On 1 January 2022 the Swiss Financial Services Act (“FinSA“) and the Swiss Financial Institutions Act (“FinIA“) entered into force. While the FinSA provides for a wide range of new rules applicable to financial service providers, irrespective of their licensing status, and new documentation rules applicable to financial instruments, the FinIA introduced, among other things, new licensing requirements for portfolio managers and trustees. The two acts provided for a number of transition periods; on 31 December 2021 the clock ran out on most of these transition periods.
By Patrick Schärli (Reference: CapLaw-2022-04)
1) Rules of conduct and organization measures: in full force and effect
The FinSA introduced, among other things, a wide array of conduct rules (just to name a few of them: client categorization, suitability and appropriateness tests, rules around the execution of financial instruments transactions) and organizational rules and requirements (e.g. measures to prevent conflicts of interest, obligations to disclose payments received from third parties such as retrocessions). These new rules apply to all types of financial service providers, irrespective of their regulatory or supervisory status.
While many of the FinSA rules may not be all that new for more sophisticated, internationally active financial service providers, the new FinSA rules present somewhat of a challenge for the large number of smaller (and sometimes unregulated) financial service providers. Moreover, financial service providers have to adapt their already existing internal processes and procedures to comply with the FinSA rules or create such internal processes and procedures from scratch. To address these challenges and provide ample time for the required implementation work, the FinSA provided for various transition periods. The most important of these transition periods, i.e. the deadline to implement the rules of conduct and organizational requirements, ended on 31 December 2021. Thus, as of 1 January 2022, the FinSA rules on conduct and organizational measures are in full force and effect.
2) Key information documents (KID): extension of transition period
In addition to the above mentioned rules of conduct and organizational measures for financial services providers, the FinSA also introduced and harmonized product documentation rules and requirements for financial instruments. These new rules include prospectus requirements for the public offering or admission to trading of securities (similar to rules known in other European jurisdictions) and a requirement to prepare a so-called key information document (“KID“) for more complex financial instruments and/or financial instruments with derivative elements (e.g. structured products, derivatives, collective investment schemes) if such instruments are offered to retail investors in Switzerland. The FinSA KID requirements largely follow similar rules laid out in its European counterpart, the EU PRIIPs Regulation (Regulation (EU) 1286/2014). In fact, a KID that has been prepared in accordance with the EU PRIIPs Regulation is considered an equivalent document for purposes of the FinSA, and such equivalent document can be used instead of a Swiss KID.
The new FinSA KID is supposed to harmonize KID requirements and replace a number of similar type of documents that have existed previously in various different Swiss financial markets regulations. More specifically, the FinSA KID replaces the simplified prospectus for structured products, the key investor information document for securities funds and other funds for traditional investments, and the simplified prospectus for real estate funds.
Originally, the use of the new FinSA KID was envisaged for products that would be offered to retail customers as of 1 January 2022. However, at the beginning of December 2021, the Swiss Federal Council extended the transitional period for the introduction of the KID. The extension of the transitional period was justified in light of similar developments in the European Union, where the European Council and the European Parliament extended the transitional period for the replacement of the UCITS KIID (i.e. the key investor information documents for European retail funds) by the PRIIPS KID to the end of 2022.
In light of these European developments and in order to ensure equal treatment and avoid additional burdens for issuers of financial instruments, the transition period for the FinSA KID was also extended by one year and now ends on 31 December 2022. As a consequence, until 31 December 2022 simplified prospectuses for structured products, key investor information documents for securities funds and other funds for traditional investments, and simplified prospectuses for real estate fund may continue to be used instead of the new FinSA KID. The relevant rules on transition periods in articles 110 and 111 of the Financial Services Ordinance and article 144 of the Collective Investment Schemes Ordinance have been amended accordingly with effect as of 1 January 2022.
3) Portfolio managers and trustees: the clock is ticking
The FinIA governs licensing requirements for a number of different financial institutions, such as securities firms, managers of collective assets or fund management companies. While changes to the licensing requirements for the afore-mentioned financial institutions were generally limited, the FinIA also introduced completely new licensing requirements for portfolio managers and trustees. In the pre-FinIA world, portfolio managers and trustees were not subject to licensing requirements and they only had to register with a self-regulatory organization for purposes of compliance with anti-money laundering legislation. Thus, the FinIA brought about significant change in terms of regulatory rules and requirements for portfolio managers and trustees.
The FinIA defines portfolio manager as someone that, based on a mandate agreement, may dispose of a client’s asset by way of the following activities: (i) purchase or sale of financial instruments, (ii) acceptance and transmission of client orders relating to financial instruments, (iii) management of financial instruments (asset management), or (iv) advice relating to financial instruments (investment advice). A trustee is defined as someone that based on a trust deed may dispose of the assets of a trust within the meaning of the Hague Trust Convention. While the FinIA provides for certain exemptions from the scope of the portfolio managers or trustee licensing requirements (e.g. because of “economic” or “family” ties), the new licensing requirements still apply to a rather large number of financial institutions. According to a communication of the Swiss regulator FINMA in September 2021, a total of around 2,400 portfolio managers and trustees had indicated to FINMA that they intended to obtain a license under the FinIA.
In terms of supervisory concept, the FinIA introduced a dual-layered supervision for portfolio managers and trustees. While FINMA is responsible for granting licenses and taking enforcement action, so-called supervisory organizations (“SO“) have been entrusted with the day-to-day supervision of portfolio managers and trustees. The SO are privately organized, but licensed by FINMA. In order for a portfolio manager or a trustee to obtain a license from FINMA, it first has to obtain an affiliation with an SO. For this purpose, the SO will review the license application before it can be submitted to FINMA. Thus, only once the SO has approved the application and granted affiliation, the relevant license application gets submitted to FINMA.
Realizing that the transition from a previously mostly unregulated business to a fully supervised and regulated financial activity will be a challenge for many portfolio managers and trustees, the FinIA provided for a rather long transition period of three years, i.e. until 31 December 2022. By that deadline, portfolio managers and trustees that started their business activities prior to 1 January 2020 (i.e. before the entry into effect of the FinIA), have to file a license application with FINMA (which includes, as mentioned above, proof of an affiliation with a SO). If a license application has been filed by or before deadline on 31 December 2022, the relevant portfolio manager or trustee is permitted to continue operating its business until a decision on the license has been taken.
It is important to note that the FinIA requires that the license be submitted to FINMA by the end of 2022, i.e. the review and affiliation process with the SO has to be completed well ahead of the 31 December 2022 deadline. Given the large number of portfolio managers and trustees that will apply for SO affiliation, FINMA has urged portfolio managers and trustees to file for an affiliation with one of the SO by no later than the end of June 2022 to ensure that the SO can complete the review process sufficiently ahead of the 31 December 2022 deadline. Only a submission of the license application to FINMA, along with proof of SO affiliation, ensures that the deadline is respected. This is of particular importance given the fact that so far only a small fraction of the around 2,400 portfolio managers and trustees actually have submitted their license application (according to a FINMA communication of September 2021, only around 180 license applications have already been submitted).
Patrick Schärli (patrick.schaerli@lenzstaehelin.com)