Chris Hamblin Compliance Matters Editor 6 November 2013


The first draft of Switzerland’s seismic financial reform legislation was supposed to be published this month, but Compliance Matters has heard that the government has postponed it until January at the earliest.

The first draft of Switzerland’s seismic financial reform legislation was supposed to be published this month, but Compliance Matters has heard that the government has postponed it until January at the earliest.

The Swiss financial services industry is going through a phase of intense self-examination in the same sense that the country’s other great business, the clock-making industry, did in the 1980s with the appearance of digital timepieces. The financial turmoil that began in 2008 (and has never truly ended) is responsible for this latest bout of introspection. Fresh legislation has been planned, although official publicity for the project has been lowkey. In a recent speech covering the whole gamut of Swiss finance and what to do about the ‘ailing’ financial services industry, the CEO of FINMA, Patrick Raaflaub, did not mention it once.

The moment at which the legislative plans officially began was 18 February 2013, when the Swiss Federal Department of Finance issued a so-called ‘hearing report’ in which it floated some of the ideas that are likely to end up in the final Act. Endless committees and consultations are expected to underlie this massive piece of legislation and only a few steps have been taken towards completion so far.

On 28 March 2013 the FDF announced that it had received about 50 written opinions on the proposals of the previous month and said that it hoped to produce an official draft for consultation in October 2013.

This deadline has now been abandoned in favour of the first quarter of the New Year and many Swiss lawyers are even sceptical about that. It is not expected that the completed Act will enter into force until 2016, by which time the world may have turned once more.

Here is a vague list of suggestions with which the Swiss parliament began earlier this year. Some ambiguities stem from the fact that English is not one of Switzerland’s four official languages.

Firstly, the heavy hand of regulation is to become heavier. The socalled ‘hearing report’ starts by saying that asset managers ought to follow more stringent ‘rules of conduct’ (in British regulation the term is ‘conduct of business’, a term that is linked in to the protection of investors from sharp practice and conflicts of interest). FINMA’s definitive version of its ‘market conduct rules’ came into force on the first of this month, but these are to combat market manipulation and insider-dealing rather than ‘investor detriment.’

There are two ways in which the report envisages progress.

  • (a) The creation of one or more self-regulatory organisations to supervise asset-managers vis-a-vis their new obligations under the ‘conduct’ rules to be set out in the new Act.
  • (b) FINMA to supervise the same.

The report envisages some sort of enhanced obligation for client advisers to be registered, which they may or may not be already. At the moment, insurance intermediaries and the distributors of collective investment schemes such as UCITS have to be registered.


The creation of self-regulatory organisations is worth further exploration. Under this option, in order to receive a licence, an asset management firm would have to have enough financial assets or surety, an operational organisation that is “fit for purpose” with the corresponding control functions and expert bodies with the necessary integrity led by qualified staff. It would have to observe the rules of the new Act and it would have to belong to an SRO, which in turn would be licensed by FINMA before it could operate.

Even though this is the ‘softer’ of two options in the report (the other being direct FINMA supervision) – or perhaps because it is – it necessitates high barriers to the issuance of a licence. There might be several advantages to this arrangement, however. One might be the greater market flexibility that membership of a small body brings, together with a higher level of acceptance by market participants, as it is the asset-manager’s preferred option. Also, every customer could choose whether he wanted to use a provider supervised by FINMA in the present day (e.g. a bank or securities dealer) or one of these hitherto-unregulated financial service providers. This might also be good for the public purse: fees would fund the SROs and FINMA would only have to keep a superintending eye on the SROs themselves. The drawbacks of this option are that the international community is widely thought to have moved on from the SRO model, which the UK abandoned in 2001 and which dates from the US in the 1930s. Under EU law, moreover, investment firms that provide investment services (i.e. asset management services) must always be subject to supervision by central state authorities. The government believes that this would make it difficult for Swiss financial service providers to gain market access to the EU.


In Switzerland, each contractual fund has to publish a prospectus annually. Securities funds, real-estate funds and other funds for traditional investments have to publish simplified prospectuses at least and send them off to FINMA, although not all of these need FINMA’s approval. The report moots the possibility of mandatory prospectuses for securities (i.e. standardised certificates which are suitable for mass trading, book-entry securities and derivatives). The phrase it uses is ‘securities offered in and from Switzerland,’ and it envisages standardised templates for these prospectuses which force issuers to disclose the risks involved and, in the case of every complex financial product, contain (or be published alongside) a ‘key investor document’ or KID that should delineate costs and other things. Any advertising should always be labelled as advertising.


This initiative seems to come from FINMA, which made some ‘investor- protection’ proposals in February last year. In a so-called ‘position paper’ it stated that providers of standardised financial products such as shares, bonds and structured products should be obliged to draw up a prospectus. It went on to dictate that “this document must contain all the key details of the product and the provider and ensure transparency concerning the risks associated with buying the product.”

On the related subject of ‘conduct of business’, the legislative proposal is for financial service providers, presumably of all kinds, to have to inform their clients about all service costs before they begin to provide the services. Added to the proposal are things with which UK practitioners are very familiar: an obligation to establish the client’s knowledge and experience with respect to the transaction; making their recommendation ‘suitable’; the avoidance of conflicts of interest between practitioner and client; and transparent remuneration practices that never hurt the quality of the service.

Something akin to the UK’s retail distribution review seems to be on the cards. The hearing report calls for disqualification of client advisers who cannot prove that they have had enough training in their products and the prevailing rules of conduct.

The mirror-image of these reforms is an increase in the power that a disgruntled customer has to obtain redress. If a client claims that a financial service provider has broken the rules of conduct, the report insinuates, a reversal of the burden of proof under civil law should apply. This is a revolutionary move, if it is to be made.

To bolster this, the legislators suggest a beefing-up of the Swiss ombudsman service, but in perplexing prose. They write of giving an ombudsman the right to make recommendations, suggesting that Switzerland is one of those unfortunate countries where freedom of speech does not apply, and then think of forcing serviceproviders to affiliate themselves with such a person. They also suggest the establishment of a governmental ombudsman who is competent enough to make decisions – a comment which seems to denigrate whoever occupies the post of ombudsman today.

The underlying message, however, is plain: the machinery that underpins the best interests of the consumer must be strengthened. Not all of the document is ambivalent about ombudsmen’s powers, either. At one point the legislators suggest that if an ombudsman concludes that the client’s claim is probably justified, the financial service provider should be obliged to pay his costs for the subsequent civil procedure and ultimately to bear them itself, irrespective of the outcome of the case. Another proposal is for the establishment of ‘independent’ (always a loaded word that usually applies to bodies firmly under the control of governments) ombudsman offices to deliberate on cases, with the power to make binding decisions up to a particular disputed amount (e.g. CHF 100,000). The informality of the procedure and the absence of costs would make it easy for customers to stake claims. If the case involved a higher disputed amount, the proposal has the ombudsman limiting himself to expressing his opinion.


On the subject of activity that goes on between Switzerland and other countries, there are four main suggestions:

  • that foreign financial service providers should have to comply with the same rules of conduct as Swiss providers if they are providing services from abroad into Switzerland;
  • that they should have to register in Switzerland insofar as their activities are subject to supervision in Switzerland and an entry in the public register (in the language of the report this seems synonymous with a licence to operate) should be tied to the fulfilment of certain conditions;
  • that instead of being obliged to register, foreign financial service providers who are active on either side of the Swiss border could be required to establish branches in Switzerland; and/or
  • that there could be a rule to ensure that the regulation of cross-border financial services provided in Switzerland is no more onerous than absolutely necessary to protect investors from sharp practice and to ensure that the markets function smoothly.


On the subject of cross-border trade, the ‘hearing report’ asks the reader two fundamental questions directly. The first is an old one about home/host state regulation, which the EU long ago resolved in favour of the home state. It says: “should foreign financial service providers engaging in cross-border activity in Switzerland have to comply with Swiss rules of conduct or the foreign equivalent?” The second relates to the concept, probably introduced for the first time in the money-laundering field by the USA PATRIOT Act, which requires foreign financial firms to have a presence in the US so that if they break the law the federal authorities have someone to arrest. It asks, rather clumsily: “In order to ensure effective and equivalent protection of Swiss clients vis-à-vis foreign providers, should foreign providers have to establish a permanent physical presence in Switzerland, including supervision, or would the proposed registration ensure an appropriate level of protection?” Such questions are crucial to the modern world of extra-territorial powers in which Switzerland must survive.


It was at the end of March 2012 that the Swiss Federal Council – sometimes called ‘Switzerland’s seven-headed president’ as its seven leading politicians collectively represent the pinnacle of the federal state – directed the Swiss Federal Department of Finance to prepare the ground for a new Financial Services Act in conjunction with the Swiss Federal Department of Justice, the police and FINMA. This, on its own, shows how political will for revolutionary change comes from the highest possible level and affects the widest possible audience.

It is still not absolutely clear whether there will be a single megalaw or several smaller ones. The councillors want to see the prudential regulation of all asset managers. FINMA is lobbying to stop SROs operating anywhere other than under Switzerland’s anti-money- laundering laws, the better to tighten its grip on mainstream financial services such as asset management. The repayment of retrocession fees (which a bank is paid for distributing third-party products to clients) is a hot issue in the Swiss courts and the extent to which existing court decisions might be generalised in the legislation is unknown. In a test case in January 2012 involving UBS, the Zurich High Court ruled that banks should reimburse fees that they did not earn through the performance of distribution services – a decision upheld by the Swiss Supreme Court on 1 November that year. Politicians are still waiting to have their say on the extent to which the new Act(s) will echo and/or fit in with the European Union’s Markets in Financial Instruments Directive. Indeed, one of the questions in the ‘hearing report’ asks the readers whether Switzerland should adopt the EU’s regulatory provisions ‘unchanged’ or whether it should design its own regulation differently and in what areas. There is still everything to play for and the time-scale is phenomenally long.

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