European legislation as well as other international standards increasingly influence Swiss financial market regulation; the new Financial Services Act (FinSA) is the direct consequence. As expected, the Swiss legislator tailored the new business conduct rules towards the EU directive. The remaining questions, however, lie in the interpretation, application, and development of the new provisions by the regulatory authorities and courts.
By Peter Sester / Linus Zweifel (Reference: CapLaw-2016-6)
1) Equivalence as the Holy Grail of Swiss Financial Market Regulation
In recent years, the EU has constantly amended its legal framework regarding financial markets with an increasing impact on non-Member States. Both through its third-country regime as well as the legislation’s broadening scope of application, EU financial market legislation and regulation steadily gain influence over non-EU matters. Switzerland is not at all exempted from this particular development and the proposed new Swiss financial market legislation is its direct answer to it.
International standards, in particular the EU financial market legislation and regulation, therefore constitute one of the driving forces in the development of FinSA. With the Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR), the EU furthers its equivalence requirement for the cross-border provision of financial services from third-country firms to professional clients based within the EU. Only in case the European Commission confirms the equivalence of a third country’s financial market regulation with the one in the EU, respective third-country firms may offer their services within the EU and to EU based clients without the establishment of an EU branch. For the offering of services to retail clients, the Lugano Convention already provides for the application of the legal framework of the client’s domicile. Member States, however, retain the power to require the establishment of a branch for the cross-border provision of financial services to retail clients.
It is therefore (and must be) the legislator’s explicit goal to establish provisions equivalent to the ones in the EU (without going beyond these) in order to ensure market access for Swiss firms to the European single market. In fact, any discrepancy between Swiss and EU regulation also affects the firm’s costs; the more equivalent the legal framework to EU regulation is, the less “double compliance work” financial intermediaries will face.
As laid down in article 47 MiFIR the legal framework of a third country may be considered equivalent if, inter alia, financial intermediaries are subject to appropriate conduct of business rules. Considering the necessity of equivalence with EU regulation, this article aims to take an exemplary look at the proposed FinSA provisions on business conduct rules from a European perspective.
2) Rules of Conduct for Financial Service Providers
Conduct of business rules constitute a main component of FinSA as well as of MiFID II whereas the FinSA provisions have been tailored towards the European directive. As a general principle, financial service providers need to act in accordance with the best interest of their clients. The following obligations for financial service providers are to be considered:
i) Informational duties included in articles 9 and 10 FinSA materially correspond with articles 24 (3)-(6) MiFID II. Clients under both legal frameworks are, inter alia, to be informed in a comprehensible manner and in due time about all risks and costs related to the financial service or the financial instruments offered. Furthermore, the firm’s information needs to encompass whether advice is offered based on an independent basis, and advertising must be clearly identifiable as such.
ii) The assessment of appropriateness and suitability forms one of the corner stones of the proposed law. Under the suitability test (article 13 FinSA; 25 (2) MiFID II) financial service providers, when offering investment advice taking account of the client’s portfolio or portfolio management, must assess the client’s financial situation, its investment objectives, and its specific knowledge and experience in the relevant field to enable it to recommend suited financial instruments or services. For other services a test of appropriateness must be conducted (article 12 FinSA; 25 (3) MiFID II) aiming at whether a specific financial instrument is appropriate for a specific client. Exceptions exist for “execution-only” transactions and the mere reception and transmission of client orders (article 14 FinSA; 25 (4) MiFID) as well as for the provision of services to professional clients (article 15 FinSA; under the MiFID II regime it is suggested to also apply this distinction in analogy to article 36 MiFID I Implementing Directive).
iii) FinSA further provides for extensive documentation and reporting duties (articles 17 and 18) which mostly reflect article 25 (5) and (6) MiFID II. Firms need to render account of their financial services, the client’s portfolio as well as the costs related to the financial services. Moreover, clients need to be informed about the “grounds for each recommendation leading to the acquisition, holding or disposal of a financial instrument” when offering portfolio management or investment advice.
iv) Lastly, FinSA entails provisions on the handling of client orders and the use of client’s financial instruments (articles 19 to 21). In particular, article 20 FinSA provides for the duty to achieve the best possible outcome for the client in terms of costs, timing and quality (best execution) reflecting article 27 (1) MiFID II. Regarding costs consideration is to be given not only to the actual price but also to further expenses and compensation from third parties.
3) Criminal Provisions for the Violation of the Code of Conduct
Financial service providers must be aware that the violation of aforementioned business conduct rules can lead to criminal, prudential and/or civil consequences. At least, the criminal provisions in FinSA (articles 92 to 94) have been adapted compared to the consultation draft; penalties for negligent behavior are no longer included and the level of penalties has been lowered considerably.
4) Outlook: Implementation, Interpretation, and Development
The legal framework regarding business conduct rules set out by FinSA is largely based on the corresponding EU provisions. Indeed, the prevailing majority of provisions is almost identical (apart from the fact that EU legislative texts can barely be qualified as particularly reader-friendly). One might even say the Swiss legislator followed a “tick-the-box” approach when ensuring equivalence of the FinSA provisions with
MiFID II.
This is not surprising given that the Federal Council itself described equivalence to EU financial market law as one of the main goals on the one hand, and the fact that most efforts in financial market regulation find their grounds in international standards on the other hand. Concerning the latter, Switzerland is committed to voluntary adherence anyway. Economic and political reality as well as dependence of Swiss financial service providers from access to the EU market did the rest to ensure that equivalence will indeed be fulfilled.
For aforementioned reasons the adoption of FinSA is crucial. From a EU perspective, it is not predictable how the necessary requirement of equivalence can otherwise be reached within a reasonable period of time. A failure of this legislative project would, therefore, heavily throw back Swiss efforts in getting its financial market legislation recognized as equivalent and, concurrently, complicate the market access for Swiss financial service providers to the EU single market.
Having said that and under the assumption that FinSA indeed enters into force, a few remaining questions with regard to the interpretation and the development of the law remain (partly) open. The question whether FINMA and the European Securities and Markets Authority (ESMA) will apply identical standards when interpreting certain provisions will be a crucial topic. What is relevant at the end of the day are not the laws in the book but the way regulatory authorities apply them in practice. This question logically extends to the approach of courts when confronted with the application of the law. Will Swiss courts take the “underlying” EU documents and case law into consideration when interpreting the new Swiss financial market law, since it is to a large extend inspired by EU legislation and regulation? To say it straight forward: Will FINMA and Swiss courts rather decide in accordance with EU practice and case law? Or will they apply an autonomous interpretation of a basically identical set of rules? The former approach would prevent national courts to consider Swiss peculiarities; the latter bears the risk of another drifting apart between Swiss and EU regulatory efforts. Obviously, these questions are not new from a Swiss perspective; however, the ever growing grade of detailed legislation and the shift from EU directives to regulations as well as the dependency on EU market access of the Swiss financial sector will lift them to a new level.
Peter Sester (peter.sester@unisg.ch)
Linus Zweifel (linus.zweifel@unisg.ch)