The New Rules in a Nutshell and How They Apply to Non-Swiss Financial Service Providers or Creators of Financial Instruments
The provision of cross-border financial services by Non-Swiss financial service providers to Swiss clients, as well as the creation of financial instruments for the Swiss market, will be regulated comprehensively by the new Swiss Financial Services Act (FinSA). The FINSA will likely be applied on 1 January 2020 and the duties for Non-Swiss financial service providers having clients in Switzerland include information, documentation, behavioral, conflict of interests related, and organisational obligations as well as the obligation to enter client advisors having clients in Switzerland into a client advisor register and to affiliate as Non-Swiss financial service provider having clients in Switzerland with the Swiss Ombudsman for financial services.
The FINSA affects in principle all Non-Swiss financial service providers who purchase, sell or distribute financial instruments, receive or transmit orders related to financial instruments, provide asset management or investment advice, and grant loans to finance transactions with financial instruments, meaning shares, bonds, funds, derivatives, and structured products related to clients in Switzerland – no matter whether institutional, professional or retail clients. Institutional clients are for example banks and other regulated entities and professional investors having at least approx. USD 2 million in wealth or approx. USD 500’000 in wealth and sufficient knowledge of financial markets. 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 duties under the FINSA include the obligations for client segmentation, information, documentation, rendering of account, suitability & appropriateness test, conflicts of interest, and organizational requirements. Client advisors must be entered into the future Swiss client advisor and the Non-Swiss service providers for which the client advisors work must affiliate with the Swiss financial services ombudsman, which will be managed by the same company. Client advisors will, in particular, have to prove that they have sufficient financial markets know-how and knowledge of the applicable Swiss behavioral rules under the FINSA. This can be done by means of an Artificial Intelligence-proctored test that can be accessed online 24/7. The Swiss client advisor register is currently in the licensing procedure with the Swiss Financial Market Supervisory Authority FINMA and the ombudsman in the recognition process with the Swiss Finance Department.
Creators of financial instruments for the Swiss market and distributors of financial instruments in the Swiss market are subject to increased documentation requirements. Public distribution of securities in Switzerland will be subject to a more extensive prospectus requirement in the future. Swiss prospectuses must be reviewed and Non-Swiss or other non-Swiss prospectuses must be recognized by the newly established prospectus reviewing body run by both Swiss stock exchanges SIX as well as BX. The approval of a reviewed or recognized prospectus is only valid for 12 months. Financial instruments may only be offered to private investors if a so-called “key information document” (KID) is created and provided prior to the offer. Structured products might only be offered to private investors if the structured products are issued, guaranteed, or secured in an equivalent manner by a Swiss bank, an insurance company, securities firm, or a corresponding Non-Swiss institution.
It is important that affected Non-Swiss financial service providers and producers of financial instruments comply with the new obligations. Willful non-registration in the client-advisor register can be fined with imprisonment of up to three years and non-diligent non-registration with up to CHF 250’000 per case. Non-compliance with financial instrument distribution rules can be sanctioned with fines of up to CHF 500’000.