A New Regulatory Framework for Switzerland’s Financial Market

The cornerstones of the process, the Financial Services Act and the Financial Institutions Act, were adopted by the Swiss legislator on 15 June 2018 and are specified by their implementing ordinances, the Financial Services Ordinance, the Financial Institutions Ordinance and the Supervisory Organisations Ordinance, adopted on 6 November 2019. All texts will come into effect on 1 January 2020.

The Financial Services Act and its Ordinance establish comparable conditions for the provision of financial services by financial service providers, whilst the Financial Institutions Act and its Ordinance govern the requirements for acting as a financial institution in, within or from Switzerland. The Supervisory Organisations Ordinance, on the other hand, governs the licensing requirements and supervisory activities of the new supervisory organisations to be established and approved by the Swiss Financial Market Supervisory Authority (FINMA) in early 2020. These supervisory organisations will handle the day-to-day supervision of portfolio managers and trustees, whilst ongoing supervision of banks, securities firms, fund management companies and managers of collective assets will remain with FINMA.

These legislative texts bring about several new regulations. The most noteworthy include new licensing obligations for portfolio managers and trustees, and regulation of the cross-border provision of financial services by foreign service providers to clients in Switzerland.
These regulations are broadly outlined below.

1. New Licensing Regime for Trustees and Portfolio Managers

A portfolio manager is defined as any person mandated to manage assets on a commercial basis in the name of and on behalf of clients within the meaning of the Financial Services Act.
A trustee, on the other hand, is any person who on a commercial basis manages or disposes of a separate fund for the benefit of the beneficiaries or for a specified purpose based on the instrument creating a trust within the meaning of the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on Their Recognition.

The Financial Institutions Act will naturally apply to Swiss portfolio managers and trustees, meaning those with their registered offices or places of residence in Switzerland, and will impose upon them a number of personal, financial and organisational requirements. In order to obtain an authorization from FINMA, these entities will need to comply with the regulatory provisions governing legal form registration; minimum share capital; adequate collateral or professional liability insurance; risk management and internal control systems; own fund obligations; qualifications and experience of managers; proper business conduct; and corporate governance rules.

As Switzerland takes a liberal approach to the exercise of regulated activities on its financial market by foreign institutions, foreign portfolio managers and trustees will only be subject to the regulations if they establish a relevant physical presence, such as a branch or a representative office, on Swiss soil. In contrast, those acting exclusively on an offshore basis will not be subject to any licensing obligation. The regulatory regimes applicable to the Swiss branches and representative offices of foreign financial institutions will be lighter than that applicable to Swiss portfolio managers and trustees. It should be noted, however, that foreign portfolio managers and trustees effectively managed from Switzerland, meaning those whose directors are domiciled in Switzerland, will be caught under the regulations and thus be required to comply with their requirements.

In practice, the financial requirements imposed under the new regulations will likely be the most burdensome to comply with for the soon-to-be regulated entities, particularly the smaller market players. For Swiss actors, these include (i) a minimum capital of CHF 100’000 fully paid up in cash and (ii) own funds amounting at all times to at least one quarter of the fixed costs reported in the most recent annual financial statement, this amount being however capped at CHF 10 million. The subscription of a professional civil liability insurance can help reduce the amount of own funds. The same financial requirements will apply to foreign portfolio managers and trustees having established a branch in Switzerland.

From an organisational perspective, the risk management and internal control functions will need to be independent from the income-generating activities, save in cases where the institution comprises no more than five full-time equivalent positions, achieves an annual turnover of less than CHF 2 million, and has a business model that does not present high risks. Furthermore, the management body of a portfolio manager or trustee will need to consist of at least two qualified directors meeting the training and professional experience requirements set under the regulations. These include a minimum of five years of professional experience in the field of asset management for third parties, respectively in the field of trusts, and training of at least 40 hours in the field of asset management for third parties, respectively in the field of trusts. The management body may consist of only one qualified director provided continuation of business operations on a going concern basis is guaranteed.

As a result of the new licensing regime, the terms portfolio manager and trustee will become protected denominations. Therefore, only those entities holding the corresponding authorisation will be allowed to use these terms, alone or in compound terms, in their company names, descriptions of their business purposes, or commercial documents.

2. Cross-Border Provision of Financial Services to Clients in Switzerland

Up until now, the cross-border provision of financial services to clients in Switzerland remained unregulated. Entry into force of the Financial Services Act and its Ordinance will change the deal.
Indeed, the regulations will apply to all foreign financial service providers, such as banks, asset managers and investment advisors, working with clients domiciled in Switzerland, save in cases where the customer relationship is established at the express initiative of the client, or where isolated financial services are requested from a foreign service provider at the express initiative of a client (commonly referred to as ”reverse solicitation”).

Foreign financial service providers, as well as client advisors, defined as natural persons who perform financial services on behalf of a financial service provider or in their own capacity as financial service providers, will need to comply with a number of educational, organisational and conduct of business requirements.

Of particular relevance is the fact that foreign financial service providers will be under the obligation to affiliate to an ombudsman’s office, which shall be responsible for hearing disputes regarding legal claims between a client and a financial service provider in mediation proceedings. Client advisors will also need to enroll in a register of advisors, unless they provide their services exclusively to professional or institutional clients. In order to register, they will need to possess sufficient knowledge of the code of conduct set out in the Financial Services Act and have the necessary expertise required to perform their activities.

From a conduct of business perspective, foreign financial service providers will be required to assign each of their clients to one of the following segments: retail clients, professional clients or institutional clients. A client’s categorisation will determine the extent of the duties owed to it by the financial service provider and its client advisors. Such duties include, inter alia, providing clients with certain information about themselves and their services within the timeframe and in the form prescribed by the Financial Services Act, as well as performing a suitability or appropriateness review before offering investment advice or portfolio management services.

In terms of internal organisation, the Financial Services Act mandates the adoption of certain processes, such as, but not limited to, taking appropriate organisational precautions in order to prevent the occurrence of conflicts of interest and taking measures to prevent staff from mis-using for own-account transactions any information made available to them only by virtue of their function. When appointing third parties, foreign financial service providers will furthermore need to ensure that they possess the necessary skills, knowledge and experience to perform their work, hold the requisite authorisations and are properly registered for their activities. Financial service providers will need to carefully instruct and supervise third parties.

3. Transitional Periods

Existing Swiss and foreign financial institutions requiring an authorisation from FINMA to continue carrying out their activities on Swiss soil pursuant to the Financial Institutions Act and its Ordinance will have until 30 June 2020 to report to FINMA, and thereafter until 31 December 2022, at the latest, to comply with the new regulatory requirements and submit their authorisation request. Affiliation to a supervisory organisation will be necessary before submitting said request.

Swiss and foreign financial institutions commencing operations after 1 January 2020 will have to report to FINMA immediately and comply from the onset with the regulatory requirements. Their request for authorisation will need to be presented to FINMA within a year of it approving the first supervisory organisation.

As regards financial service providers, given the late adoption of the Financial Services Ordinance, the Swiss Federal Council elected to extend most transitional periods for complying with the provisions of the Act and Ordinance to two years following their entry into force, so until 31 December 2021.

Affiliation with the ombudsman office and registration of client advisors in a register of advisors will, however, need to occur within six months of the regulations coming into effect, provided an ombudsman office and a register of advisors are approved before 1 January 2020. Failing this, the six-month deadline to affiliate or register will only start running from the day on which an ombudsman office, respectively a register of advisors, is effectively approved.