Overview

The Financial Services Act (FinSA), together with the Financial Institutions Act (FinIA), entered into force on 1 January 2020. The purpose of FinSA is the cross-sector regulation of financial products and services, and their distribution (same rules for same business). FinSA also aims to improve and standardise client protection and strengthen the reputation and competitiveness of the Swiss financial centre.

The Act is based on the European MiFID II Directive, but takes a more liberal approach to certain points (e.g. rules on retrocession, suitability assessment, etc.). To give financial service providers sufficient time to implement the new regulation, a two-year transition period applies to the fulfilment of most FinSA obligations.

Key changes

• Client segmentation (retail clients, professional clients, institutional clients) including possibility to opt in/opt out.
• Assurance that client advisors have sufficient knowledge of the FinSA Code of Conduct and the necessary expertise to perform their activities.
• Comprehensive information and documentation duties towards clients in connection with onboarding and the provision of services.
• Provision of a key information document (KID) to retail clients for investment advice (and for execution-only transactions). In addition to the type and characteristics of the financial instrument, this KID also contains its risk/return profile, tradability, minimum holding period and associated costs.
• Performance of an assessment of appropriateness (for transaction-related investment advice) and an assessment of suitability (for portfolio-related investment advice and portfolio management).
• Requirement for investment advisors to be entered in a register of advisors. This applies to all advisors who do not require authorisation, recognition, a licence or registration under FINMASA.
• Requirement to take out professional indemnity insurance or provide equivalent collateral and to be affiliated with an ombudsman’s office.

Expert opinion

The provisions of FinSA entered into force on 1 January 2020 (a two-year transition period applies to various FinSA obligations). This poses some potential challenges for Swiss financial service providers, though many of the provisions are already known from the Code of Conduct. In contrast to its European equivalent MiFID II, FinSA leaves considerably greater scope for entrepreneurial flexibility.

In particular, it is advisable to analyse the new requirements carefully and to make necessary adjustments, e.g. to the organisational set-up, client information policy or the contractual framework.

Overview

FinIA and FinIO unify the authorisation rules for asset managers, managers of collective investment schemes, fund management companies and investment firms by introducing prudential supervision and thus comprehensive supervision for all service providers. The authorisation cascade for asset managers and trustees (first stage of the cascade) stipulates a significantly lower supervisory intensity and also lower regulatory requirements compared with the higher stages (e.g. banks and investment firms).

FinIA and FinIO entered into force together with FinSA and FinSO on 1 January 2020.

Key changes

Authorisation requirements and supervisory regime

• Since the entry into force of FinIA, asset managers and trust companies are also prudentially supervised. The supervision is carried out using a mixed model: FINMA is responsible for authorisation and enforcement, while the annual supervision is carried out by the new supervisory organisations.
• Asset managers and trust companies now subject to an authorisation requirement must report to the supervisory authority within six months of FinIA coming into force and submit the corresponding authorisation application within two years. FINMA has launched the authorisation process; reports and applications can be submitted via the web-based survey and application platform (EHP).
• Only investment advisors are exempt from the authorisation requirement, but they must be entered in an advisor register.

Organisation, corporate governance and risk management requirements

• The financial institution must define appropriate corporate governance rules.
• The persons responsible for the administration and management of the financial institution must offer a guarantee of irreproachable business conduct.
• The financial institution identifies and monitors its risks and establishes an effective internal control system.
• Individuals who perform risk management or internal control duties may not be involved in the activities they supervise (exceptions apply to risk-free micro set-ups).

Capital requirements and financial guarantees

• Financial service providers must comply with minimum capital and capital adequacy requirements and financial guarantees, or take out professional indemnity insurance.

Expert opinion

Action should be taken at an early stage in order to be well prepared both from an organisational point of view (e.g. by implementing an internal control system and an independent compliance function) and with regard to the new authorisation requirements.

We recommend performing an individual analysis of the current situation to identify any need for action, and implementation of measures to close any gaps in terms of FinIA requirements.

The FINMA authorisation process (registration, reporting to FINMA, affiliation with an SO and preparation of the authorisation application) often requires significant internal administrative resources. Third-party experts can offer efficient and cost-effective support.

Overview

After a long lead time, the revised European Markets in Financial Instruments Directive (MiFID II) entered into force on 3 January 2018. The core element of this revision is the strengthening of provisions aimed at protecting investors. Various studies on the current state of implementation among European financial service providers show that MiFID II requirements have been well implemented overall. No corresponding studies were found for Swiss financial service providers with European customers, but it can be assumed that there are major differences in the implementation status of MiFID II between different financial institutions. Since the directive came into force, the European Securities and Markets Authority (ESMA) has published various additions to the Q&As in connection with the client protection provisions of MiFID II and MiFIR, which are used to interpret the provisions.

Key changes

• Extension of information duties in connection with costs incurred
• Introduction of a distinction between independent and non-independent investment advice
• Requirements for the provision of independent investment advice
• Prohibition on accepting commissions (e.g. retrocession) for asset management and independent investment advice
• Introduction of monitoring duties in connection with the distribution of financial instruments (product governance)
• Obligation to record telephone conversations in connection with client orders
• Obligation to submit a suitability statement for investment advice
• Loss threshold reporting for asset management mandates from a loss of 10% of the total portfolio
• Quarterly preparation of client reports (or monthly for portfolios with leverage)
• Specifications in connection with cost information for asset management mandates
• Clarification of the interaction between the annual ex-post cost information and the periodic statements of accounts
• Regulation in the event of conflicting product intervention rules in the EU member state and the country in which the investment service is provided
• Clarification by ESMA in its Q&A on investor protection that the definition of minor non-monetary benefits applies to all investment services and not only to investment advice and asset management
• Explicit questioning of clients about sustainable investing in the context of their investment objectives; the information on products offered should also include information on sustainable investment; the amended MiFID II Delegated Regulation has been submitted for consultation

Expert opinion

Due to the consumer court of jurisdiction under the Lugano Convention (LugÜ), the MiFID II client protection provisions may also be relevant to Swiss financial service providers. We therefore recommend conducting a risk analysis around the following questions:

• Which services do I currently provide to my EU clients?
• Which services and EU markets have strategic relevance to my company?
• What is the gap between the target status according to MiFID II and the current status of the service I provide?
• How high is the risk of legal action by EU customers?
• Which quick wins can I make in relation to the implementation of MiFID II and which duties must also be fulfilled under FinSA?

Overview

No amendments to the content of the Anti-Money Laundering Act (AMLA).

Further amendments to AMLO-FINMA due to FinSA and FinlA are expected in Q4 2020. These amendments primarily concern the abolition of DSFI status arising from FinlA, individual due diligence obligations and a lowering of the threshold value for client identification for transactions in virtual currencies. Asset managers and trustees are also required to specifically clarify the policyholder and the person actually paying the premiums.

CDB 20 entered into force on 1 January 2020.

Key changes

AMLA: Postponement

The revised AMLA, amended to include new due diligence requirements, verification of information on the beneficial owner and regular updating of client data, is now expected to enter into force in mid-2021.

AMLO-FINMA: New amendments in connection with FinSA and FinIA

AMLO-FINMA entered into force together with CDB 20 on 1 January 2020.

The status of directly subordinated financial intermediary (DSFI) is to be abolished.

The threshold value for exchange transactions in cryptocurrencies is to be reduced from CHF 5,000 to CHF 1,000.

Asset managers and trustees will also have to clarify the policyholder and the person actually paying the premiums for life insurance policies with separately managed accounts/portfolios (insurance wrappers). This applies to business relationships established since the entry into force of the amendment.

Due diligence obligations for the extension of consumer credit are to be simplified in that copies of identity documents will not have to be authenticated for business relationships opened by correspondence.

CDB 20: In force

CDB 20 (documentation obligation, lowering of the threshold for cash transactions, video and online identification, abbreviated process by the supervisory board and amendments to forms) is closely related to AMLO-FINMA and it is therefore appropriate that both entered into force on 1 January 2020.

Expert opinion

AMLA: Traceability and quality requirements for identification will be increased. The pressure to automate the client due diligence process for corporate clients will increase due to this requirement.

AMLO-FINMA: Legislators and regulators have, in the context of FinSA and FinIA, given FINMA various powers to issue further technical implementation provisions. As part of this, FINMA must amend existing FINMA ordinances, such as the AMLO-FINMA circular.

CDB 20: Certain challenges have already been identified, particularly the shortened period in which to provide documents and other information about contracting parties, beneficial owners and/or controlling persons. The onboarding process must therefore be updated and optimised.

Overview

Due to the introduction of the EU General Data Protection Regulation (GDPR), stricter data protection conditions now apply in the European Economic Area (EU and EEA countries) than in Switzerland. The first fines and compensation based on the GDPR have already been imposed in the EU/EEA.

The Swiss Federal Act on Data Protection (FADP) is currently being thoroughly updated to ensure appropriate protection of privacy in an increasingly digital future. Parliament intends the revised FADP to be as EU-compatible as possible to ensure continued equivalence with data protection in the EU. This also includes introducing documentation- and process-oriented regulations based on the GDPR model. There will be a few important changes for financial service providers in Switzerland that are not already covered by EU data protection rules.

Key changes

The final version of the fully revised FADP is expected to be adopted at the end of the autumn session on 25 September 2020. In particular, the fully revised FADP aims to improve the protection of personal data and adapt this protection to technological and international legal developments, and to increase transparency and self-determination for private citizens.

Profiling in particular is a controversial point. Profiling involves the automatic collection and evaluation of personal data, which is used to determine or predict an individual’s life circumstances, personal characteristics and behaviour. On 2 June 2020, the Council of States proposed establishing less strict rules for companies’ automated processing of personal data. Companies would have to implement the stricter rules on profiling only if data linkage can be used to evaluate essential aspects of data subjects.

There is also some debate around the assessment of creditworthiness. The National Council believes that it should be possible to draw on 10 years of personal data, but the Council of States wants to set a limit of five years for such data. Genetic data is also yet to be defined. The Council of States does not accept the National Council’s restriction of this definition to data that uniquely identifies a person.

Agreement has been reached on various points: (i) obligation to report data breaches; (ii) provision of information to the data subject on the collection of personal data regardless of where the data is collected; (iii) trade union-related views or activities will qualify as sensitive personal data.

The EU Commission will assess the equivalence of the FADP only after the new ECJ ruling on the appropriateness of the EU contractual clauses is known.

Expert opinion

The GDPR will shape the revision of FADP. If Swiss financial service providers are not already impacted by the GDPR, the same requirements must be met under the revised FADP with a few exceptions.

Therefore, the current state should be analysed to determine which data will be processed, where, by whom, for what purpose and for how long. This process must be defined in a process description and all the information must be summarised in a central record. This is the only way to demonstrate that processing is lawful, and to identify any gaps.

The first fines and compensation payments have been imposed for data breaches throughout Europe. A comprehensive data protection assessment will allow you to quickly and efficiently review the current situation in your company.

Overview

Sustainability topics are growing in importance around the world. As a member of the United Nations (UN), Switzerland is obliged to implement the UN 2030 Agenda for Sustainable Development, and in 2017 ratified the Paris Climate Agreement. The Swiss financial centre roadmap 2020+, which sets out priorities for the coming years, includes ‘sustainable finance’ as one of the most important issues for the Swiss financial sector. In the current FINMA Risk Monitor, financial risk is one of the most significant long-term risks connected to climate change.

In 2019, FINMA and the SNB joined the Network for Greening the Financial System. In 2020, Switzerland also joined the International Platform on Sustainable Finance. We can also expect developments abroad, such as the ambitious EU action plan to finance sustainable growth, to have an impact on Switzerland.

Key changes

In June 2020, the Swiss Bankers Association (SBA) updated its position paper on sustainable finance, which sets out banks’ own initiatives and the political framework so that Switzerland can become a leading hub for sustainable finance. At the same time, it published its guidelines for the integration of ESG considerations into the advisory process for private clients.

The Swiss Funds & Asset Management Association (SFAMA) is firmly committed to sustainable finance. In June 2020, together with Swiss Sustainable Finance (SSF), it published core messages and detailed recommendations for the Swiss asset management industry on sustainable practices.

In 2017, the Federal Office for the Environment (FOEN) and the State Secretariat for International Finance (SIF) initiated voluntary, anonymous and free climate compatibility tests to enable Swiss insurance companies and pension funds to have their portfolios of stocks and corporate bonds tested for climate compatibility. These tests were initiated again in 2020 and extended to banks and asset managers.

The European Commission pursues three main objectives with the EU action plan unveiled in March 2018. It aims to: 1. reorient capital flows, 2. manage financial risks, 3. foster transparency and long-termism.

The specific implementation measures include:
1. taxonomy, 2. investor duties and disclosures, 3. low-carbon benchmarks, 4. better advice to clients.

The taxonomy published in the EU Official Journal enables investors to reorient their investments towards more sustainable technology and businesses. The taxonomy for the objectives of ‘climate protection’ and ‘adapting to climate change’ is expected in late 2020, to be fully applied from the end of 2021. The four remaining objectives are to be available by the end of 2021 and applied by the end of 2022.

In Germany, the Federal Financial Supervisory Authority (BaFin) published a Guidance Notice on Dealing with Sustainability Risks with specific approaches in December 2019.

Expert opinion

Client awareness of ESG investment is growing and as Switzerland has a long tradition of sustainability, sustainable finance presents an opportunity for the Swiss financial centre. One example of this is the advisory process, which is comprehensively regulated by existing legislation (FinSA in Switzerland, MiFID II in the EU). Certain ESG criteria are already covered by the existing legal framework.

Global developments and measures in the sector show that sustainable finance is gaining momentum, which will have an effect on regulation. The concrete implementation of the EU action plan is not yet known, so those concerned must monitor developments and employ forward-looking sustainability strategies in order to respond flexibly to regulatory changes.

It is time to pay attention to your strategic position on these topics.

Overview

The Federal Council’s report on the legal framework for blockchain and distributed ledger technology (DLT) of 14 December 2018 showed that although the Swiss legislative framework is generally well adapted to new technology, there is still a need for adjustment in some areas.

Subsequently, in March 2019, the Federal Council submitted a series of amendments to existing laws for consultation. During its meeting on 27 November 2019, the Federal Council adopted the dispatch on the adaptation of federal law to developments in distributed ledger technology. In particular, this includes amendments to the Code of Obligations and securities law, the Debt Enforcement Bankruptcy Act (DEBA), the Banking Act (BankA), the Anti-Money Laundering Act (AMLA) and the Financial Market Infrastructure Act (FMIA). On 17 June 2020, the National Council approved legislative amendments in order to improve framework conditions.

Key changes

Securities law: In addition to the existing categories of ‘securities’, ‘uncertificated securities’ and ‘intermediated securities’, a new category of ‘registered uncertificated securities’ will be introduced. Tokens that represent a legal position (claim, membership) will fall into this category. Registered uncertificated securities will be created and transferred by entry in manipulation-resistant electronic registers.

DEBA: Within DEBA, segregation of crypto-based assets in bankruptcy will be introduced, provided that these assets are either individually assigned to a third party or to a community asset, and provided that it is clear to what proportion of the community assets the third party is entitled. Access to data is also provided for as part of the segregation.

BankA: The segregation of crypto-based assets in the event of bankruptcy has an impact on any banking licence requirements, as segregatable assets are not considered deposits. Nevertheless, for reputational reasons, the Federal Council plans to subject the collective custody of certain crypto-based assets, yet to be defined, to the ‘Fintech’ or ‘BankA 1b’ banking licence, provided that they are not mixed with bank assets and no lending business is conducted (otherwise, a banking licence in accordance with Art. 1a BankA may be required).

FMIA: FMIA provides for the creation of a new ‘DLT trading facility’ infrastructure for the multilateral trading of DLT securities (registered uncertificated securities, but not payment tokens/utility tokens) in accordance with non-discretionary rules.

AMLA: The DLT trading facilities will be defined as financial intermediaries and are therefore subject to AMLA obligations.

FinSA: Financial service providers that offer financial services exclusively to institutional or professional clients will not have to be affiliated with an ombudsman’s office. This should relieve the administrative burden on small DLT trading facilities.

Expert opinion

The creation of registered uncertificated securities will provide legal certainty regarding the issue and transferability of crypto-based assets.

The segregation of crypto-based assets is also likely to increase their acceptance and prevalence. Finally, the new DLT trading facility will allow retail clients to access multilateral DLT trading platforms. Trading platforms should therefore check whether their activity falls within the definition of a DLT trading facility and is therefore subject to the associated FMIA licensing requirements.

Custodians of crypto-based assets should pay careful attention to further developments, particularly the list of crypto assets to be published by the Federal Council, and, if relevant, investigate whether they must obtain a licence in accordance with BankA.

It will be interesting to see the changes planned for the future of insurance and collective investment schemes.

Overview

Swiss company law is to be updated. The Federal Council adopted the related dispatch for Parliament at its meeting on 23 November 2016.

The aim is to make regulations on company foundations and capital more flexible, to strengthen shareholder rights and to promote gender equality at senior executive level in major listed companies. On 19 June 2020, the proposal was approved in the final vote of the procedure for reconciling differences between the two councils.

Key changes

Liberalisation of incorporation and capital provisions: The company law provides for certain simplifications. For example, it provides for equity capital to be denominated in a foreign currency, and authorised capital reductions within the scope of a new capital band are permitted. In the future, provided the circumstances are straightforward, the company forms AG, GmbH and Genossenschaft should be able to be founded, dissolved and deleted from the commercial register without the need for public authentication. However, Parliament does not want to make it easier to set up a company and wants the requirement for public authorisation to continue to apply to the foundation of companies. On 19 December 2019, the National Council followed the Council of States and rejected the simplified foundation of companies.

Introduction of a capital band: A capital band enables the annual general meeting and board of directors to increase or reduce the capital within a specified capital band for a period of up to five years.

Strengthening of shareholder rights: Strengthening of shareholder rights was a key concern of the revision. It is now envisaged that AGMs will have more powers (e.g. delisting, change of registered office). Minority shareholders should also be able to exert more influence on the AGM's agenda.

Rewards for loyal shareholders: The proposal for the introduction of loyalty shares with preferential rights and higher dividends was removed during the conciliation conference.

Gender quotas for the board of directors and executive board of large listed companies (> 250 employees): at least 30% women on the board of directors and at least 20% on the executive board. If these targets are not met, the company will be required to specify the reasons and the action being taken to improve the situation in its compensation report.

Expert opinion

The approval of the proposal by Parliament ends a long ongoing process. The changes due to the revision of company law increase flexibility for Swiss companies limited by shares but also impose other restrictions.

For example, the capital bands will allow easier operational implementation of capital changes. The option to hold equity capital in a foreign currency relevant to the business also increases flexibility for companies that operate internationally, thus also increasing the appeal of Switzerland as a business location.

However, the introduction of gender quotas, the expansion of the powers of the annual general meeting and the strengthening of the influence of minority shareholders limit flexibility in order to introduce the desired control measures.

Overview

In June 2017, the European Commission published the Shareholder Rights Directive II (SRD II) – Directive (EU) 2017/828 of the European Parliament.

In September 2018, the SRD II was supplemented by an EC Implementing Regulation, which establishes minimum requirements for the identification of shareholders, transmission of information and facilitation of the exercise of shareholder rights with an implementation period until 3 September 2020.

This Regulation was adopted to address certain deficiencies in the corporate governance of listed companies in Europe: the inadequate involvement of shareholders and a lack of transparency with regard to investment behaviour, business model and handling of conflicts of interest.

Key changes

This directive of the European Parliament and of the Council aims to strengthen the position of shareholders and thus encourage more active participation in the companies in which they invest. Interactive communication should also be improved.

The following points must be considered:

1. Shareholder identification (‘know your shareholder’)
2. Transmission of information and the facilitation of the exercise of shareholder rights
3. Transparency obligations of institutional investors, asset managers and proxy advisors
4. Shareholder co-determination rights

The Shareholder Rights Directive also establishes new transparency and disclosure obligations for institutional investors, asset managers and proxy advisors. In future, institutional investors and asset managers must disclose various pieces of information (including information on their investment behaviour, business model and handling of conflicts of interest).

They should also disclose an engagement policy that describes how shareholder engagement is integrated into investment strategies. This should be based on the principle of ‘comply or explain’.

Decisions about transactions by listed companies with related parties are also affected by the new requirements. All material transactions (with a value of at least 2.5% of actual assets) with related parties will be subject to the approval of the supervisory board and must be publicly disclosed.

The Directive potentially affects the following three groups:

• Issuers
• Intermediaries (banks and infrastructure)
• Investors (shareholders)

Expert opinion

As European regulations, the Directive and the Implementing Regulation do not in principle apply to Switzerland. However, the Implementing Regulation expressly stipulates that the requirements should also apply to intermediaries that have neither their registered office nor their head office in the EU.

Swiss banks and financial services providers (at least from the point of view of the national law of EU member states) fall within the scope of the Implementing Regulation if:

• they are an ‘intermediary’, i.e. they provide services for the safekeeping or management of securities or the maintenance of securities accounts on behalf of shareholders or other intermediaries, and
• they do so in respect of the shares of companies that have their registered office in an EU/EEA member state and the shares of which are admitted to trading on a regulated market situated or operating within a member state.

Overview

SWIFT stands for ‘Society for Worldwide Interbank Financial Telecommunication’. The organisation offers customers and banks a common platform in order to send and receive messages securely and reliably. SWIFT standardises and transmits the messages exchanged between financial institutions.

This amendment focuses on ‘MT103’, an individual payment order available to a limited group of users (supervised financial institutions). The amendment aims to simplify payment status queries by banks and to keep pace with new technology, customer requirements and transparency requirements.

Key changes

For bank-to-customer transfers (MT103), a payment confirmation must be provided when the payment is received by the beneficiary. Payment confirmations notify the originating bank that the funds have been credited to the ultimate beneficiary’s account.

Structure of MT103

An MT103 message contains approximately 22 fields, six of which are mandatory fields. Fields 20, 23B, 32A, 50a, 59a and 71A are mandatory. Other fields may also be mandatory depending on the legal requirements in the particular country.

Impact

Financial institutions with FIN must confirm the status of their incoming MT103 payments by the end of 2020. This applies when the money has been credited to the recipient’s account or if the payment has been rejected. Confirmation must be provided within two working days of the value date given in MT103 for non-gpi (global payments innovation) members. gpi agents must continue to comply with the requirements set out in the SWIFT gpi rules.

The confirmation should include the following information:

• Status originator BIC
• Currency and amount
• Date/time credited to recipient account/rejected

Banks may also confirm payments via their SWIFT interface by using the MT199 message to send status updates, or for customers with access to the gpi Connector, by sending API calls.

Other amendments

The implementation of ISO 20022 messages for cross-border payments and the reporting of cash transactions was extended by one year to 2022.

Expert opinion

Banks often need to handle several queries on the status of a payment, leading to frustration for customers and increased operating costs. This also has a negative impact on relationships between buyers and sellers if there is a problem with a payment.

Companies rely on a payment – which is an integral part of their supply chain – being received. If this step is not completed, their business may be affected and goods and services will be delayed. Payment confirmations allow banks to provide a better customer experience by offering transparency and certainty that payments have reached their destination.

To make use of the update and the benefits for both financial institutions and end customers, we advise specifying the status for payments sent to agents outside SWIFT FIN (MT), or if the payment cannot be processed immediately.