We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
23 August 2016
The offering of financial instruments in Switzerland under the draft Financial Services Act is under debate before the Economic Affairs and Taxation Committee of the Council of the States (for further details please see "Offering of financial instruments – a major change of direction"). The draft act should enter into force from January 2018 at the earliest and will introduce new prospectus and basic information document requirements regarding the offering of financial instruments (eg, equity and debt securities, derivatives and structured products). These new requirements will be the responsibility of the financial instruments' offerors and manufacturers. The draft act will also impose new rules of conduct on financial services providers, which must be complied with at the point of sale.(1) While some of these rules only restate existing duties, others will lay down new obligations for the financial services industry.
The rules of conduct will apply to the following activities to the extent that they are rendered by a financial services provider that is acting on a professional basis in or from Switzerland:
A broad array of services (including share deal financings) may possibly be subject to the rules of conduct. Conversely, these rules should disapply with respect to insurance and reinsurance services or real estate and commercial lending.
With respect to intra-group relationships, a company which receives financial services from an affiliated company is not regarded as a client of that company.(3)
The rules of conduct are divided into categories of duties relating to:
The standard of protection varies based on the classification of the client involved in the subject transaction. In this regard, the draft act distinguishes between three types of client:
According to the draft act,(7) when carrying out any of the subject activities, financial services providers must disclose certain information to their clients in a comprehensible manner, including:
This information must be provided before the execution of the financial services agreement or the provision of services and can be issued in standardised form and communicated electronically to the client.(9) Further, the financial services provider must communicate any material change to the information to the client. While such communication must be made immediately with respect to information relating to services offered and the financial instruments, any substantial change to the information pertaining to the financial services provider may be made on the occasion of the next contact with the client.(10) The provision of false information or hiding material facts may lead to criminal fines of up to Sfr100,000.(11)
Additionally, where the contemplated transaction relates to a financial instrument for which a basic information document is required,(12) the financial services provider should make the document available to its (retail) clients free of charge before subscription or conclusion of the relevant contract.(13) The same applies if the value of a financial instrument is based on the fluctuation of one or more other financial instruments for which a basic information document has been drawn up.(14) A breach of such duty may trigger criminal fines up to Sfr100,000.(15) By contrast, if the financial services provider's offer relates to a financial instrument for which only the drawing up of a prospectus is required,(16) the financial services provider must make the prospectus available if a retail client requests it.(17)
The extensive information duties apply regardless of client classification, with the exception of the obligation to hand over a basic information document or prospectus which is triggered only if the client is classified as a retail client.(18)
Appropriateness and suitability assessment duties
The second set of duties relates to the appropriateness/suitability assessment, first introduced in Europe under the first EU Markets in Financial Instruments Directive and, to some extent, already applied by the Swiss courts based on the Code of Obligations. These duties are applicable only to financial services providers acting as investment advisers or investment managers.(19) The type of assessment to be conducted by the relevant financial services provider is contingent on the nature of the services rendered and client classification.
The following assessments apply with regard to the nature of service rendered where a financial services provider:
Financial services providers are dispensed with the appropriateness and suitability assessment requirements if the services are:
In such instances, financial services providers must inform their clients before providing their services that no appropriateness or suitability assessment will be performed.(22)
The following applies with regard to client classification if the client is classified as:
Further, if the information received by the financial services provider is insufficient for assessing the appropriateness or suitability of a financial instrument, the financial services provider must inform its client before providing the services.(26) The same applies if the financial services provider concludes that a financial instrument is not appropriate or suitable for its client. This notification may be made in a standardised manner.(27) Notwithstanding such notification, if the client maintains its investment decision, the financial services provider remains free to execute the relevant transaction (although it should carefully document the warning to the client).(28)
A serious breach of the appropriateness and suitability assessment duties is subject to criminal fines up to Sfr100,000, not to mention other regulatory and contractual consequences for the non-compliant financial services provider.
Documentation and accountability duties
Under the draft act, financial services providers will be required to document in an appropriate manner:
Financial services providers must provide their clients with a copy of the documentation or make it available to them through another appropriate manner.(32) Further, in case of advisory or management mandate, financial services providers will have to account for:
Transparency and best execution duties
The transparency and best execution duties apply regardless of client classification. In particular, they require that financial services providers:
Prevention of conflicts of interest
As a result of the organisation measures imposed by the draft act, financial services providers are under a general duty to avoid or, as the case may be, disclose such conflicts of interest.(39) In particular, the act addresses which conditions a financial services provider may receive from third parties regarding compensation (ie, brokerage fees, commissions, discounts or other financial benefits).(40) Reflecting the current requirements laid down by case law,(41) financial services providers may accept such compensation provided that they either:
Absent any indication to the contrary in the draft act, offerors or manufacturers of financial instruments are not responsible for ensuring compliance with the rules of conduct, unless they are acting in a financial services provider capacity. However, offerors and manufacturers of financial instruments remain liable for any inaccurate or misleading information disseminated in a prospectus, key information document or similar communication to a client.(43) The client that would incur any loss resulting from a financial services provider breaching its obligations in connection with the acquisition or sale of financial instruments would thus have no recourse against the offeror or manufacturer of such financial instruments.
Conversely, a financial services provider should in principle incur no liability in case of inaccurate or misleading information contained in a prospectus or key information document that it would have handed over to its clients when performing its services. The conduct that a financial services provider should adopt if such documents are unavailable is less clear. In particular, it is uncertain whether a financial services provider may still provide services with respect to a financial instrument for which no prospectus or key information document has been drawn up or whether the financial services provider should refrain from providing any such services.
While many of the rules of conduct are already known by financial services providers, the draft act and its implementing ordinance will impose clearly defined requirements, which will require financial services providers to adapt their day-to-day operations and take organisational measures to ensure continuing compliance. However, offerors and manufacturers of financial instruments should not be responsible for monitoring compliance with the rules, subject to their involvement in a specific transaction as financial services providers.
For further information on this topic please contact Nicolas Béguin at ABR Avocats by telephone (+41 022 703 51 00) or email (firstname.lastname@example.org). The ABR Avocats website can be accessed at www.abrlegal.ch.
(1) The new rules do not prejudice the sector-specific rules of conduct which already apply to certain financial services providers, such as the holders of a licence pursuant to the Collective Investment Schemes Act (see Article 8(3) of the Financial Services Act).
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.