Chris Hamblin Compliance Matters Editor 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 first draft of Switzerland’s seismic financial reform legislation
was supposed to be published this month, but Compliance
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 FINMA, Patrick Raaflaub, did not mention it once.

The moment at which the legislative plans officially began was
18 February 2013, when the Swiss Federal Department of Finance
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).
FINMA’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.

  • (a) The creation of one or more self-regulatory organisations to
    supervise asset-managers vis-a-vis their new obligations under
    the ‘conduct’ rules to be set out in the new Act.
  • (b) FINMA to supervise the same.

The report envisages some sort of enhanced obligation for client
advisers to be registered, which they may or may not be already.
At the moment, insurance intermediaries and the distributors of
collective investment schemes such as UCITS have to be registered.


The creation of self-regulatory organisations is worth further exploration.
Under this option, in order to receive a licence, an asset
management firm would have to have enough financial assets or
surety, an operational organisation that is “fit for purpose” with the
corresponding control functions and expert bodies with the necessary
integrity led by qualified staff. It would have to observe the
rules of the new Act and it would have to belong to an SRO, which
in turn would be licensed by FINMA before it could operate.

Even though this is the ‘softer’ of two options in the report (the other
being direct FINMA supervision) – or perhaps because it is – it necessitates
high barriers to the issuance of a licence. There might be
several advantages to this arrangement, however. One might be the
greater market flexibility that membership of a small body brings,
together with a higher level of acceptance by market participants,
as it is the asset-manager’s preferred option. Also, every customer
could choose whether he wanted to use a provider supervised by
FINMA in the present day (e.g. a bank or securities dealer) or one of
these hitherto-unregulated financial service providers. This might
also be good for the public purse: fees would fund the SROs and
FINMA would only have to keep a superintending eye on the SROs
themselves. The drawbacks of this option are that the international
community is widely thought to have moved on from the SRO model,
which the UK abandoned in 2001 and which dates from the US in
the 1930s. Under EU law, moreover, investment firms that provide
investment services (i.e. asset management services) must always
be subject to supervision by central state authorities. The government
believes that this would make it difficult for Swiss financial
service providers to gain market access to the EU.


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 FINMA, although not all of these need
FINMA’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


This initiative seems to come from FINMA, 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.


On the subject of activity that goes on between Switzerland and
other countries, there are four main suggestions:

  • that foreign financial service providers should have to comply
    with the same rules of conduct as Swiss providers if they are
    providing services from abroad into Switzerland;
  • that they should have to register in Switzerland insofar as their
    activities are subject to supervision in Switzerland and an entry
    in the public register (in the language of the report this seems
    synonymous with a licence to operate) should be tied to the
    fulfilment of certain conditions;
  • that instead of being obliged to register, foreign financial service
    providers who are active on either side of the Swiss border
    could be required to establish branches in Switzerland; and/or
  • that there could be a rule to ensure that the regulation of
    cross-border financial services provided in Switzerland is no more
    onerous than absolutely necessary to protect investors from
    sharp practice and to ensure that the markets function smoothly.


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.


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 Swiss Federal Department of Finance
to prepare the ground for a new Financial Services Act in conjunction
with the Swiss Federal Department of Justice, the police and
FINMA. This, on its own, shows how political will for revolutionary
change comes from the highest possible level and affects the
widest possible audience.

It is still not absolutely clear whether there will be a single megalaw
or several smaller ones. The councillors want to see the prudential
regulation of all asset managers. FINMA 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.

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