Article
Reference
Reshaping the future - An analysis of the draft bills of a Financial Services Act (Fidleg) and Financial Insitutions Act (Finig)
BAHAR, Rashid, REUTTER, Thomas
BAHAR, Rashid, REUTTER, Thomas. Reshaping the future - An analysis of the draft bills of a Financial Services Act (Fidleg) and Financial Insitutions Act (Finig). International Financial Law Review , 2014, p. 65-67
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CO-PUBLISHED ARTICLE
eshaping he future
R ashid Bahar and Thomas Reutter of Bar & Karrer analyse two new bills that seek to widen the
regulation of Swiss financial services
T
he Swiss government opened a consulration process for the draft bills of a Financial Services Act (Fidleg) and a Financial Institutions Ace (Finig). These two projects will reshape the regulatory framework governing the Swiss fmancial markets. They include new rules of conduct for flnancial intermediaries, a regulatory regime to prepare a prospectus in connection with public offerings of securities, registration obligations for client advisors and foreign service providers, licensing obligations for asset managers and comprehensive rules airning to facilitate access co justice.The consultation process runs until October 15 2014. After chat, the Federal Council plans to send the bill of the Financial Services Acr and the Financial Institutions Act to parliament in the second quarter of 2015.
These cwo bills are expected to be enacted in the course of 2016 and eventually enter inro force on the January 1 2017.
Scope
Whereas under exmmg regulations, only banks, securities dealers and collective investor schemes (including fund management companies and asset managers for collective investment schemes) are subject to prudential regulation, the draft Fidleg aims to regulate al!
types of financial services, regardless of whecher chey are provided by regulated or unregulated entities. Only lending services that are not related to invesrmenrs and rraditional insurance and reinsurance services will remain out of the scope of chis draft bill if it becomes law.
Moreover, the draft Fidleg will apply to al!
types of customers. Going one step further than MIFiD [Markets m Financial Instrumenrs Directive] and following che
same classiflcation as under the Collective Invescmenc Schemes Act, ic applies co retail clients, professional clienrs and insticutional clients, albeit with a different level of protection and a possibiliry co ope out or into differenc levds of protections.
Rules of conduct
The cornerstone of the draft Fidleg is a comprehensive set of rules of conduct. These rules include a duty co inform clients and to ensure that services and products offered are suitable or appropriate for chem, and an obligation co ensure best execution. To facilirate the enforcemenc of the rules of conduct, che draft Fidleg backs the rules of conduct with extensive documentation and reporting duries.
The information duries comemplaced by the draft Fidleg aim to give investors a clear picture of whar services or products they are getting, in terms of expecred risks, returns and costs. Invesrmenr advisers and portfolio managers are subject to additional obligations aiming to clarify the scope of cheir services, namely whecher they act independently or not, whether they provide their services on an ongoing basis and whecher they analyse the encire market or restrict their investment services to products issued by certain issuer. To facilitate the process, the draft Fidleg provides thac chese duries can be satisfied in a standardised form in a prinred document or on a webpage.
Codifying existing requiremencs under con tract law and taking them one step fimher, the draft Fidleg conremplates obliging as a regulacory matter invesrmenr advisers and invesrment managers to ensure that the services and instruments they offer are suitable for their clients. Therefore, invescment
advisers and
investmenr managers
The cornerstone of the draft
wknow ill be their required clients' to flnancial situation and investment objectives as well as theirknowledge and
Fidleg is a comprehensive set of rules of conduct
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experience and to
BANKING AND PROJECT FINANCE
decermine on che basis of this information whetber the services and instruments they offer are suirable. Ail other service providers will be required to ensure chat the service or instrument is appropriate for the client.
As a matter of principle, these obligations will apply across the board. However, the draft Fidleg provides for several exceptions. No appropriateness duty applies when the service provider only custodies securities and carries our orders or when it acts on an execution- only basis at the initiative of the client. The draft Fidleg also allows flnancial service providers to assume, subjecr to any conrradictory evidence, chat professional and insticutional investors are aware of the risks chey incur and have the flnancial capabiliry to bear such risks, therefore reducing the burden of rhe appropriateness and suitabiliry requiremems.
Further, the draft Fidleg proposes to expand besr execution obligations in line wich MiFID II. Moreover, slightly more conservatively, instead of an ourright ban, it codifies the principles the Swiss Supreme Court developed regarding inducemems and distribution fees as a regulatory obligation applicable to al!
flnancial service providers. Namdy, a service provider will be required to accounc and hand over to its clients inducemenrs it receives unless the client waived such right in advance.
The encire system is backed by extensive documentation and reporting obligations as well as duties to cake organisational measures.
Wich respect to the laner, they apply boch within and ourside a given firm. Therefore, in addition to a general obligation to have an appropriate organisation, flnancial service providers are speciflcally req uired to ensure char cheir employees and any chird party they instruct have appropriate qualifications, knowledge and experience to discharge their duties. Wichin a chain of service providers, the instructing flnancial institution will be responsible for ensuring that the service providers it retained comply wich the rules of conduct, whereas in the other direction, the service provider acting on the instructions of another service provider can assume chat the instructing service provider complied wich irs obligations unless it has any reason to believe chat it failed to do so.
Prospectus rules
The draft Fidleg intends ro overhaul the prospectus rules. Instead of the exiscing regime based prirnarily on private law and the listing rules of stock exchanges, it proposes to
inrroduce a comprehensive regulatory regime governing the content and approval of prospectuses inspired by the EU Prospectus Directive, as amended.
The obligation to prepare a prospectus
IFLR/October 2014 65
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CO-PUBLISHED ARTICLEunder Fidleg will be triggered by any public offering of securities. It will apply both to
primary offerings in conneccion with issuances and secondary offerings. However, the prospectus nues will provide for a certain number of exemptions for offers to institutional investors, to a limited number of retail investors, as well as quantitative limitations regarding exempting offers with a high denornination or minimum investments and a de minimis exemption. The prospectus rules also contemplate inu·oducing detailed rules on the content of the prospectus, which will be enforced through an ex ante control process, which will no longer be !di: to self- regulation, but will, instead, be subject to formai administrative proceedings.
Moreover, to ensure that retail investors have sufficient information available, Fidleg envisages obliging producers of investmenr products, two undefined terms, ro prepare a basic information sheet. Al! investment products except equities, including not only packaged investrnent producrs but also straight bonds, will be subjecr to this regime.
Asset managers and tax compliance
ln parallel to the draft Fidleg, the Federal Departmenr of Finance (FDF) has also published a bill for a Federal Act on Financial lnstirutions (Finig). This wiÙ consolidare the existing rules on banks, securities dealers, fund managers and asser managers for investment funds within a single ace and expand its scope ro ail portfolio managers.
The drafr Finig aims ro put in place a sysrematic hierarchy of licences from a limited licence for portfolio managers ail the way to banking licences at the pinnacle, which allows its holders to carry out any financial service except fund management. Intermediate stages include an asset manager licence, which allows its holder to manage assets of collective invesrmenr schemes and pension funds, and a securities house licence, which allows its holder to offer securities cuscody and trading services.
More specifically, the draft Finig proposes a major development to regulare ail portfolio managers. Portfolio managers are nor subjecr ro prudential licensing requiremenrs or supervision under the existing regulations.
They are only regulated indirecrly through the anti-money laundering framework, which is largely delegated to self-regulatory organisations. Although the Swiss Financial Market Supervisory Authority (Finrna) has tried co stop the gap through its circular on minimum standards for self-regulacion of portfolio management, which imposes a common framework applicable to al!
professional organisations involved with 66 1 FLR/October 201 4
Rashid Bahar Bar& Karrer
Brandschenkestrasse 90 CH-8027 Zurich Switzerland
T:+41 582615392 F: +41 58 263 53 92
E: rashid.b[email protected] W: www.baerkarrer.ch
portfolio management, this regime is very open-rexrured and allows for substancial differences in terms of enforcement policies.
This new regime will be sirnilar to the existing regime for asset managers, although in several important areas the requirements will be less stringent. ln parcicular, insread of fully- fledged capital and liquidiry requirements, portfolio managers will need co provide appropriate guaranrees, a term chat needs to be further defined through implementing regulation. Similarly, we expecr chat the organisacional requiremems will be less cumbersome, allowing this business to be carried out in a smaller structure chan asset managers, securities dealers or banks.
ln addicion to licensing requirements, the draft Finig also contribuces to the Federal Council's so-called white money strategy, which seeks to ensure thar Swiss banks manage only tax-complianr funds. Ir therefore posirs an obligarion for fmancial institutions to positively assess whether a given client poses a risk thar funds will not be taxed before the initiation of the relationship is accepted. If so, the financial institution will be required to determine whether additional clarifications are necessary based on the specific faces and circumstances. If it concludes char there are any reasons to believe that funds are not or will not be taxed, the flnancial instirucion will be required ro turn down rhe client and, with respect to existing clients, close the accounr unless the client proves chat it complied wirh its tax duties or if a voluntary disclosure would impose an undue burden on the client.
Therefore, Finig sets a lower threshold for a financial institution ro ace chan anti-money laundering regulations, which require founded suspicions ro rrigger the obligation to file a suspicious activiry report.
Registration obligations
ln addition to licensing obligations in the draft Finig, the draft Fidleg conremplates two registration obligacions: one for client advisors
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and anorher for foreign financial service providers. These registration obligations do not email an ongoing oversight, bue merely seek to ensure chat, at the outser, a client advisor or a foreign financial service provider sacisfles the statutory requirements.
Client advisors will need to have appropriare education, including continuing education regarding the rules of conducrs. More imporrandy, client advisors will need ro
be regisrered wirh a newly creared registration body to carry out their dury. Registration should be a relatively srraight forward process, since client advisors will need to prove chat: (a) they were nor convicted of any criminal offence under Fidleg or any general financial offence under the Swiss Criminal Code, or subjecr co a ban from any acciviry in che fmancial industry; and (b) that they or their employer has su.fficient insurance coverage and is member of an ombuds organisation.
Over and above this registration dury, client advisers will also be required to have appropriare training and attend concinuing educacion on rules of conduct.
Foreign service providers, who do not have a permanenr physical presence in Swirzerland, will, in a deparrure from the exisring regulatory philosophy, be subject ro the draft Fidleg and, in particular, be required ro regisrer with Finma, if they inrend to offer fmancial services in Switzerland chat are subjecr to licensing requirements (portfolio managemenr, asset managements, fond management, securities trading and banking).
ln essence, regisrrarion should also be available to foreign financial institutions that are licensed and subject ro equivalenr ongoing supervision in their home country, provided the foreign securities dealer and irs home regulator is willing to cooperate and provide information with Finma.
Access to justice
In addicion to its regulatory framework, the drafr Fidleg provides for a comprehensive set
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of rules aiming co improve access co jusrice for clients. In parcicular, che drafc Fidleg contemplates the following changes: (i) it intends to impose on financial service providers a srrict duty to produce al!
documents relaced co a client and their invescments at the request of such client; (ii) ir shifts the burden of proof in conneccion wich daims for breaches of srarucory information and disdosure ducies from the plainti.ff co the financial service provider; (iii) ic insticuces a mandatory mediation procedure based on an ombud-syscem; (iv) it proposes co introduce eicher a simplilled arbitration procedure or a plaintiff fund set up by the government and sponsored by financial service providers chat may be rapped by clients in stace coure litigacion againsc financial service providers;
and, (v) in pa.rallel, ic also creaces a collective action mechanism chat allows incerest groups co sue on behalf of clients and even co enter into settlement agreements. 'While ail of chese changes are game changers, the collective action mechanism is probably the more innovative one and consequently deserves most attention.
The drafc Fidleg proposes co allow independent non-profit organisations to ace as protectors of the interest of clients. lf chey satisfy certain general and straightforward requirements (legal personality; ope.ration on a non-profit basis; and, purpose co observe the incerest of clients), chey can initiate collective actions under Fidleg and cap the plaintiff fund. Fidleg does noc set any ocher specific requiremencs (for instance, in terms of representativeness) co cercify a non-profit organisation as a plaintiff
Such non-profit plaintiffs cannot under Fidleg sue for damages; they can only seek a declaratory ruling or injunctive relief (for instance, co prevenc further breaches). The underlying idea is chat, on the basis of chis declaratory ruling, individual plaintiffs will be able on an expediced basis to seek damages or any other type of monecary relief However, in specillc cases, a fmancial institution will be able co object chat the plainriff does noc belong co d1e dass (because of speci.fic faces and circumstances) or should not be enritled to damages because, for example, it did not incur any Joss or there is no causation becween the Joss and the breach.
As an alternative co seeking judicial redress, the drafc Fidleg allows non-profit organisations co enter inco secdements wich financial service providers. In such a case, the terms of d1e settlement may offer individual clients financial compensation, avoiding the two-tiered process of a declaracory ruling followed by an individual suie for damages.
The system skecched out by the drafc Fidleg is flawed in several respects. Firsc, it requires www.iflr.com
Thomas Reutter
Bar & Karrer
Brandschenkestrasse 90 CH-8027 Zurich Switzerland T: +41582615284 F: +41 58 263 52 84
E: thomas.reutter@baerkarrer.ch W: www.baerkarrer.ch
the seulement to describe the faces and breaches oflaw mac give rise to me setdement, forcing me defendant ro acknowledge having commitced wrongdoing. Second, in addition
CO me certification process which requires the highesr cantonal court to review the settlement and ensure char it is fair and compensaces me viccims of the wrongdoing, ir allows individual clients co opt out from the secdement. If more man a chird of the viccims ope Out - a quantum mat may be difficuJt CO
verify considering thac the population of victims may not be known ac the oursec - eicher party will be entitled. ro revoke the settlemenc. The financial service provider is lefc wich no other choice chan litigating the matter individually afcer going on the record by acknowledging me facts and circumstances as well as me breach of law underlying the settlement. This uncertainty at the end of me process may discourage financial service providers from initiacing serclemenc calks ac me outsec.
Criminal provisions
To ensure strict compliance wich d1e law, the drafc Fidleg proposes to incroduce crirninal provisions. These provisions relate co breaches of law in connection wim prospectuSes and basic information documents, illegal offerings of financial instruments and me breach of conducc rules.
The harshesc of these provisions relates ro disclosure in prospecruses and similar documents. Incentional false information, incencional omission of macerial information or a failure co include all line items provided by law may lead to imprisomnenc of up co iliree years or a fine. The same applies co a failure to provide a prospectus or key invescor document in me proper manner or an incentional fa.Hure co publish these documents in due course. In a deparcure from general principles of crirninal law, negligence is also sancrioned wich a fine of up to 180 daily rates
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(Tagessatze - a fine char is expressed in numbers of days, but which depends on the offender's income).
False information does noc have co be macerial co crigger criminal liability. The same applies for any line item matis required by law co be included in a prospectus or key information document. Neimer is it required mat one or more investors must have incurred any damage as a result of false or misleading information in the disclosure document. In me case of an incentional ace or omission, it seems chat the intent must on[y relate CO me false or misleading nature of me information.
This is an offence even if there is no furcher intent to deceive or to obtain a monerary advancage and mere negligence suffices co trigger criminal liability. For instance, a person is exposed to criminal sanctions for merely overlooking of a piece of information in an otherwise properly conducted due diligence review; a conclusion mat seems excessively harsh for persans involved in drafring prospeccuses.
The drafc Fidleg also sanctions certain offerings of financial instruments in breach of the proposed new legal provisions. For example, whoever offers a bond or a structured product co privace clients wimout providing a basic information sheec in accordance wich Fidleg will be subjecr to crirninal sanctions, consisting of a fine of up to SFr500,000 ($532,000) in me case of an incentional ace, or a fine of up to SFr150,000 in me case of a negligenc ace.
Furcher, whoever breaches me duty of information or the duty co conducc an appropriaceness or suitability check will become subjecc co a fine. Theoretically, even a minor omission ro inform me client about one line item prescribed by law may lead co a fine. The fmes are up to SFr50,000 in the case of an incentional ace and up co SFrl5,000 in me case of a negligenc ace.
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