On 15 June 2018, the Swiss parliament adopted the Financial Services Act and the Financial Institutions Act, which are expected to enter into force on 1 January 2020. One of the key changes introduced by the Swiss Financial Services Act is the obligation to prepare and make available to retail investors a short document setting out the key information, the so-called key information document (Basisinformationsblatt). The draft implementing ordinances the Federal Council has published on 24 October 2018 contains supplementary provisions on the content, language, layout and scope of the new regulatory leaflet. While the proposed template for the future key information document is almost identical to the EU PRIIPs KID template, the Swiss version of the key information document is far more flexible than its EU equivalent and reflects the pragmatic approach taken by the Federal Council in the draft ordinances to ensure a successful implementation of the new regulatory leaflet.
By Daniel Haeberli (Reference: CapLaw-2018-59)
1) Introduction – The new Swiss financial market regulation
On 15 June 2018, the Swiss parliament adopted the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) and on 24 October 2018 the Swiss Federal Council opened a consultation process regarding the draft ordinances implementing the new financial market regulations – the Financial Services Ordinance (Draft-FinSO), the Financial Institution Ordinance (Draft-FinIO) and the Supervisory Organisation Ordinance (Draft-SOO) – that will last until 6 February 2019. It is expected that the final ordinances will be published in the third quarter of 2019, just ahead of the expected entry into force of the Financial Services Act and the Financial Institutions Act and the implementing ordinances on 1 January 2020.
This article introduces the new key information document under the Swiss Financial Services Act (the KID or FinSA KID) and, in particular, the content and format requirements set out in the Draft-FinIO.
2) Key Information Document – Comparability requires standardization
One of the key changes introduced by the FinSA is the obligation to prepare and make available a short document setting out the key information, the so-called key information document (Basisinformationsblatt), when offering financial instruments to retail investors (private clients) in Switzerland.
The introduction of a short information document for financial instruments is not a novelty, neither internationally nor in Switzerland. The Regulation (EU) No. 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (the PRIIPs Regulation) requires manufacturers of packaged retail and insurance-based investment products to prepare a key information document (the PRIIPs KID). The PRIIPs KID is intended to show investors the key product features of a financial product on maximum three DIN A4 pages, allowing a cross-product comparison of different investment opportunities. The PRIIPs Regulation entered into force on 1 January 2018.
In Switzerland, the Collective Investment Schemes Act (CISA) introduced in 2007 the simplified prospectus for structured products. The simplified prospectus must describe the key characteristics of the product, its profit and loss prospects, together with the significant risks for investors. Instead of providing detailed regulations on the content and formation of the simplified prospectus, the Collective Investment Schemes Ordinances provides for a delegation to a self-regulatory body. The Swiss Bankers Association and the Swiss Structured Products Association have issued guidelines on informing investors about structured products. While setting out the information items that need to be addressed in the simplified prospectus, these guidelines neither limit the number of pages of a simplified prospectus nor provide a template or require a specific sequence of the information that must be included in the simplified prospectus. As a result, there is no standardized simplified prospectus across the structured products industry in Switzerland. This will change with the KID as contemplated by the Draft-FinSO.
The KID should not only be easy to understand and enable private clients to make a well-founded investment decision, but should also enable retail investors to compare the key features of different investment products. Achieving comparability of financial instruments is really a novel feature for a regulatory investor information document in Switzerland. In order to achieve comparability of financial instruments, the content and format of the KID must be standardized.
3) Content and Format of the Key Investor Document
a) Minimum requirements in the FinSA and supplementary provisions in the Draft-FinSO
Very similar to the current provision in the CISA relating to the simplified prospectus for structured products, the FinSA states the principle that the KID must contain the essential information of the financial instrument and sets out the minimum information that must be covered therein.
In particular, the following information must be covered in the KID according to article 60 FinSA:
(i) the type and characteristics of the financial instrument,
(ii) the risk/return profile of the financial instrument,
(iii) the costs of the financial instrument,
(iv) the minimum holding period and tradability of the financial instrument, and
(v) information on the authorization and approvals associated with the financial instrument.
The introduction of supplementary provisions on the KID was delegated to the Federal Council pursuant to article 63 FinSA.
The Draft-FinSO contains in articles 88 et seq. the supplementary provisions on the content, language, layout and scope of the KID. In particular, the Draft-FinSO provides for a template KID and specifications as to the content of the KID.
b) Format of the KID
As the introduction of the KID was inspired by the EU PRIIPs Regulation it does not come as a surprise that the template KID in the Draft-FinSO is almost identical to the PRIIPs KID template. The length of the KID is also limited to three DIN-A4 pages as is the PRIIPs KID. Identical to the PRIIPs Regulation, the sequence and headings as provided in the template must be strictly followed. There are no requirements regarding the sequence of information within the individual sections and the length of the individual sections.
The template contains 10 sections with the following headings, which are the same as in the PRIIPs template:
- Purpose
- Product
- Warning
- What kind of product is it?
- What are the risks and what might I get back in return?
- What happens if [name of the issuer] is unable to make the payment?
- What costs will be incurred?
- How long do I have to hold the investment and can I withdraw money early?
- How can I make a complaint?
- Other relevant information
Providing for a template in the Draft-FinSO that is very similar to the PRIIPs template has the benefit of ensuring the comparability of financial instruments for which a PRIIPs KID or a FinSA KID is made available. The comparability between the PRIIPS KID and the FinSA KID is very important since the FinSA allows the use of equivalents foreign key information documents instead of a FinSA KID and the Draft-FinSO expressly recognizes the PRIIPs KID as such equivalent foreign document.
c) Content of the KID
In respect of the content of the KID, the Swiss regulations are not as detailed as the PRIIPs regulations and provide far more flexibility than the PRIIPs regulations.
In the EU there are associated implementing regulations, in particular the Commission Delegated Regulation supplementing the PRIIPs Regulation by laying down regulatory technical standards with regard to, among other things, the content of the PRIIPs KID and there are guidelines published by the European Commission and further specifications in the form of questions and answers on the PRIIPs KID by the European Financial Supervisory Authorities (ESAs).
The Draft-FinSo specifies the content of the FinSA KID in schedules 10, 11 and 12 of the Draft-FinSO. These schedules specify the information that needs to be included in the sections “What kind of product is it?”, “What are the risks and what might I get back in return?” and “What costs will be incurred?”. In respect of the other sections of the KID template, the Draft-FinSO does not provide any further specific requirements other than the specifications that are directly included in the template.
Schedule 10 of the Draft-FinSo lists the information that are to be included in section “What kind of product is this?”. In particular, a description of the legal form and a brief description of the nature of the financial instrument is requested. This is very similar to the information required to be included in a PRIIPs KID. An item that is not mandatory under the Draft-FinSO, but required under the PRIIPs Regulation is the description of a target group and target market. Since the FinSA does not contain any provisions similar to the MiFID 2 product governance regulations, including a target market concept, there is not really a need to mandatorily include a description of the targeted retail investor in the FinSA KID.
The biggest differences between the PRIIPs Regulations and the draft FinSO in respect of the content requirements are in respect of the description of the risk and rewards of the financial instrument (i.e., “What are the risks and what might I get back in return?).
d) The risk and rewards description – the Swiss approach
The PRIIPs Regulation has introduced a summary risk indicator (SRI) of seven classes to present the risk of a product in the PRIIPs KID. The methodology to assign each product to one of the seven classes is rather complex and is composed of a market risk measure and a credit risk measure. The rewards of a product must be presented by including four performance scenarios. These require complex calculations based on the same date used for the purpose of calculating the market risk measure and may, as has recently been acknowledged even by the ESAs, result in misleading figures.
The Draft-FinSO does not follow the PRIIPs Regulations in respect of the risk and rewards description. The approach taken in the Draft-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.
The risk profile of a financial instrument can be described in generic terms. A risk indicator may be provided as an alternative to or in combination with the generic risk description. If the risk is described on generic terms, the typical product risks must be considered, such as:
- issuer risk
- market risk
- liquidity risk
- foreign exchange risk
- termination and reinvestment risk
These typical product risks are listed in Schedule 11 of the Draft-FinSO and shall serve as guidance when completing this section. This list is very much in line with the risks that are usually addressed in a simplified prospectus for structured products.
If a risk indicator is provided in the KID, it must be calculated and presented pursuant to the respective requirements applicable to a document which is recognized as being equivalent. Of course, the idea is that the SRI of the PRIIPS Regulation may be used since Schedule 14 of the Draft-FinSO expressly recognizes the PRIIPs KID as an equivalent foreign document. Including just any risk indicator, whether developed by the issuer of the financial instrument or introduced by an industry association such as the Swiss Funds & Asset Management Association SFAMA or Swiss Structured Products Association SVSP, is not permitted.
The KID must also inform investors of the loss and reward potential of a financial instrument by including performance scenarios. In principle, a positive, a neutral and a negative scenario must be presented. Schedule 11 of the Draft-FinSO does not provided for further specific requirements for the presentation of the performance scenarios. The performance scenarios used in a simplified prospectus for structured products may serves as a guideline for certain financial instruments. A possibility that is expressly permitted in the Draft-FinSO is to calculate and present the performance scenarios pursuant to the PRIIPs Regulation.
4) Final remark
The rather lean and flexible regulations in respect of the of the content and format requirements for the KID reflect the rather pragmatic approach taken by the Federal Council in the Draft-FinSO and should ensure a successful the implementation of the KID.
Daniel Haeberli (daniel.haeberli@homburger.ch)