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The Federal Council launched the consultation on the Federal Financial Services Act (PD-FFSA) and the Financial Institutions Act (PD-FinIA) on 27 June 2014. Both preliminary drafts are expected to be discussed by Parliament in 2015 in order to enter into force on 1 January 2017. The PD-FFSA governs the conditions for providing financial services and offering financial instruments, while the PD-FinIA introduces differentiated regulations on supervision for financial institutions. Asset managers in particular will be subject to stricter supervision in order to improve investor protection.
1. Current rules applying to independent/external asset managers
Independent/external asset managers, i.e. in particular asset managers who are not associated with a banking or other financial group but work for themselves independently manage (part of) their clients’ assets in accordance with guidelines, restrictions and investment objectives agreed with the client against payment of a fee. According to current legislation, independent/external asset managers do not require an institutional licence under financial market law. However, financial intermediaries who are active on a professional basis are subject to the Anti-Money Laundering Act (AMLA). As a result, they must either subject themselves to direct supervision by the Swiss Financial Market Supervisory Authority (FINMA) (directly subordinated financial intermediaries, DSFI) or become a member of a self-regulatory organisation (SRO) pursuant to AMLA. In addition, independent/external asset managers can also join a private-sector industry body (IB) that monitors compliance with the rules of conduct, in particular to enable their clients to claim the status of qualified investors as defined by the Collective Investment Schemes Act (CISA).
Under current legislation, managers of Swiss occupational benefits schemes (pension funds) are not subject to prudential supervision but still need to comply with the provisions of pension fund law and are subject to AMLA.
Asset managers of collective investment schemes are subject to prudential supervision, need a licence under CISA and have to join an IB that monitors their compliance with the industry’s codes of conduct.
2. Future regulations under the PD-FFSA/PD-FinIA
2.1 Prudential supervision of all types of asset Managers
According to the PD-FinIA, in future all types of asset managers will be subject to prudential supervision, resulting specifically in constant supervision, obligations that have to be met on an ongoing basis, and the submission of annual regulatory audit reports to the supervisory body. The new law makes a distinction between asset managers and qualified asset managers:
· An asset manager is someone who professionally manages assets on behalf and for the account of his clients under a mandate agreement or can otherwise dispose of his clients’ assets.
· A qualified asset manager is someone who professionally manages assets on behalf and for the account of collective investment schemes (asset managers of collective investment schemes) or for Swiss occupational benefits schemes.
Detailed information on the definitions of the different asset manager categories and their delineation will only be included in the Federal Council’s implementation law and is not yet available.
2.1.1 General licensing requirements for all types of asset managers
The general licensing requirements for all types of asset managers under the PD-FinIA will be aligned to the provisions on organisation, risk control and assurance of proper business conduct by the board of directors, executive management and qualified shareholders contained in the Banking Act (BankA), Stock Exchange and Securities Trading Act (SESTA) and CISA. These requirements differ according to the type of asset manager as they have to take account of the risks and complexity of the asset manager’s business and transactions. A licence to operate as an asset manager or qualified asset manager also authorises the holder to act as a representative of foreign investment schemes. Swiss branches and representations of foreign asset managers and qualified asset managers also need a licence.
In compliance with the Federal Council’s “white money” strategy which did not manage to pass the consultation process, all types of asset managers now have to check tax conformity before accepting any assets.
2.1.2 Asset managers
In addition to meeting the general licensing requirements, asset managers must be legally organised as a sole proprietorship, general partnership, limited partnership, public limited company or limited stock partnership, limited liability company or cooperative with its registered office in Switzerland and also offer appropriate financial guarantees or have professional liability insurance. The Federal Council will only work out the details when formulating the relevant ordinance.
Regarding the supervisory body of asset managers, two options were submitted for consultation: direct supervision by FINMA, or supervision by one or several parastatal supervisory organisations (SO). These SOs are not equivalent to an SRO under AMLA, as an SO will have more obligations and powers.
Asset managers have to notify the supervisory authority within six months of the entry into force of the PD-FinIA and fulfil the requirements of the PD-FinIA and apply for a licence within two years of the entry into force of the PD-FinIA. Asset managers who have been exercising their profession for at least 15 years upon the entry into force of the PD-FinIA do not need a licence if they do not accept any new clients (known as grandfathering).
2.1.3 Qualified asset managers
A licence to operate as a qualified asset manager also authorises the holder to act as an asset manager. Asset managers of collective investment schemes that fall under the CISA de minimis rule are deemed to be “just” asset managers, not qualified asset managers. This rule applies if their clients are qualified investors pursuant to Art. 10 para. 3 or 3ter CISA and one of the following two conditions is met: (a.) the assets under management of collective investment schemes, including assets acquired by using financial instruments with a leverage effect, do not exceed CHF 100 million; or (b.) the assets under management of collective investment schemes do not exceed CHF 500 million and include neither financial instruments with a leverage effect nor assets that grant the right to redemption within the first five years of making the initial investment in any of these collective investments.
In addition to meeting the general requirements for a licence, qualified asset managers must be organised as one of the legal entities specifically allowed for asset managers – but not as a sole proprietorship or a cooperative – with its registered office in Switzerland, have sufficient own funds and either a fully paid-up minimum capital or appropriate collateral. The Federal Council will only work out the details when formulating the relevant ordinance, but it can be assumed that the current provisions of CISA and the Collective Investment Schemes Ordinance (CISO) will serve as a guideline.
Qualified asset managers provide portfolio and risk management services for the assets entrusted to their care. In addition, fund management for foreign collective investment schemes and other administrative tasks related to the above activities are also specifically permitted.
A change of qualified asset manager must be reported to FINMA as the competent supervisory authority in advance.
2.2 Provision of financial services
The PD-FFSA follows the example of the EU’s Directive on Markets in Financial Instruments (MiFID) and FINMA’s position paper on distribution rules and subordinates the provision of financial services, in particular asset management services, to certain regulatory rules of conduct. Asset managers will have to comply with extensive obligations towards their clients to provide information and conduct research on the financial services and products offered by them as asset managers. Even before recommending suitable financial services and/or instruments, asset managers have to research the financial situation and investment objectives of their clients as well as their knowledge and experience with regard to the financial services and instruments offered.
The individual rules of conduct differ in scope according to client segment: institutional, professional and private clients. While all rules of conduct have to be observed in full in business transactions with private clients who need a high degree of protection, the suitability test in particular can be discarded for institutional clients (banks, insurance companies, securities companies, asset managers, qualified asset managers, fund managers, SICAVs, SICAFs, LPCIs, central banks) who have only a small need for protection. Given their medium need for protection, professional clients (all institutional clients, public-sector entities with a professional treasury unit, pension funds with a professional treasury unit and companies with a professional treasury unit) can be assumed to have the required knowledge and experience when carrying out the suitability test.
The PD-FFSA applies rules on a suitable organisational structure and rules designed to avoid or remove conflicts of interest to all asset managers. Client advisors – natural persons who establish contact with a client and offer or execute a specific financial service for the latter – are now also obliged to register and pursue training and further education.
Foreign providers of financial services who engage in an activity subject to authorisation in Switzerland are also obliged to register and comply with the rules of conduct of the PD-FFSA.
2.3 Enforcement of civil claims
The draft law contains targeted measures to improve the enforcement of clients’ claims under private law. Clients in particular have a general right to recover all documents concerning them from the asset manager. Contrary to the current practice of Swiss civil law, the burden of proof in court proceedings is also reversed, so that it is no longer the client who has to prove non-compliance, but rather the asset manager who has to prove compliance with his information and disclosure obligations. The options of legal action by an association and collective settlement proceedings are also planned and the ombudsman service should be strengthened by introducing obligations for asset managers to join, participate in and contribute financially to this service. The draft submitted for consultation also proposes the establishment of either a permanent arbitration court or a fund to finance the costs of legal proceedings supported by all financial service providers. On balance, these measures will severely increase the burden to produce documentation and the legal risks for asset managers.
3. Conclusion
Following the example of the MiFID and FINMA’s position paper on distribution rules, the PD-FinIA and PD-FFSA introduce very comprehensive rules for all asset managers that partly go far beyond what is necessary:
· In future, prudential supervision of external/independent asset managers and managers of the assets of Swiss occupational benefits schemes;
· Rules introducing appropriate financial guarantees and professional liability insurance, suitable internal control systems, and risk and compliance management procedures;
· Obligation for client advisors to register;
· Tax conformity test before accepting assets;
· Various rules of conduct for investment advisors: obligations to provide information and to conduct research, accountability obligations, rules regarding conflicts of interest, suitability test.
These regulatory provisions will require more time and effort and trigger higher costs, which will lead to a wave of consolidation, in particular among independent/external asset managers as many of them will no longer have the critical mass needed for operating profitability.