The new Financial Services Act will require all providers of financial services to be affiliated with an ombuds institution. This requirement is the only substantially new element remaining from a broad set of proposals to strengthen the enforcement of clients’ rights. Parliament ultimately opposed the introduction of new procedural mechanisms specifically for the financial services industry, such as collective action instruments and changes to the ‘loser pays’ rule.
By Thomas Werlen / Jonas Hertner (Reference: CapLaw-2018-60)
1) Introduction
One of the primary drivers of a new law governing the provision of financial services was the realization, in the wake of the financial crisis of 2007/2008, that retail investors had insufficient means to enforce monetary claims against financial institutions. The insolvencies of the Lehman Brothers and Kaupthing groups had left scores of investors without an effective remedy, mainly for two reasons. First, both procedural and substantive law made it difficult for individual investors to establish proof of misconduct of their financial service provider. Second, litigation against financial service providers was costly to the point that damaged investors were discouraged from trying to enforce their rights if the damages incurred were below a certain threshold.
2) A brief legislative history of the ideas to strengthen the rights of clients
The original preliminary draft of the Financial Services Act (FinSA), issued by the Federal Council in June 2014, included a relatively far-reaching section on the enforcement of clients’ rights. The envisaged strengthening of the rights of clients of financial service providers consisted of three key elements: (1) the providers’ obligation to produce certain documents and clients’ right to information (coupled with a reversal of the burden of proof), (2) a requirement for all service providers to be affiliated with an ombuds institution, and (3) measures to allocate the cost risks of litigation to services providers, either through a specialized arbitration court or through a new fund set up to finance litigation brought by clients under certain circumstances. The third element, a change in the allocation of the cost risks of litigation brought by clients against service providers, was specifically designed to address the lack of an effective collective action mechanism.
Following a consultation proceeding, in which these changes faced overwhelming criticism from financial service providers, the draft bill put forward in November 2015 significantly curtailed the proposed changes. The provisions governing the enforcement of clients’ rights in the November 2015 draft bill were limited to the following elements:
a) Service providers’ obligation to produce documents and clients’ right to information
The client has a right to be provided a copy of all documents concerning the client. The client may enforce this right in summary proceedings. If a service provider refuses to provide such copy, the refusal may influence the allocation of costs in a subsequent dispute between the parties.
b) Ombuds system
All service providers are required to be affiliated with an ombuds institution. The ombuds proceeding needs to be “un-bureaucratic”, fair, efficient, impartial, and cost-effective or free for the client. The ombuds system is designed to facilitate an agreement between the parties, but will not result in a resolution of the dispute against the will of either party.
c) Advance on Court Costs and Allocation of Litigation Costs
Retail clients are to be exempt from advancing court costs and a security for the defendant’s legal fees. In addition, service providers prevailing in litigation brought by retail clients will only be entitled to claim their legal fees from the claimant if (1) the client did not go through the respective ombuds institution, (2) the client has extraordinary financial means, (3) the amount in dispute does not exceed CHF 250,000, and (4) if the claim was not frivolous. Finally, a court may diverge from the general rules of cost allocation in the Swiss Civil Procedure Code under certain circumstances, including if a client had reasonable grounds to bring a claim against the service provider in light of the ombuds proceedings.
The bill’s provisions on the enforcement of clients’ rights was subject to lively discussions in parliament. The proposed amendments regarding the advance on court costs and allocation of litigation costs were struck without replacement. Majorities in both chambers made reference to the ongoing plans to revise the Civil Procedure Code and argued that changes to the principles of cost allocation in civil procedure should not be specific to the financial services industry.
Towards the end, the debates in particular focused on the question whether the burden of proof for misconduct or false or misleading information by the service provider should be with the client, or whether certain assumptions benefitting the client should be introduced. Another hotly debated point was whether service providers should be able to exonerate themselves with respect to any civil law obligations if they could show that they met all regulatory requirements of the FinSA. Finally, on 15 June 2018, both chambers of parliament adopted the text in a final vote.
3) The provisions governing the enforcement of clients’ rights in the new FinSA
The enforcement of clients’ rights in final text of the FinSA rests on the two remaining pillars of (1) a client’s right to be provided a comprehensive copy of all documents and records the service providers keep concerning the specific client and the client relationship, and (2) the ombuds system, requiring all service providers – not only the banks – to be affiliated with an ombuds institution recognized by the Federal Department of Finance.
a) The duty of the service provider to keep records and to provide these records to the client upon request
With respect to the scope of the records to be kept by the service provider, Art. 15(1) FinSA requires service providers to keep records on (a) the specific services to be provided as agreed upon with the client and the information gathered from the client, (b) any waiver from the requirement to assess the suitability and appropriateness pursuant to articles 13 and 14 FinSA, and (c) all financial services provided.
For advisory contracts, Art. 15(2) FinSA additionally requires the service provider to keep records on the client’s requirements and the reasons for each recommendation that results in the purchase of the recommended product.
Art. 16(1) FinSA requires the service provider to transmit the information pursuant to Art. 15 FinSA by post to its client upon request or to provide it by any other suitable means.
In addition, Art. 16(2) FinSA requires the service provider to provide information regarding (a) the services which were agreed upon and executed, (b) the composition, valuation and development of the portfolio, and (c) the costs associated with the provision of the services.
The draft Financial Services Ordinance (Draft-FinSO) will further specify the scope and modalities of the information to be provided. The Draft-FinSO does not introduce any significant new requirements and merely reflects the current approach as commonly used by banks.
With respect to the client’s right to be provided with the information described above, Art. 72(1) FinSA entitles the client to request a comprehensive copy of such information at any time.
Art. 72(2) FinSA requires the request to be made in writing. The service provider is required to provide the copy within 30 days free of charge.
Article 72(3) FinSA entitles the client to pursue the right to a copy of the records in summary proceedings if the service provider does not comply with client’s request.
Article 72(4) FinSA notes that a refusal by the service provider to comply with the request may be taken into consideration by the court in a later litigation when allocating the costs of the proceedings.
The Draft-FinSO suggests that, while the first copy of information must be provided free of charge, any subsequent request, if not sufficiently justified, may incur an appropriate fee.
b) The ombuds system
Art. 74 et seq. FinSA stipulate the new ombuds system, which will require all service providers to fund and be affiliated with a particular ombuds institution. The funding of a particular ombuds institution shall be governed by an institution’s own regulations, borne by its service provider participants in proportion to their use of the institution (Art. 80 FinSA).
Art. 75 FinSA requires the ombuds proceeding to be “un-bureaucratic”, fair, swift, impartial, and free or cost-effective for the client. The ombuds proceeding is confidential, meaning that the statements made in the proceedings must not be used in another proceeding. The confidentiality also covers party submissions: neither party has a right to see the correspondence between the other party and the ombuds institution. The client may initiate a proceeding before the ombuds institution (1) in accordance with the respective regulations of the institution, (2) if the client can demonstrate that he or she notified the service provider of an issue and undertook a reasonable effort to resolve it, (3) if the client’s claim is not manifestly ill-founded and was not subject to a previous conciliation proceeding, and (4) if the issue is not yet pending before a judicial body (e.g., another ombuds institution, a state court or a conciliatory authority).
While the ombuds institution will not have discretion to issue a decision on the matter brought before it, it may give its own factual and legal assessment and include it in the final communication to the parties (Art. 75(8) FinSA).
Pursuant to Art. 76 FinSA, an ombuds proceeding does not preclude a civil proceeding covering the same matter. If, however, a judicial body seizes the matter, the ombuds institution concludes its proceeding. If an ombuds proceeding was undertaken but did not result in a resolution of the dispute, the claimant in a civil proceeding may unilaterally decide to waive the conciliation stage pursuant to the Civil Procedure Code.
Art. 77 ff. FinSA stipulates the obligations of service providers in connection with the ombuds system. Notably, service providers must affiliate themselves with a recognized ombuds institution; participate in an ombuds proceeding if so requested by a client; duly honor all requests to appear and submit statements in the proceeding.
Service providers must inform their clients about the possibility to request an ombuds proceeding in connection with the opening of a client relationship, when rejecting a claim made by a client, and anytime upon request.
With respect to the organizational aspects of the ombuds system, Art. 81–83 FinSA broadly govern the membership of service providers, providing that ombuds institution need to accept service providers if they meet the institution’s own membership criteria, and that service providers may be excluded if they violate their obligations pursuant to Art. 78–80 FinSA. Ombuds institutions are required to notify the supervisory authority and the central register of ombuds institutions (both likely to be within the Federal Department of Finance) of all service providers accepted as members and of those not accepted or subsequently excluded (Art. 83 FinSA).
The ombuds institutions themselves shall be recognized by the Federal Department of Finance if they meet the requirements of Art. 84 FinSA. Notably, they (and the ombudspersons engaged by the institution) are required to be impartial and independent, and that the ombudspersons are sufficiently competent. Institutions further need to have regulations governing its organization and membership of service providers, the ombuds procedure, and the financial contributions of service providers. Any amendment of internal regulations will have to be approved by the supervisory authority (Art. 85 FinSA). Ombuds institutions shall publish annual reports on their activities (Art. 86 FinSA).
4) Conclusion
What had started with an attempt to significantly strengthen the means of retail clients of financial service providers to litigate claims against service providers, produced little more than a restatement of the status quo.
The provisions governing the right of clients to be provided with a full documentation of records relevant to the client relationship with the service provider mirror the existing provisions governing the agency contract in the Code of Obligations, and the right of a person to be provided with copies of records held by an organization pursuant to the Data Protection Act.
As regards the provisions governing the ombuds system, the expansion of the system to cover all providers of financial services will not resolve the substantial and procedural problems clients have been facing when litigating claims against service providers.
With respect to the lack of tools for clients to pursue claims collectively, the decision to try to devise new collective action instruments within the general framework of the Civil Procedure Code – as opposed to an industry-focused approach in the FinSA – may be regarded as a wise one (c.f. Werlen/Decurtins, The Proposed Strengthening of Group Action in Swiss Civil Procedure, in: CapLaw-2018-44). However, in light of the current debate on the basis of the preliminary draft revision of the Civil Procedure Code published on 2 March 2018, it is unlikely that a consensus on a comprehensive collective action regime will be found in the immediate future.
Thomas Werlen (thomaswerlen@quinnemanuel.swiss)
Jonas Hertner (jonashertner@quinnemanuel.swiss)