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A Walk Around New Swiss Regulatory Developments

Martin Liebi and Merlin Haldemann, 21 June 2019

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Wealth management practitioners left numbed by the endless coverage of Brexit or US-China trade rows should heed important regulatory changes that have happened in Switzerland.

One of the problems of the media/political world’s obsession with Brexit is that it can obscure other European issues affecting financial services. This publication has been aware for some time about recent and slated future changes around Switzerland’s regulatory regime. At the time of writing, there is still work to be done to finalise how trusts and family offices will be governed in the Alpine state. And Switzerland has also recently been at odds with the European Union on a number of fronts (Switzerland is not an EU member state, but has a large number of bilateral treaties with the bloc.)

This publication regularly meets private client professionals in Switzerland, many of whom say the regulatory changes deserve more prominence than they sometimes receive. We are pleased to share the following views on regulatory matters from legal experts at PricewaterhouseCoopers. The authors of the following comments are Martin Liebi and Merlin Haldemann. Both are based in Zurich. The editors of this news service are pleased to share these views and invite readers to respond. The editors do not necessarily endorse all views of guest writers. Email the editor at tom.burroughes@wealthbriefing.com and deputy editor at jackie.bennion@clearviewpublishing.com

The new rules in a nutshell
The provision of cross-border financial services by non-Swiss financial service providers to institutional, professional, or retail clients in Switzerland, as well as the creation of financial instruments for the Swiss market, will be regulated comprehensively by the new Swiss Financial Services Act (FinSA), which is expected to enter into force on 1 January 2020. The new duties include information, documentation, behavioural, conflict of interest and organisational obligations as well as the obligation to enter client advisors having direct contact with clients in Switzerland into a client advisor register and to affiliate with the Swiss Ombudsman for financial services. It is important to note that only marketing activities aimed at potential clients in Switzerland, i.e. before having concluded a client contract, will trigger the obligations under the FinSA.

The affected financial services, financial instruments and clients in Switzerland
The new Swiss Financial Services Act (FinSA) affects all financial service providers who purchase, sell or distribute financial instruments for Swiss clients, receive or transmit orders related to financial instruments, provide asset management or investment advice, and grant loans to finance transactions with financial instruments. Other credit related activities are generally not covered. In particular and unlike under the European Directive on Financial Instruments (MiFID II), the advice of companies on capital structure, the sector-specific strategy and related matters as well as advice and services relating to mergers and acquisitions of companies are generally not affected.

The universe of affected financial instruments, to which the financial services relate, is essentially the same as under MiFID II (shares, bonds, derivatives, structured products, funds, structured deposits). Clients in Switzerland must be segmented into private clients, professional clients and institutional clients. Clients can generally change the client category on request.

The applicable obligations for non-Swiss client advisors and non-Swiss financial service providers
The obligations to be fulfilled by non-Swiss financial service providers are similar to the ones under MiFID II and include the obligations for client segmentation, information, and rendering of account. With regard to the appropriateness test, a distinction is made in Switzerland between investment advice, which takes the entire portfolio into account, and investment advice, which only takes into account part of the portfolio. The latter only requires a suitability test. Execution only services are not subject to an appropriateness or suitability test, even with complex products. In some cases, the Swiss obligations go beyond the scope of MiFID II. Non-Swiss client advisors providing financial advice must be entered into the Swiss client advisor register. Client advisors are the natural persons who provide financial services to clients in Switzerland by means of email, phone, in writing, or any other means. They must be entered into the future Swiss client advisor register Regulatory Services AG (www.regservices.ch). Also, the financial service providers for which the client advisors work must affiliate with the Swiss Ombudsman, which is managed by the same company. 

The Swiss client advisor register and the Swiss Ombudsman are currently in the licensing procedure with the Swiss Financial Market Supervisory Authority FINMA and the recognition process with the Swiss Federal Department of Finance. A Swiss peculiarity is found in the regulation of compensation from third parties (retrocessions/ commissions). These generally belong to the client insofar as they are connected to the provision of the financial services. However, the client may waive his or her right to commissions, even if commissions are not exactly determinable in advance. Furthermore, obligations with respect to the organisation of financial service providers apply. Financial service providers must have an appropriate organisation and, in particular, they must properly monitor employee transactions, as well as appropriately address conflicts of interest. 

Changes in the area of public offerings of financial instruments in the Swiss market
From 1 January 2020 on and subject to a transition period, there will also be material changes with regard to the offering of financial instruments in the Swiss market. Public offerings of securities in the Swiss market will be subject to more extensive prospectus requirements. These requirements and possible exceptions are generally aligned with the European Prospectus Regulation. However, there are also some deviations as part of a "Swiss finish" such as the lack of a prospectus obligation in offerings addressed to up to 500 private investors. 

Prospectuses must be reviewed by the newly-introduced prospectus reviewing body. Both the Swiss stock exchange SIX Swiss Exchange as well as the other Swiss stock exchange BX Swiss, which is part of the Börse Stuttgart Group, will operate a prospectus reviewing body. Prospectuses that have been prepared in accordance with the EU Prospectus Regulation and that have already been reviewed by an equivalent foreign authority (e.g. the BaFin) only have to be recognised in a simplified procedure and deposited with the prospectus reviewing body. In any case, the approval or recognition is only valid for twelve months and must be renewed thereafter.

As in the EU, financial instruments may only be offered to private investors if a so-called "key investor information document" (KIID) is created and provided prior to the offer, except in the context of an asset management contract or of shares or debt securities. KIIDs issued in accordance with the EU PRIIPs Regulation are equivalent to the Swiss KIID and may be used instead.

No major change will be made to the requirements for the offering of structured products. Structured products may only be offered to private investors, if the structured products are issued, guaranteed or secured in an equivalent manner by a Swiss bank, insurance company, securities firm or a corresponding US institution, except in the case of a written and permanent portfolio management or investment advisory contract.

Sanctions in case of non-compliance with the new rules 
It is important that affected non-Swiss financial service providers, non-Swiss client advisors, and producers of financial instruments comply with the new obligations. Deliberate non-registration with the client advisor register can be sanctioned with imprisonment of up to three years and non-diligent non-registration with a fine of up to SFr250,000 ($251,510) per case. There are also fines set forth of up to SFr500,000 for non-compliance with the obligations or for the unlawful offering of financial instruments. The Swiss Financial Market Supervisory Authority FINMA may also open an investigation for the unlawful provision of financial services and to sanction the financial service providers and involved client advisors accordingly.

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