On 1 January 2020 the new Swiss Financial Services Act (FinSA) and its implementing ordinance, the Financial Services Ordinance (FinSO), will come into effect. The Swiss Federal Council announced its decision on the entering into force of the new financial services regulation and the final text of the implementing ordinances on 6 November 2019. There are no big surprises in the final ordinances regarding the newly introduced basic information sheet (Basisinformationsblatt). However, a number of amendments were made based on responses in the consultation process of the draft ordinances.

By Daniel Haeberli (Reference: CapLaw-2019-53)

1) No surprises in respect of the content requirements

One of the key novelties introduced by the FinSA is the obligation to prepare and make available a short document setting out the key information, the so-called basic information sheet (Basisinformationsblatt; BIS), often referred to also as the “key information document” or “basic information document”.

This basic information sheet must contain all information for the investment decision in such a way that is easily comprehensible and designed to assist the investor in comparing the financial instrument being offered to other financial instruments. 

The key elements that need to be covered in the BIS are set out in article 60 FinSA, while the introduction of supplementary provisions on the BIS was delegated to the Federal Council pursuant to article 63 FinSA. The FinSO, thus, provides in articles 88 to 90 the supplementary provisions on the content, language, layout and scope of the BIS and in annex 9 of the FinSO a template and content specifications of the BIS. 

While on its face these requirements are largely aligned with those applicable to the key information document (KID) under the EU PRIIPs Regulation, they are less detailed as well as less onerous and leave much more flexibility. The biggest differences between the PRIIPs Regulations and the FinSO regarding the content requirements are in reference to the description of the risks and rewards of the financial instrument (i.e., “What are the risks and what might I get back in return?”). The approach taken in the FinSO provides for a lot of flexibility and avoids some of the flaws of the summary risk indicator and performance scenarios of the PRIIPs KID. However, the rather lean regulations under the FinSO and flexibility provided by the FinSO allows for different presentations of risk and performance scenarios. This may ultimately result in various manufacturers presenting risks and performance scenarios in different ways and making basic information sheets less comparable. While the EU has a very strong focus on comparability, Switzerland has taken a different view. The Swiss regulations focus less on standardizing the information in the BIS, but allowing the market to develop a standard. 

The final text of the FinSO does not contain any substantive amendments to the draft FinSO that was subject to the consultation process, at least in respect of the provisions relating to the BIS. Accordingly, there were no surprises as to the content requirements of the BIS when the Swiss Federal Council published the final text on 6 November 2019. 

The Swiss Federal Council did, however, make some relevant amendments in the final text of the FinSO based on results of the consultation process.

2) Relevant amendments in the final ordinances 

a) The BIB and the equivalent foreign document – the PRIIPs KID,
but not the PIB

Article 59 para. 2 FinSA provides that documents prepared under foreign regulations which are equivalent to the BIS may be used instead of a BIS. Based on article 63 lit d FinSA it is for the Swiss Federal Council to determine what foreign documents are equivalent to the BIS. The draft FinSO, which was subject to the consultation process, listed the PRIIPs KID and the German product information sheet (so-called “Produktinformationsblatt”; PIB) as equivalent foreign documents. The final FinSO now only refers to the PRIIPs KID. Accordingly, the PRIIPs KID is the only foreign document that may be used as a substitute to the BIS. 

b) The BIS and execution-only transactions

In general, a financial service provider when recommending a financial instrument to a retail client (article 8 para. 3 FinSA) has to make available a BIS. According to article 8 para. 4 FinSA, no BIS has to be made available in case of an execution only transaction (i.e., if the service consists exclusively in the execution of client orders without providing any advice). At a rather late stage of the parliamentary discussion of the FinSA, this provision was amended by adding the exemption that making a BIB available only applies if no other already exists. In the consultation process of the draft ordinances, a number of participants commented on this restriction of the exemption and asked for clarification in the ordinance when a BIB is deemed as already existing for purposes of article 8 para. 4 FinSA. 

The final text of the ordinance takes up this point and states that a BIB is deemed already existing if it can be found with reasonable efforts (article 11 para. 2 FinSO). Obviously, it is subject to interpretation what actions a financial service provider has to take in order to comply with the reasonable efforts obligation. According to the explanatory report, this should normally be an Internet search since it may be expected that manufacturers will generally publish the BIS on their website. However, a financial service provider should also be able to discharge its reasonable efforts obligation by other means than an Internet search. It must, for example, be sufficient, if the financial series provider has access to a professional centralized documentation repository that collects BIS’ from manufacturer. 

Another relevant amendment in the final text of the ordinance is the new provision in article 11 para. 3 FinSO. While in principle, the BIS has to be made available prior to executing a transaction, this provision allows retail clients to agree to only receive the BIS after the execution of the transaction. This exemption is, however, only available in respect of execution-only transactions and takes into account that in such a situation it is for practical reasons generally not possible to make the BIS available prior to the execution of the transaction. In such situations, timing is essential and retail investors should have the possibility to immediately execute the transaction. Accordingly, it is likely that financial service provider will seek a general consent from their retail clients when opening a securities account. Such consent may, however, not be included in the bank’s general terms and conditions, but must be obtained in a separate document. 

c) The BIB and financial instruments that are created for
a single counterparty

While, in general, a BIS has to be prepared for all financial instruments according to article 58 FinSA, shares and debt instruments without a derivative character are explicitly exempted pursuant to article 59 FinSA (see also article 86 FinSO, which substantiates the exemption). The final ordinance provides a further exemption in article 80 para 2 FinSO: no BIS is required for financial instruments that are created for a single counterparty. This exemption aims in particular at derivatives that are based on a bilateral contract, such as interest rate and currency futures and swaps that are based on a master agreement, such as the ISDA Master Agreement. Conceptually such bilateral financial instruments do not really have a manufacturer. Whether this exemption also applies to, for example, individually tailored structured products for a specific investor is debatable, as is the question whether (as a matter of principle) there is a sufficient legal basis for this exemption in the FinSO.

d) The BIB during the transitional period

In the final text of the ordinance, the transitional period in respect of the requirement to prepare a BIS has been extended to two years. Accordingly, for collective investment schemes a simplified prospectus or key investor information document, pursuant to the Collective Investment Schemes Ordinance, and for structured products, a simplified prospectus pursuant to the Collective Investment Schemes Act, may be prepared instead of a BIS until 1 January 2022. 

Pursuant to the explanatory report, it is, however, not permissible to prepare both documents (i.e., a simplified prospectus or key investor information document and a BIS). The reasoning for this restriction is that it may confuse retail clients if they receive both documents, as the content of the two documents is not identical. However, the practical impact of this prohibition should be minimal. 

No such restriction applies in respect to the UCITS-KIID and the PRIIPs KID. These documents may be prepared in addition to the simplified prospectus or key investor information document, both during and after the end of the transitional period. This is important as, for example, most Swiss manufacturers of structured products already prepare a PRIIPs KID today. Furthermore, from a regulatory perspective, it is fine to prepare a PRIIPs KID as well as a BIS for the same product. Providing retail investors with both documents may entail some risks from a civil law perspective, as the content of the two documents is not identical. Since the legislator treats the two documents as equivalent, it may, however, be difficult to make a sound argument for civil liability on the basis that the PRIIPs KID and the BIS contain different information.

e) The product documentation for structured products during
the transitional period

The transitional period for the prospectus regime pursuant to article 109 FinSO means, in relation to structured products, that no prospectus must be prepared until at least October 1, 2020. No prospectus means that no prospectus within the meaning of the FinSA nor a prospectus pursuant to article 1156 of the Code of Obligations nor a simplified prospectus pursuant to article 5 of the Collective Investment Schemes Act must be prepared. Only in case where structured products shall be listed on a Swiss exchange, a listing prospectus pursuant to the current listing regime must be prepared. Furthermore, during the transitional period of article 111 FinSO, a simplified prospectus pursuant to the Collective Investment Schemes Act in its version of March 1, 2013 can be prepared instead of a BIS or PRIIPs KID. The current exemption from preparing a simplified prospectus in case of listed structured products (article 4 para. 4 of the Collective Investment Schemes Ordinance) is, however, no longer available after January 1, 2020.

3) Additional remarks

a) Duty to prepare the BIS

A BIS has to be prepared by the manufacturer in case a financial instrument is offered to private clients in Switzerland (article 58 para 1 FinSA and article 80 FinSO). This is a point of production duty, which is triggered at the point of sale. Accordingly, in case the manufacturer is not identical with the offeror of the financial instrument, it is to be expected that the manufacturer and the offeror will address the manufacturer’s duty to prepare a BIS in a distribution agreement. 

Relating to a non-Swiss manufacturer, the question is whether the duty to prepare a BIS extends to such foreign manufacturer. The Swiss regulations are based on the principal of territoriality. Of course, there are certain cross-border situations that fall within the scope of the Swiss regulations based on an explicit statutory provision. The FinSA does, however, not explicitly state that non-Swiss manufacturers are obliged to prepare a BIS. Furthermore, the criminal sanctions in the FinSA do not apply in case a BIS is not prepared. Merely the non-publication of the BIS is subject to criminal sanctions (article 90 FinSA). 

In case a manufacturer does not intent to prepare a BIS, it needs to be ensured that the product documentation prepared at the point of production includes a respective statement. In particular, in respect of financial instruments that are to be offered exclusively to professional investors and asset management clients without a BIS, (article 58 para. 2 FinSA exempts manufacturers from preparing a BIS if the financial instrument may only be purchased in the context of a asset management mandate), the product documentation should include a relevant selling restriction and statement that no BIS is being prepared.

b) Duty to publish and make the BIS available

If and when a financial instrument, for which a BIS has to be prepared, is publicly offered, it has to be published (article 66 FinSA). This duty can be met by making hard copies available free of charge at the seat of the issuer, lead manager or offeror or by making it accessible on the website of the issuer, lead manager or offeror or the website of the exchange or the Review Body (Prüfstelle) (article 64 in connection with 66 FinSA). 

In case of a personal recommendation in respect of a financial instrument for which a BIS has to be prepared, the financial service provider has to make a BIS available to the private client (article 8 para. 3 FinSA). Making available means that a copy of the BIS has to be handed out or emailed to the client. Alternatively, the BIS may be made accessible on a website. The service provider must then ensure that the BIS remains accessible for as long as the financial instrument is offered and that the client is aware of the website’s address and, if no deep link is provided, where to locate the BIS on the website.

In order to meet the publishing duty as well as the duty to make the BIS available, making the BIS accessible on a website seems to be the most practical approach. There is no transitional period for these duties. Hence, they apply as of 1 January 2020. This is important to note as no such obligation applies under the pre-FinSA regime. Offerors and financial service providers, respectively, will need to implement a process ensuring the duties to publish and make available the BIS are being complied with as from 1 January 2020.

4) Final remarks

The amendments help to ensure that the provisions on the basic information sheet can be implemented and complied with in a meaningful way in practice and the two year grace period, during which the simplified prospectus and the key investor information document can be used, enables a smooth transition to the new regime.

Daniel Haeberli (daniel.haeberli@homburger.ch)