Swiss Financial Regulation Not Fit For Purpose - FINMA

Knud Noelle 9 March 2010


Current Swiss legislation does not sufficiently protect investors using investment advisory and wealth management services, FINMA, the Swiss financial regulator, said, following two major investigations into the impact of the Bernard Madoff Ponzi fraud and the distribution of structured products guaranteed by subsidiaries of Lehman Brothers on the Swiss market.

Consequently, FINMA is now looking into how changes can be made to the existing regulatory regime.

The report confirms that generally in Switzerland the risks of the products were known, but regarded as negligible.

The regulator pointed out two key areas where there is a need for regulatory action. With regard to information on return potential and risk of losses associated with the purchase of financial products, FINMA foresees that regulation will have to change so that this information will be explained in future in simple, comprehensible language in the sales documentation.

Secondly, FINMA said that regulation would have to change insofar that financial intermediaries in future will have to be required to diligently establish the risk capacity and awareness (risk profile) of their clients not only in wealth management but also in the investment advisory business, and to ensure adequate diversification when providing investment advice.

Furthermore, the regulator said that existing rules on compliance with the principle of diversification need to be tightened up in wealth management.

About a year ago, FINMA launched proceedings against Credit Suisse concerning the distribution of Lehman Group's capital-protected structured products. However, at the end of 2009, the regulator concluded that Credit Suisse did not breach any regulation in the way it distributed the products. However, it added that the Zurich-headquartered made mistakes in some cases in its provision of advice. These proceedings were terminated at the end of last year.

The report is online in French and German on the FINMA website. A summary of the key points is also available in English.

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