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LEGISLATIVE DELAYS PUSH SWISS REGULATORY PLAN INTO LIMBO
Chris Hamblin
Compliance Matters
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 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
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).
’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.
INVESTOR-PROTECTION IN PROMOTIONS
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 ’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.
INVESTOR-PROTECTION IN DEPTH
This initiative seems to come from , 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.
CROSS-BORDER TRADE
On the subject of activity that goes on between Switzerland and other countries, there are four main suggestions:
BRAVE NEW WORLD
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.
A WEIGHTY LAW, A LENGTHY TIME-SCALE
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 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.