DR. MARTIN LIEBI, ATTORNEY-AT-LAW AT PRICEWATERHOUSECOOPERS LEGAL, ZURICH/SUPPLIED
The obligations under the new Swiss Financial Services Act (FINSA) will affect Middle Eastern financial service providers that provide financial services on a cross-border basis to Swiss retail, professional or institutional clients.
The production of financial instruments for the Swiss market is also for the first time comprehensively regulated. Most likely to take effect on 1 January 2020, there will be transition periods applicable to many of the new obligations.
The new provisions will apply to the financial institutions providing financial services, but also to their employees, directly. They will introduce certain information, documentation, and behavioural rules as well as organisational requirements, such as rules to prevent conflict of interests and how to handle commissions paid by third parties in the context of the provision of financial services.
Client advisors must be entered into a newly established client advisor register and the Middle Eastern financial service providers affected by FINSA must affiliate with an ombudsman. Extensive obligations apply also to Middle Eastern producers of financial instruments or Middle Eastern entities offering securities in the Swiss market.
The public offering of securities requires the publication of a prospectus which must be reviewed or approved by the newly established prospectus reviewing body. Prospectuses created under the laws of Middle Eastern jurisdictions or even UK law will have to get recognised by the prospectus reviewing body.
The obligation to produce a key investor information document (KIID) applies if financial instruments are distributed to retail clients.
Cross border impact
Financial services provided by financial service providers to clients in Switzerland fall within the scope of FinSA if they are provided in particular by phone, in writing or by e-mail. Excluded from FinSA are however explicit requests of Swiss clients to Middle Eastern financial service providers to provide financial services.
On the flip side, any provision of financial services on Swiss territory, even if such provision is made only on a temporary basis (for example, visit of the client during his stay in Geneva), falls within the scope of FinSA.
It is important to note that even pre-contractual activities with potential prospective clients can trigger the application of the obligations under FinSA. Prospective clients are protected with regards to the obligations under FinSA like actual clients.
Financial services that trigger the application of FinSA are the purchase or sale of financial instruments (equity and debt securities, structured products, funds, derivatives, bonds and structured deposits), the receipt and transmission of orders related to financial instruments, the management of assets (the administration of financial instruments), investment advice (the provision of personal recommendations on transactions with financial instruments) and the granting of loans to finance transactions with financial instruments.
Not all clients are protected equally under the FinSA. Financial service providers must segment their clients into private clients, professional clients or institutional clients, each category subject to different levels of protection. Institutional clients enjoy the lowest level of protection.
There is a legal assumption that professional clients do not require a suitability & appropriateness test due to their experience, expertise or wealth. The additional obligations with which the Middle Eastern financial service providers must comply with are aligned with the ones imposed under the European regulation MiFID II.
There is for example, an obligation to conduct an appropriateness and suitability test, to provide information (about the financial service providers in general and the specific activities provided and products distributed), to document and render account (such as related to the financial services agreed with and provided to clients), and to treat equally, unless they are waived by the clients entitled to do so.
Another key new feature that has a direct impact on employees of Middle Eastern financial service providers is the obligation to enter into a public client advisor register. The entry is a mandatory legal requirement for any natural person that is marketing, offering, and providing financial services to prospective or actual clients in Switzerland.
The client advisor register has to cheque the financial know-how of the client advisor and its knowledge of the applicable behavioural rules under the FinSA, such as but not limited to, information, documentation, rendering account and retrocession obligations. There will be an AI-proctored online test available 24/7 which client advisors can take at their convenience at their location of choice.
Additional requirements are professional liability insurance (or equivalent security), the affiliation of the financial service providers for which the client advisor is working for to an ombudsman, no entry in the criminal register regarding property and no industry ban or prohibition issued by the Swiss Financial Market Supervisory Authority (FINMA).
Both the client advisor register, and the ombudsman are intended to be operated by Regulatory Service, a group company of BX Swiss Exchange. The company is still, at the time of writing, in the authorisation process with FINMA and in the recognition process with the Swiss Federal Department of Finance.
Timely and full compliance with these new requirements is key for Middle Eastern financial service providers. Sanctions for non-compliance can be quite draconic.
Willful non-compliance with these new requirements can lead to imprisonment of up to three years and even non-diligent compliance results in a fine of up to CHF 250,000. It’s very likely that FINMA will initiate an enforcement procedure in case of non-compliance.
Financial instruments and securities
There is also quite a change to the Swiss regime applicable to the cross-border offering of financial instruments and securities. Creators of financial instruments for the Swiss market and entities offering securities in the Swiss market are now subject to increased regulation.
The admission to trading and the public offering of financial instruments require now generally a prospectus created in line with clearly defined content requirements similar to the ones applicable in the European Union, unless an exemption applies.
Any prospectus must be reviewed, or in case of a non-Swiss prospectus, be recognised by a newly established prospectus reviewing body.
The distribution of financial instruments to private clients require a KIID. The KIID contains the key risk parameters and features of the financial instrument. Structured products can still only be issued by Swiss or foreign equivalently supervised bank, insurance company, or investment firm.
Although there are transition periods applicable, there is also a backloading obligation for all securities stemming from an ongoing public offer pending on or beyond 2 January 2022.
Willful non-compliance with the rules about the creation and documentation of financial instruments can be sanctioned with a fine of up to CHF 500,000 and no diligent non-compliance with a fine of up to CHF 100,000.