Switzerland sets new rules for Asian financial service providers offering cross-border services

• FinSA introduces significant changes that will affect all financial service providers who purchase, sell or distribute financial instruments for Swiss clients
• The MiFID II standard fulfills more or less the requirements under FinSA with respect to some duties
• There will be a fine of up to $502,400 (CHF 500,000) for non-compliance with the obligations or the unlawful distribution of financial instruments

The provision of cross-border financial services by Asian financial service providers, as well as the creation of financial instruments for the Swiss market, will be regulated comprehensively by the new Swiss Financial Services Act (FinSA), which is expected to be enforced on 1 January 2020. The new duties include information, documentation, behavioral, interest-related and organisational obligations as well as the obligation to enter involved client advisors into a client advisor register and to affiliate with the Swiss Ombudsman for financial services.

The new FinSA introduces significant changes. In principle, this affects all financial service providers who purchase, sell or distribute financial instruments for Swiss clients, receive or transmit orders related to financial instruments, provide asset management or investment advice and grant loans to finance transactions with financial instruments.

FinSA’s scope of application covers fewer activities than intended for under Markets in Financial Instruments Directive (MiFID) II, while other credit transactions are generally not covered. The advice of companies on capital structure, sector-specific strategy and related matters as well as advice and services relating to mergers and acquisitions of companies are generally not affected.

Swiss clients are segmented into private clients, professional clients and institutional clients, and they can generally change their client category on request.

The applicable obligations for client advisors and financial service providers

The applicable obligations are essentially the same as those under MiFID II. However, there are significant differences. The MiFID II standard fulfills more or less the requirements under FinSA with respect to some duties, including the obligations for client segmentation, information and rendering of account. Regarding the appropriateness test, a distinction is made in Switzerland between an investment advice that takes the entire portfolio into account and another that takes into account only a part of it. The latter only requires a suitability test. Execution Only services are not subject to an appropriateness or suitability test, even with complex products.

In some cases, the Swiss obligations go beyond the scope of MiFID II. Client advisors or natural persons who provide financial services in Switzerland must be entered into the Swiss client advisor register, Regulatory Services AG. The financial service providers for which the client advisors work must also affiliate with the Swiss Ombudsman, which is managed by the same company. The Swiss client advisor register and the Swiss Ombudsman are currently in the licensing procedure with the Swiss Financial Market Supervisory Authority (FINMA).

A Swiss peculiarity is found in the regulation of compensation from third parties. A client connected to the provision of the financial service, however, may waive his right to commissions, even if they are not exactly determinable in advance. Furthermore, obligations with respect to the organisation of financial service providers apply. Financial service providers must have an appropriate organisation and must properly monitor employee transactions, as well as appropriately address conflicts of interest. These obligations are essentially in line with the standard under MiFID II.

Changes in the area of public offerings of financial instruments in the Swiss market

From 1 January 2020, there will also be material changes regarding the public offering of financial instruments in the Swiss market. The requirements of the prospectus and the possible exceptions are generally based on the European Union Prospectus Regulation.                                                 

Prospectuses for public distribution must be checked by a reviewing body. Both SIX Exchange AG and BX Swiss, which are part of the Swiss stock exchange Börse Stuttgart Group, will have a reviewing body. Prospectuses that have been prepared in accordance with the EU Prospectus Regulation and already reviewed by an authority only have to be recognised in a simplified procedure and deposited with the reviewing body. However, the approval or recognition must be renewed after twelve months.

Asian providers in Switzerland may only offer structured products to private investors if they are issued, guaranteed or secured in an equivalent manner by a Swiss bank, insurance company, securities firm or a corresponding Asian institution. However, a written and permanent portfolio management or investment advisory contract remains reserved.

Non-compliance sanctions

It is important that affected Asian financial service providers and producers of financial instruments comply with the new obligations. There are fines set forth in the FinSA of up to $502,400 (CHF 500,000) for non-compliance with the obligations or the unlawful distribution of financial instruments. FINMA may also open an investigation for the unlawful provision of financial services as well as sanction the financial service providers and involved client advisors accordingly.

Dr. Martin Liebi LL.M., attorney-at-law, is the head of capital markets within the legal services at PricewaterhouseCoopers Legal, Zurich, Switzerland. He is also a judge at the Commercial Court of Zurich and a lecturer at the LL.M. program of the University of Zurich; Merlin Haldemann, attorney-at-law, is practicing capital markets law at PricewaterhouseCoopers Legal, Zurich, Switzerland