IN CONCRETO - NEWS January 2020


The new regulations of the Swiss financial market came into force on January 1, 2020: what are the consequences for asset managers?

By Eric ALVES DE SOUZA and Camille LOUP

 

The following is an overview of the main rules laid down in the new Financial Services Act (FinSA), the Financial Institutions Act (FinIA) and their implementing ordinances, to which all asset managers in Switzerland are subject since January 1, 2020.

It will inform you on who, what, when and how to apply these new standards.

 
 

Who ?

FinSA

The FinSA is aimed at financial services providers, investment advisers, and issuers and suppliers of financial instruments. In cases of doubt, the Swiss Financial Market Supervisory Authority (FINMA) offers an analysis service (with charge) prior any start of authorization proceedings.

  • Financial services providers are subject to FinSA if they offer their services on a professional basis, in Switzerland or to clients in Switzerland, subject to certain exceptions.
  • Investments advisors are natural persons offering financial services independently or on behalf of providers.

This newsletter focuses on asset managers who were not subject to FINMA supervision prior to January 1, 2020, as they were not securities traders, nor did they manage collective assets. They now qualify as supervised entities.

FinIA

FinIA applies to financial establishments, which are referred to as asset managers, trustees, fund asset managers, fund management companies and securities firms.

The generic term asset managers refers to anyone who may, on the basis of a specific power, professionally dispose of assets, in the name and on behalf of clients. The legal form of the asset manager may be a sole proprietorship – which must be registered at the commercial register – a commercial company or a cooperative society.

The feature of the manager’s professional capacity is given:

  • when the manager’s gross income exceeds CHF 50'000.- per calendar year, or
  • when it establishes business relationships with more than 20 contracting parties, or
  • when it has a power of disposal for an indefinite period over third-party assets exceeding CHF 5 million at a given point.

The asset manager's task is to manage individual portfolios. Within this framework, it may provide investment advice, portfolio analysis and offer financial instruments.

 

What ?

FinSA

Asset managers must classify their clients into three categories:

  • private clients;
  • professional clients;
  • institutional clients.

The law provides precise criteria to distinguish between these categories.

FinSA reinforces the duty of asset managers to inform their clients. In addition to informing about the establishment itself and its activity, it is required to check the appropriateness and adequacy of the offered financial services.

The appropriateness of a financial instruments is assessed on the basis of the client's knowledge and experience. This basic requirement shall apply to the financial service provider advising on an isolated transaction. Suitability requires that the advisory or management services be provided in accordance with the financial situation, investment objectives, knowledge and experience of the client. This requirement applies to every financial service provider managing a portfolio, be it on an investment advice or asset management basis. A financial service provider who acts under an execution-only mandate is exempted from the obligation to check appropriateness and suitability.

A lack of knowledge and experience on the part of the client may be compensated with sufficient explanations. Furthermore, if the financial service provider does not receive enough information to assess suitability or appropriateness, it must inform the client before providing the service. Similarly, if the financial service provider considers the financial instrument to be inappropriate or not suitable, it must advise the client against said instrument, even if it provides the service nonetheless upon the client’s urging.

 
The client’s information to be collected is the following:
 
Knowledge & experience of the client
Investment objectives:
  investment time frame
  risk awareness
  (financial) risk capacity/cash requirements
  risk inclination
  purpose of investments
  investments restrictions, if any
Financial situation of the client: :
  income: origin and amount of regular income
  assets, including real estate
  current and future financial commitments
Family and professional situation of the client
Client's age
Other relevant criteria


It is worth pointing out that the method to collect the information is not defined by the FinSA. The documentation may be limited to its essence but must be sufficient to enable the financial service provider to fulfill its obligations to account to its client and to inform the FINMA or its authorized representatives about the services provided. Ultimately, the financial service provider is free to choose how it intends to document the client's situation, as long as it meets its obligations.

FinIA

The establishments targeted by FinIA must obtain an authorization from FINMA. To this end, they must comply with appropriate organizational rules and ensure the proper conduct of business operations. In addition, the individuals in charge of their administration must enjoy a good reputation. The asset managers will also have to be affiliated to a supervisory organization (SO), a list of which will soon be available on the FINMA website.

The management board must be composed of at least two qualified members. However, only one sole manager may be sufficient if the continuity of the activity is guaranteed. The actual management must be carried out in Switzerland.

A person is "qualified" if he or she has adequate education and training for the asset management business and enough professional experience in managing third parties’ assets at the time he or she is appointed as member of the board.

Risk management must be adequately designed, and internal controls must be effective, in particular to ensure compliance with legal requirements and the establishment's internal regulations. These tasks may be entrusted to a qualified manager or delegated to employees or to a qualified external body. However, the persons assuming these tasks may not take part in the activities they supervise if the organization exceeds a certain size (more than five full-time positions or annual gross income exceeding CHF 2 million) or if the business model presents high risks.

The minimum capital requirement is CHF 100,000.- and must be paid up in cash. Appropriate guarantees or a professional liability insurance are mandatory. In addition, the net equity must be adequate, i.e. at least ¼ of the general expenses shown on the last annual accounts, up to a maximum of CHF 10 million. Half of the liability insurance coverage, if provided, may be deducted from the required equity.

Lastly, the holders of a qualifying stake of at least 10% of the capital or voting rights (directly or indirectly) or any persons who may significantly influence the management must also have a good reputation and guarantee that their influence will not be exercised to the detriment of a sound and prudent management of the business.


When ?

Deadline Event
June 30, 2020 deadline for reporting the financial services provider to FINMA
entry in the special register for advisors not subject to FINMA supervision
affiliation to a mediation body
December 31, 2021
obligation to inform the client, check appropriateness and suitability, record all required information and report to the client
obligation to classify clients (three categories)
compliance with funding and organizational requirements
acquisition of the required knowledge
December 31, 2022 final deadline to apply to FINMA for authorization, i.e. fulfilling all the relevant conditions



How ?

As of January 1, 2020, FINMA has made available a web platform on which the asset manager must:
  1. create his account;
  2. register to FINMA;
  3. submit an application for authorization.
No fees are charged for these services, except for the authorization itself.
 
In addition, following its affiliation to a SO, the asset manager will have to grant to the latter access rights to said platform. Likewise, a right of access to third parties may be granted.
 
FINMA expects to be able to give an initial feedback within 20 days after the filing of the application for authorization. The fee for granting the authorization ranges from CHF 2,000 to CHF 20,000. This does not take into account the costs related to the SO.

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Citation authorized with the following reference: ALVES DE SOUZA/LOUP, The new regulations of the Swiss financial market came into force on January 1, 2020: what are the consequences for asset managers?, published on January 8, 2020 by Bory & Partners, Attorneys-at-law, In Concreto News – January 2020.

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