, banks bear the burden of proof in the case of a client’s disadvantage.
- FinTech: The Council of States aims to create a separate legal basis for FinTech companies. In general, such companies shall no longer be subject to the same strict rules as required by banks. With this intention, the Council of States is in line with the Federal Council which currently authorized the Federal Department of Finance with the preparation of an according consultation draft.
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 license requirements and the impact of the new rules on core processes all along the client life-cycle. Furthermore, key strategic decisions should be identified, evaluated and taken. On this basis, a concrete implementation can be planned.
Banks and external asset managers who also intend to implement MiFID II should start planning early on how to best manage synergies between the two regulations. .
Performing a regulatory impact assessment is a good way to address all of these topics.