Offering of investment funds under the new Swiss Financial Services Act – a change of paradigm
Lenz & Staehelin, Geneva
Lenz & Staehelin, Geneva
On 1 January, new financial legislation entered into force in Switzerland, bringing significant changes to the regulatory framework applicable to financial sector participants. In particular, the Federal Financial Services Act (FinSA) and its implementing ordinance (FinSO) impose new obligations on those endeavouring to market financial products and services in Switzerland.
The purpose of this article is to outline the main obligations applicable to the cross-border offer of financial products, in particular non-Swiss collective investment schemes, into Switzerland under this new MiFID-inspired regulation. After a quick overview of the scope and the implementation of the FinSA, this article lays out the main obligations relevant to the commercialisation and marketing of funds in Switzerland, with a particular emphasis on the notions of ‘financial service’, ‘offer’ and ‘advertisement’ under the new law and their consequences.
This article only addresses FinSA requirements that may be relevant to non-Swiss financial service providers when offering their services to Swiss clients from outside Switzerland. It does not cover questions in relation to potential licensing and/or authorisation requirements that may be triggered by the performance of a specific activity in Switzerland.
The new FinSA – general principles and entry into force
The main purpose of the FinSA, as stated in its first article, is to protect clients of financial service providers and to streamline the conditions applicable to the provision of financial services in Switzerland. To that effect, the law notably provides for specific obligations that financial service providers must abide by when servicing clients, as well as harmonised documentation requirements for financial products marketed in Switzerland.
The FinSA applies to the provision of financial services and the offer of financial instruments (as defined under section 3) on a professional basis, either from Switzerland or on a cross-border basis to clients in Switzerland (see in particular Article 2 of the FinSA and Article 2 of the FinSO). For the sake of clarity, the notion of ‘financial instrument’ under the FinSA is defined as covering a broad range of financial products, including notably collective investment schemes, structured products and derivatives, as well as equity securities and debt instruments (Article 3A of the FinSA).
As a notable exception, the law does not apply to financial services provided by a foreign provider on a cross-border basis upon express request from the client (reverse solicitation – see Article 2, paragraph 2 of the FinSA). This reverse solicitation exemption is, however, narrowly construed and service providers should exert caution when relying on this exception. Similarly, the rules governing the offer presented in the next section do not apply in case of specific requests of an investor without prior intervention of the offeror of the financial instruments.
Although the FinSA entered into force at the start of this year, market participants have been afforded generous transitional periods, in most cases of two years, to implement most of the new requirements (see in particular Articles 103–111 of the FinSO, in relation with Article 95 of the FinSO). Where relevant, service providers must abide by the regulations formerly applicable to their activity until they are able to comply with the new rules. This applies in particular to the rules of conduct published by the Swiss Funds and Asset Management Association (SFAMA) as regards the distribution of investment funds. This piece of self-regulation must be complied with by financial service providers offering funds or performing a financial service in the form of a ‘purchase and sale’ pursuant to Article 3C of the FinSA until they have implemented the new FinSA rules of conduct and/or organisational measures. Until such time, the requirement to conclude distribution agreements, based on the model published by SFAMA, also remains in force. In relation to the offer of funds, the transitional regime further means that in order to benefit from the more lenient rules of the new regulation concerning the duty to appoint a Swiss representative and paying agent (as outlined below), market participants must first implement the new rules.
In addition, it should be noted that, as of May this year, the Swiss Financial Market Supervisory Authority (FINMA) is in the process of adapting its implementing regulations to the new law. For the matter at hand, however, the impact of the updated FINMA regulation should be limited to the obligations of the Swiss representative of foreign funds. Incidentally, some of the new entities set up under the FinSA, such as in particular the ombudsman’s office and client advisers’ register, are in the process of being established, which also triggers specific implementation deadlines for financial service providers, as outlined below.
Commercialisation and marketing of funds under the FinSA – important distinctions and main obligations
Understanding the impact of the FinSA for a specific financial service provider first requires analysing whether the activity carried out on behalf of Swiss clients qualifies as: (1) a ‘financial service’ pursuant to Article 3C of the FinSA and/or: (2) an ‘offer’ of financial instruments pursuant to Article 3G of the FinSA. It should be stressed that both notions are conceptually independent and a specific activity may, at least theoretically, qualify only as a financial service, only as an offer or fulfil the criteria for both.
As both qualifications trigger the application of specific requirements, this section defines the two notions and outlines the main obligations set off by the qualification as a financial service and as an offer, before briefly addressing the specific requirements applicable to the advertisement of financial products and services.
Under the FinSA, the following activities are considered as financial services when provided to a client (Article 3C): (1) the purchase and sale of financial instruments; (2) the receipt and transmission of orders in relation to financial instruments; (3) portfolio management involving financial instruments; (4) investment advice in relation to financial instruments; and (5) granting of loans to finance transactions with financial instruments. Of particular relevance to the marketing of collective investment schemes, the service of ‘purchase and sale of financial instruments’ is defined as encompassing any activity that specifically aims at the acquisition and/or disposal of a financial instrument (Article 3, paragraph 2 of the FinSO). This covers circumstances in which no advice is provided to the end investor, but where the activity may be seen as an important cause for the investor to take such an investment decision. The official explanatory notice accompanying the publication of the FinSO further makes it clear that the contact with an end client is necessary for an activity to qualify as purchase and sale as defined by Article 3, paragraph 2 of the FinSO. As a rule, the provision of such services to supervised financial intermediaries, acting on behalf of their own clients, does not qualify as ‘purchase and sale of financial instrument’ pursuant to Article 3C of the FinSA and Article 3, paragraph 2 of the FinSO.
Financial service providers, meaning those individuals and/or entities performing financial services on a professional basis in or from Switzerland (Article 3D of the FinSA), must satisfy a series of specific obligations under the FinSA. In particular, they must first classify their clients as institutional, professional or retail clients, depending on their corporate structure, level of supervision, assets and/or expertise in the financial sector (Articles 4–5 of the FinSA and Articles 4–5 of the FinSO). The category in which a client is sorted is instrumental in determining the level of protection afforded to this client under the FinSA, as a financial service provider would have to abide by more stringent duties in relation to retail clients than when dealing with institutional and/or professional clients. The FinSA provides for a relative level of flexibility in relation to client classification, offering specific clients with the option to either opt for more or less protection under the FinSA (see in particular Article 5).
Furthermore, unless the foreign financial service provider in question is subject to sufficient prudential supervision abroad and only targets professional and/or institutional clients in Switzerland, its client advisers – that is, every individual performing financial services on its behalf (Article 3E of the FinSA) – must be registered in a Swiss client advisers’ register (Article 28 et seq of the FinSA). Under the FinSA transitory provisions, client advisers must register within six months after the recognition of the first client register by the FINMA (Article 107 of the FinSO).
In addition, financial service providers must affiliate with a recognised ombudsman’s office in Switzerland (Article 74 et seq of the FinSA). Financial service providers have six months to affiliate after the date of the approval of the first ombudsman’s office (Article 108 of the FinSO). It should be noted that the Swiss Parliament is discussing the possibility to exempt financial service providers which only target institutional and/or professional clients from this obligation.
The FinSA further lists specific organisational measures that must be set up by entities providing financial services (see Articles 21–27 of the FinSA). In particular, these measures aim at ensuring that such service providers, as well as their staff and other third parties involved in the provision of financial services, are complying with the relevant FinSA obligations and to prevent conflicts of interest. Under the FinSA, financial service providers must notably disclose remunerations received from third parties such as retrocessions to their clients and obtain their consent should they wish to keep such payments. The FinSA also provides for specific obligations in ‘chain of providers’ configurations, meaning cases in which a financial service provider mandates another financial service provider to procure financial services to clients (Article 24 of the FinSA). In such arrangements, not only is the mandating entity responsible for the compliance with FinSA obligations towards the client, but the mandated financial service provider may refrain from providing the financial services agreed upon if it has doubt as to the compliance by the mandating entity with its obligations under the FinSA (Article 24, paragraphs 1 and 2 of the FinSA). Furthermore, should a financial service provider involve third parties in the provision of financial services, it must carefully select, instruct and supervise such third parties (Article 23, paragraph 2 of the FinSA – note that, under the Federal Act on Financial Institutions, which entered into force at the same time as the FinSA, additional detailed delegation rules apply to Swiss establishment subject to this act).
Moreover, when providing financial services to retail and, to a lesser extent, to professional clients, financial service providers must also comply with the rules of conduct listed under Articles 7–19 of the FinSA, including in particular information duties, documenting and reporting duties, as well as, where relevant to the services provided, suitability/appropriateness assessments and/or best execution duties. Article 20, paragraph 2 of the FinSA allows for flexibility in the application of such rules of conduct by allowing professional clients to waive the application of some requirements.
Offer of financial instruments
The FinSA defines an ‘offer’ as any invitation to acquire a financial instrument that contains sufficient information on the terms of the offer and the financial instrument itself and is typically intended to draw the intention to that financial service and to sell it (Article 3G of the FinSA and Article 3, paragraph 5 of the FinSO), whereas an offer to the public is deemed to constitute a ‘public offer’ (Article 3H of the FinSA). On the contrary, the provision of information upon clients’ unprompted requests, the reference by name to financial instruments, even in conjunction with factual, general information such as international securities identification numbers (ISINs) or net asset values, the provision of factual information only or the preparation, provision, publication and forwarding of legally or contractually required information and documents to existing clients or financial intermediaries (such as corporate action information, invitation to general meetings, as well as associated requests to issue instructions) are not deemed to constitute an offer (Article 3, paragraph 6 of the FinSO).
As a rule, unless a specific exception applies, when an offer targets retail clients, a key information document (KID) must be issued (Article 58 of the FinSA). The KID for collective investment schemes must be made available at least in English or in one of the Swiss official languages (German, French and Italian) (Article 89, paragraph 2 of the FinSO). It shall be noted that European PRIIP KIDs are considered as equivalent to the Swiss KIDS and may be used in their stead (see Annex 10 of the FinSO in relation to Article 87 of the FinSO and Article 59, paragraph 2 and Article 63.2 of the FinSA). If the FinSA contains detailed requirements for the prospectus that must be issued for each public offer of financial instruments (see in particular Article 35 et seq of the FinSA), such requirements do not apply to foreign investment schemes, whose prospectuses must be established and issued according to the foreign law applicable to it.
To fully appreciate the consequences of the offer of foreign collective investment schemes in Switzerland, the FinSA must be read in conjunction with the Federal Collective Investment Schemes Act (CISA), which was revised with the entry into force of the FinSA and notably sets out specific rules that are applicable to the offer of foreign collective investment schemes in Switzerland. In addition to the client classification of the FinSA, the CISA further distinguishes between qualified and nonqualified investors (see Article 10 of the CISA, in particular paragraph 3 and 3b). If there are some exceptions (see in particular Article 10 paragraph 3b of the CISA), as a rule the FinSA retail clients are considered to be nonqualified investors for the purpose of the CISA, whereas professional and institutional clients under the FinSA are qualified investors under CISA (see notably Article 10, paragraph 3 of the CISA).
Of particular relevance to the subject matter of this article, Article 120 of the CISA notably states that only foreign collective investment schemes approved by the FINMA and for which a Swiss representative as well as a Swiss paying agent have been designated can be offered to nonqualified investors (Article 120, paragraph 1 and 2 of the CISA). These additional requirements are, however, waived for offers that solely target qualified investors. There is one notable exception to this rule – investors that are not per se qualified but have opted out of the protection afforded to them as retail clients/nonqualified investors on the basis of Article 5, paragraphs 1–2 of the FinSA can only be offered foreign collective investment schemes for which a Swiss representative and paying agent have been appointed.
In sum, foreign collective investment schemes may be offered rather freely to Swiss clients that are classified as qualified investors/professional or institutional clients, as there is no registration requirement at product level. Should a foreign offeror wish to target retail clients/nonqualified investors however, it should be mindful of the specific requirements of the FinSA and the CISA mentioned in this section.
In addition to the requirements applicable to the provision of financial services or the offer of financial instruments, the FinSA also prescribes specific conditions for the advertisement of financial products and services in Switzerland.
The notion of ‘advertising’ encompasses any communication that is aimed at investors and whose purpose is to draw attention to financial instruments or services (Article 95 of the FinSO). Pursuant to Article 68 of the FinSA, advertising must be clearly indicated as such. It must mention the prospectus and the KID for the financial instruments in question, as well as where such documents may be obtained.
Moreover, when advertising for foreign collective investment schemes, the obligations listed under Article 120 of the CISA must be complied with (Article 127a of the CISO, CISA’s implementing ordinance). As a result, no advertising targeting nonqualified investors can be made for foreign collective investment schemes that are not eligible for an investment by such investors. This, as a result, precludes any marketing of funds to nonqualified investors where those funds are not registered with the FINMA pursuant to Article 120 of the CISA.
Conclusions – main takeaways
In conclusion, the entry into force of the FinSA resulted in important changes in the regulatory framework applicable to financial sector participants, including foreign entities offering financial products to Swiss clients on a cross-border basis. In particular, the new law introduced the notions of ‘financial services’ and of the ‘offer’, which set off specific obligations. As outlined in this article, however, the FinSA allows for some flexibility in its application, in particular in relation to professional and/or institutional clients.
From a practical point of view, the first step for financial service providers wishing to implement the FinSA would be to identify the types of services provided to clients in Switzerland and their classification under the FinSA, both in terms of financial service and offer, as well as to identify the type of clients targeted and/or served in Switzerland. Based on this first analysis, it would then be possible to determine which obligations are relevant to the service provider in question and, eventually, to adapt the documentation and processes to the new law.
All in all, the Swiss regulatory framework remains very liberal. This particularly holds true where a foreign service provider targets solely sophisticated investors in Switzerland, such as financial institutions or pension funds. In those cases, the impact of the FinSA at the point of sale is somewhat mitigated, in particular as compared to MiFID II. This is even more obvious at the level of the product, as the FinSA and the CISA impose little to no restriction to the offer of foreign collective investment schemes to qualified investors.
Triggering important paradigm shifts, both at the product level and at the point of sale, the new regulation compels individuals and entities active in the Swiss financial market to review their business model and to update their marketing strategies. That being said, the new law is not revolutionary. In particular, those used to operating under the MiFID regulations will most likely find the new rules applicable at the point of sale rather familiar.
 Markets in Financial Instruments Directive.
 Packaged retail and insurance-based investment product.