Compliance

Swiss Regulatory Developments - A View From Schroders

Rolf H Weber and Florian S Jörg, 24 July 2019

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The wealth management firm delves into developments in Swiss regulation and why they matter for the sector.

This publication has been tracking regulatory developments that are brewing in Switzerland (see a recent article about how they affect trusts and wealth managers here). Those developments have perhaps been overshadowed by the noise around Brexit and other geopolitical controversies. But the Alpine state's regulatory changes are important not just for local practitioners but for wealth advisors who work with the country.

This article, by Schroders and Bank Co, is written by Rolf H Weber, attorney-at-law in Zurich and professor at the University of Zurich and abroad. He has worked in the field of financial regulation for many years. His co-author is Florian S Jörg, attorney-at-law who, like his fellow writer, is with Bratschi AG.

This news service is grateful to Schroders for permission to republish this important article. As ever, the editors do not necessarily endorse all views of guest contributors and invite readers to respond. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Switzerland’s implementation of the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) aims to harmonize its financial services regulatory legislation with that of the European Union. We have asked Prof. Dr Rolf H Weber, Emeritus Professor of Law at the University of Zurich, and Dr Florian S Jörg, both being attorneys-at-law at Bratschi AG, what impact FinSA will have on clients and financial service providers – also with respect to the Markets in Financial Instruments Directive II (MiFID II).

New investor protection regulation at our doorstep
In the European Union (EU) and in Switzerland, the legislative power has attempted to improve private and institutional investor protection in the financial services sector by tightening the regulatory environment. In addition to addressing investor protection issues, the new regulations aim to boost market integrity, improve transparency and simplify the cross-border provision of services.

In 2018, the revised version of the Markets in Financial Instruments Directive, MiFID II, which also applies to Swiss financial institutions providing services to clients in EU countries, came into force across the EU. In the sense of a common accord, and after several years of preparatory work, Switzerland passed the Financial Services Act (FIDLEG) in summer 2018 with a view to securing harmonisation in regulatory legislation. This law will be applicable – apart from partial delays caused by some transitional provisions – from the beginning of 2020.

FIDLEG aims to reinforce client protection in the Swiss financial market and, at the same time, to promote Switzerland’s competitiveness as a financial centre as well as to introduce standardised requirements for the provision of cross-border financial services. A central element of this legislation is to provide clients with sufficient information about the financial products and financial service providers that they are offered; in concrete terms, the appropriateness and suitability of the financial service offering is based on the client’s personal circumstances.

FIDLEG requires banks to introduce customer segmentation. The regulations (e.g., rules regarding due diligence and codes of conduct for banking) are not applied uniformly across all client categories. Clients are allocated to one of three categories: private clients, professional clients and institutional clients. However, the system is flexible in allowing a client to move from the appropriate category to another one if expressly requested.

Advantages and disadvantages for investors
The future regulations of FIDLEG offer clients various advantages:

– Advisory consultations by telephone and other electronic communications must be recorded, which will provide additional security for clients and the bank;

– When concluding the contract or before executing a securities transaction in advisory services, the client will receive a detailed breakdown of the costs (purchase price, and transaction and running costs); and

– Before an investment can be made in specific financial instruments, the investment has to be assessed to ensure that it is appropriate and suitable for the individual in question. In future, investment products will be developed for specific client categories and only offered to that circle of individuals; this gives clients increased assurance that they will only be offered products that truly suit their financial circumstances.

The future regulations, however, have a few negative consequences that, depending on the circumstances, will impact some clients more than others. The transmission of documentation (in paper or electronic form) to clients will increase substantially, and not simply initially when the ‘regime’ comes into force, but also continually with each investment (for example, detailed product information and cost data) and at the end of each quarter. The volume of notifications will accumulate in future, and clients will be obliged to not only read but also study the content of the documentation. In addition, the choice of products offered to individual clients will shrink: because the banks have to comply with stricter requirements, it can be anticipated that in order to minimize risks during advisory consultations, the offering will be strictly focused on the client’s personal investor profile.

It is also important that clients are aware of the fact that independent asset managers and trustees, who were previously not directly authorised and monitored by FINMA (excepting direct or indirect “accountability” regarding compliance with anti-money laundering regulations), will henceforth be classified as providers of financial services if they manage assets commercially on behalf and for the accounts of their clients. Consequently, in future they will be subject to the authorisation requirements and supervision. The rigour of the regulatory regime has been reduced during the legislation process; i.e., the requirements [now] appear to be equitable. Clients who, in particular, form relationships with banks via independent asset managers should therefore expect high standards in the expertise, experience and reliability of these third parties.

A tentative comparison between the EU and Switzerland
When comparing MiFID II with FIDLEG, it is encouraging to note that the Swiss regulation upholds the principle of ‘the responsible investor’ to a greater extent than the EU regulation does. However, because the MiFID II requirements are more stringent with regard to the appropriateness and suitability [of financial service provision], there are unresolved issues regarding the equivalence of the degree of protection provided by these two acts and the legitimacy of the cross-border activity of Swiss financial service providers.

Additionally, in Switzerland, civil law has the capacity to intervene in individual cases where non-compliance is suspected; i.e., a bank’s failure to comply with the rules of conduct may provide the basis for a claim under contract law, even if the activity does not prompt supervisory intervention.

MiFID II and FIDLEG contain numerous beneficial measures from the client’s standpoint. However, the new regulations generate more bureaucracy not only for banks but also for clients and may possibly limit the range of investment alternatives on offer. In addition, an increasing standardisation in the product and service offering associated with these future statutory norms conflicts with the clients’ need for individual solutions.

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