Cross-border financial services in light of FinSA
A new era for financial services provided into Switzerland on a mere cross-border basis
On June 15, 2018, the Swiss Parliament adopted the Financial Services Act (FinSA), a statute that will significantly change the Swiss regulatory regime on financial services once it has entered into force, presumably on January 1, 2020. In particular, non-Swiss financial service providers should be aware that FinSA will also apply to services provided on a mere cross-border basis into Switzerland. Non-Swiss financial service providers will be required to either establish a regulated branch or subsidiary in Switzerland or register their client advisers in a newly established register of client advisers.
Scope of Application
To date, a rather liberal approach applies to financial services offered on a mere cross-border basis into Switzerland. The FinSA will, however, introduce a more restrictive legal regime as to financial services offered from abroad to Switzerland. The FinSA will apply, in particular, to financial service providers and client advisers.
Pursuant to the FinSA, financial service providers are persons that provide financial services on a professional basis in Switzerland or to clients in Switzerland, while client advisers are the natural persons who actually perform financial services on behalf of a financial service provider (or in their own capacity as financial service providers). As a result, the FinSA will apply to non-Swiss financial service providers (and their client advisers) that provide their services on a cross-border basis into Switzerland. Whenever financial services will be provided to clients located in Switzerland, the FinSA will apply, irrespective of where the financial service provider (or the client adviser) is located.
The following activities fall within the meaning of financial services pursuant to the FinSA when provided for a client: (i) purchase and sale of financial instruments, (ii) receipt and transmissions of orders on financial instruments, (iii) management of financial instruments (asset management), (iv) personal recommendations relating to transactions on financial instruments (investment advisory) and (v) the granting of loans to finance transactions with respect to financial instruments.
In accordance with the FinSA, equity and debt securities, including bonds, units in collective investment schemes, structured products, derivatives and certain types of deposits are considered to be financial instruments. By contrast, loans do generally not fall within the meaning of financial instruments pursuant to the FinSA, unless they are granted to finance transactions with respect to financial instruments.
The goals in respect of the broad applicability of the new legal regime on financial services are to promote a fair competition (level playing field) among Swiss financial service providers and their respective competitors located abroad and to guarantee a better protection to clients in Switzerland.
Obligation to either (i) establish a regulated branch or subsidiary in Switzerland or (ii) register the client advisers
Pursuant to the FinSA, client advisers of Swiss financial service providers that are not subject to prudential supervision, as well as client advisers of non-Swiss financial service providers, cannot carry out their activity in Switzerland unless they are recorded into a register of client advisers. Non-Swiss financial service providers that aim to continue to offer their services to clients in Switzerland once that the FinSA has entered into force, will therefore have to either (i) establish a regulated branch or subsidiary in Switzerland – which will be subject to prudential supervision by the Swiss regulator (FINMA), or (ii) register their client advisers into a new register for client advisers that will be established pursuant to the FinSA — which will not trigger prudential supervision by the Swiss authorities.
Requirements to be admitted into the register of client advisers and duty to update
The client adviser who seeks to obtain registration in the register of client advisers shall, in particular, demonstrate that he or she: (i) has sufficient knowledge of Swiss regulations and the required expert knowledge (please also refer to the next paragraph), (ii) has sufficient professional insurance or similar financial guarantees in place or the financial service provider for which the client adviser is working satisfies this requirement, (iii) is affiliated with an ombudsman pursuant to the FinSA in case the client adviser is also the financial service provider or, if this is not the case, the financial service provider itself holds an affiliation, (iv) is not and was not convinced for certain violations of Swiss financial services regulations, including the criminal provisions set forth in the FinSA, or certain provisions of the Swiss Criminal Code, which have been registered into a criminal record and (v) is not subject to certain sanctions taken by the Swiss regulator (FINMA), such as the prohibition from practicing the profession for a certain period of time.
As far as the required knowledge of Swiss regulations is concerned, in order to be admitted into the register of client advisers, a client adviser should prove that he or she has sufficient knowledge of the rules of conduct set forth in the FinSA. This includes duties of: (i) disclosing information to clients, (ii) assessment of the appropriateness and suitability of the financial services provided to each client, (iii) recordkeeping, (iv) transmission of documents, (v) transparency and due care as to the clients’ instructions received. In addition, the client advisers must know the rules of conduct relevant to their specific activity, which are part of the Swiss rules on financial markets. That being said, non-Swiss financial service providers and their client advisers may be interested to hear that the rules of conduct implemented by the FinSA are in principle equivalent to those set forth in the EU pursuant to the Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments, i.e., the MiFID II regulation.
Finally, both client advisers who have been recorded in the register of client advisers and the financial service providers for which the client advisers are working (unless the client adviser is acting on his or her own as financial service provider) shall communicate to the authority maintaining the register any change as to the facts relating to the registration. As mentioned above, the registration in the register will not lead to the financial services provider or the client advisers becoming subject to prudential supervision in Switzerland.
Potential registration exemptions for services exclusively provided to professional or institutional clients
The FinSA grants to the Swiss Federal Council the authority to implement a registration exemption in the implementing ordinance for client advisers of non-Swiss financial service providers that are subject to prudential supervision abroad, as long as they provide their financial services into Switzerland exclusively to professional or institutional clients.
Pursuant to the FinSA, the following are deemed to be professional clients: (a) regulated financial intermediaries as defined in the Swiss Banking Act, the new Swiss Financial Institutions Act and the Swiss Collective Investment Schemes Act, (b) regulated insurance companies as defined in the Swiss Insurance Supervision Act, (c) foreign clients subject to an equivalent form of prudential supervision as the entities under letters (a) and (b), (d) central banks, (e) public law corporations with professional treasury operations (i.e., that employ one person qualified and experienced in financial matters to manage the financial assets), (f) pension funds and occupational pension funds with professional treasury operations, (g) companies with professional treasury operations; (h) large companies, and (i) private investment structures with professional treasury operations which have been established for high-net worth retail clients.
Institutional clients are, pursuant to FinSA, certain professional clients, namely those defined supra under letters (a) to (d), as well as national and supranational public law corporations with professional treasury operations.
The Swiss Federal Council has the possibility to make the registration exemption mentioned above subject to the condition of reciprocity. Since the implementing ordinance of the Swiss Federal Council (or a draft thereof) is not yet available, it remains unclear at this stage to what extent the aforementioned registration exemption (if any) for cross-border services will be implemented and whether it will be or not conditional to the application of the principle of reciprocity.
Implementing ordinance and entry into force
A number of provisions of the FinSA such as those relating to the expert knowledge required or the registration exemption mentioned above are anticipated to be further specified in an implementing ordinance to be promulgated by the Swiss Federal Council, a draft of which is expected to become available later this year.
The FinSA, together with its implementing ordinance, is expected to enter into force on January 1, 2020.
We will continue to monitor these developments and issue further bulletins on specific topics as soon as the draft implementing ordinance is available.
This Homburger Bulletin expresses general views of the authors at the date of the Bulletin, without considering the facts and circumstances of any particular person or transaction. It does not constitute legal advice. This Bulletin may not be relied upon by any person for any purpose, and any liability for the accuracy, correctness or fairness of the contents of this Homburger Bulletin is explicitly excluded.