July 01, 2019

New Rules For US Financial Service Providers That Provide Cross-Border Financial Services In Switzerland Or Produce Financial Instruments For The Swiss Market

Martin Liebi and Merlin Haldemann

Regulatory implications

The provision of cross-border financial services by US financial service providers, 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, behavioral, interest related and organisational obligations as well as the obligation to enter involved client advisors into a client advisor register and to affiliate with the Swiss Ombudsman for financial services.

The affected financial services, financial instruments and clients in Switzerland

The new Swiss Financial Services Act (FinSA) also introduces significant changes for US financial service providers and producers of financial instruments. In principle, this 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 transactions are generally not covered by the scope of FinSA. The scope of application of the FinSA therefore covers fewer activities than intended for under MiFID II. Thus, 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 is generally also not affected. The universe of affected financial instruments, to which the financial services relate, essentially covers the financial instruments under MiFID II. Swiss clients are segmented into private clients, professional clients and institutional clients. Clients can generally change the client category on request. Already mere marketing activities towards potential clients in Switzerland, i.e. before having concluded a client contract, will trigger the obligations under the FinSA.

The applicable obligations for client advisors and financial service providers

The applicable obligations are essentially the same as those under MiFID II. However, there are significant differences. The MiFID II standard fulfills more or less the requirements under the FinSA with respect to some duties. These duties 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. Client advisors must be entered into the Swiss client advisor register. Client advisors are the natural persons who provide financial services in Switzerland. 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. 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 service. However, the client may waive his right to commissions, even if they 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. However, these obligations are essentially in line with the standard under MiFID II.

Changes in the area of public offerings of financial instruments in the Swiss market

From 1 January 2020, there will also be material changes with regard to the public offering of financial instruments in the Swiss market. Public distribution in Switzerland of financial instruments will be subject to a more extensive prospectus requirement in the future. The requirements of the prospectus and the possible exceptions are generally based on the European Prospectus Regulation. However, there are also some deviations in this regard as part of a "Swiss finish" such as the lack of a prospectus obligation in a public offering to 500 private investors. Prospectuses for public distribution must be checked by a reviewing body. Both the Swiss stock exchange SIX Exchange AG as well as BX Swiss, which is part of the stock exchange Börse Stuttgart Group, will have a reviewing body. Prospectuses that have been prepared in accordance with the EU Prospectus Regulation and that have already been reviewed by an authority (e.g. the BaFin) only have to be recognised in a simplified procedure and deposited with the reviewing body. However, the approval or recognition must be renewed after twelve months.

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

As before, US financial service providers or creators in Switzerland may only offer structured products 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. However, a written and permanent portfolio management or investment advisory contract remains reserved.

Sanctions in case of non-compliance with the new rules

It is important that affected US financial service providers and producers of financial instruments comply with the new obligations. There are fines set forth in the FinSA of up to CHF 500,000 for non-compliance with the obligations or for the unlawful distribution 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.

Summary

As of 1 January 2020, the new Swiss Financial Services Act will have a profound effect on the business activities of US financial service providers and their client advisors with clients in Switzerland, as well as on the US producers of financial instruments for the Swiss market. Many of the obligations essentially correspond to the requirements under MiFID II. However, some changes go beyond the scope of application of MiFID II, such as the obligation to be entered into the client advisor register and the obligation to affiliate with an Ombudsman for US financial service providers who are active in the Swiss market. The public distribution of financial instruments is subject to more extensive prospectus requirements. In general, prospectuses must be checked by the reviewing body. However, if a foreign reviewing body or authority has already carried out a check, a recognition or a deposit are sufficient.

 

Martin Liebi

Head of Capital Markets, PricewaterhouseCoopers

Martin Liebi, attorney-at-law, is head of capital markets within the legal services at PricewaterhouseCoopers Legal, Zurich, Switzerland, and can be reached martin.liebi@ch.pwc.com

Merlin Haldemann

Attorney, PricewaterhouseCoopers

Merlin Haldemann, attorney-at-law, is practicing capital markets law at PricewaterhouseCoopers Legal, Zurich, Switzerland and can be reached at merlin.x.haldemann@ch.pwc.com