Following a review of the consultation results on the draft Financial Services Act (FinSA) and the draft Financial Institutions Act (FinIA), the Swiss Federal Council decided that certain elements needed to be revised and the dispatch for submission to the Swiss Parliament be postponed until the end of 2015.
By René Bösch / Benjamin Leisinger (Reference: CapLaw-2015-33)
On 25 June 2014, the Swiss Federal Council launched the consultation on the FinSA and the FinIA.
- The FinSA shall introduce for the first time a comprehensive framework for the issuance and sale of securities. The draft FinSA (see CapLaw-2014-5 for an overview) provides for a prospectus requirement for all securities (see CapLaw-2015-3 describing the prospectus regime originally proposed), the need for a Key Investor Information Document (KIID) for all complex financial products, stricter duties at the point of sale, client segmentation, licensing requirements for individual client advisors and the regulation of cross-border activities into Switzerland. Moreover, the draft FinSA includes provisions aimed at facilitating the enforcement of customers’ claims against financial service providers (namely, group settlement proceedings and representative action).
- The FinIA intends to introduce a differentiated supervisory and regulatory regime for financial institutions providing asset management services to third parties. It is envisaged to serve as the legal framework that will govern the licensing requirements and further organizational conditions for financial institutions. The stated goal of the FinIA is to (i) enhance the protection of investors and clients of financial institutions, (ii) increase the functionality of the financial market, and (iii) increase the stability of the financial system as a whole.
The consultation period in respect of both drafts ended on 17 October 2014.
On 13 March 2015, the Swiss Federal Council stated that, according to its review of the results of the consultation, both of the preliminary legislative drafts were positively received by the majority of the consultation participants, but serious reservations were expressed about individual areas contained therein.
- For example, the proposed reversal of the burden of proof with respect to enforcing civil claims against financial service providers was among the most criticized provisions. The draft FinSA proposed that the burden of proof for the fulfilment of information and disclosure duties stipulated by the FinSA be shifted to the financial services provider (article 74(1) FinSA) and that if the financial services provider has not fulfilled his legal information and disclosure duties (or could not prove that it did), it will be presumed that the client would not have executed the concerned trade.
- Moreover, the procedural costs fund (a proposed fund to be sponsored by financial services providers to bear an appropriate part of client litigation costs) and the arbitration court (a proposed alternative venue for civil claims) were clearly rejected together with the instruments of collective legal protection limited to financial services.
- Other disputed and criticized topics included the client advisor register, disclosure of the compensation of financial service providers (e.g., retrocessions), and enhanced due diligence requirements relating to clients’ tax compliance.
When presenting their review of the consultation results, the Swiss Federal Council also announced their decision on the controversial topics in the consultation procedure:
- In addition to the proposed reversal of the burden of proof, the procedural costs fund and the arbitration court will also be eliminated. Rather, access to a court of law should be facilitated with a new cost settlement rule without cross-financing amongst financial service providers, whereby the financial service providers, subject to certain conditions, will pay the plaintiff costs regardless of the outcome of proceedings. The regulations on the instruments of collective legal protection (i.e., group settlement proceedings and representative action) will be integrated in the Civil Procedure Code in the coming years and will no longer be regulated in the FinSA.
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Moreover, according to the Swiss Federal Council’s decisions, the client advisor register will be completely revised in the new draft legislation to be submitted to the Swiss Parliament and will be merged with the general register for foreign financial service providers also provided for by the FinSA.
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According to the Swiss Federal Council, the rule on disclosure of retrocessions will be retained in the form contained in the preliminary draft submitted for consultation. This means that there will neither be a ban on retrocessions nor any restrictions on transparency.
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The enhanced due diligence requirements in connection with client’s tax compliance will be regulated within the scope of the dispatch on the implementing act on the automatic exchange of information (AEOI). In the case of institutional oversight (contained in the FinIA), a general legislative basis is envisaged explicitly mentioning legal risks.
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In contrast to previous expectations, the Banking Act will not be repealed in its entirety, but the FinIA and the Banking Act will be reconciled.
The Swiss Federal Council conducted a separate discussion on the specific design for the supervision of asset managers, the requirement of training and continuing education and the problem of costs associated with enforcement of civil claims against financial service providers. On 24 June 2015, the Swiss Federal Council announced that it has decided to propose a separate new supervisory organization (authorized and supervised by FINMA) for asset managers performing a risk-based supervisory activity. Further, the rules on training and continuing professional development will be expanded compared to the consultation draft to include the responsibility of financial service providers that their client advisors meet the requirements. Finally, the Federal Council decided to propose an exemption from the advances on proceedings costs and that financial service providers must cover their litigation costs even if they win, provided in each case that the amount in dispute is below CHF 250,000 and that there was an ombudsman proceeding beforehand.
According to the website of the State Secretariat for International Financial Matters, the dispatch to the Swiss Parliament which will contain the draft legislation reflecting these changes is expected to come in the third quarter of 2015.
René Bösch (rene.boesch@homburger.ch)
Benjamin Leisinger (benjamin.leisinger@homburger.ch)