The FIDLEV specifies all provisions of the FIDLEG in connection with the offering of financial services. Accordingly, the ordinance primarily contains supervisory rules of conduct for financial service providers with the aim of strengthening client protection and better informing investors.
Implementing ordinances on the FIDLEG/FINIG – basic principles
After the referendum period on the FIDLEG and the FINIG expired unused on 4 October 2018, the Federal Council has opened the consultation on the following three implementing ordinances:
- Financial Services Ordinance (FSIO)
- Financial Institutions Ordinance (FINIV)
- Ordinance on the Organisation of Supervision (OOV)
The FinSA clarifies all provisions of the FinSA in connection with the provision of financial services. Accordingly, the ordinance primarily contains supervisory rules of conduct for financial service providers with the aim of strengthening client protection and providing investors with better information.
FINIV sets out in detail the requirements for the categories of financial institutions. With the exception of banks and insurance companies, all financial intermediaries that are directly supervised by FINMA are regulated by the Financial Institutions Act and the corresponding FINIG ordinance.
Rules of conduct
As soon as a financial service is provided on a professional basis, the person providing the financial service qualifies as a financial service provider.
This means that the obligations stipulated by the FIDLEG must also be complied with, which are briefly explained below:
- a) Duty to inform according to Art. 8 FIDLEG;
- b) Adequacy test in the case of investment advice on individual transactions; suitability test in the case of asset management or investment advice taking into account the client portfolio according to 10 et seq. FIDLEG;
- c) Duty of documentation and accountability according to Art. 15 FIDLEG;
- d) Duty of transparency and due diligence according to Art. 17 – 19 FIDLEG.
a) Duty to provide information
In terms of Art. 7 paras. 1 and 2 of the Draft Regulation on Financial Services in the Internal Market (FinSA), a financial service provider must provide information on the nature and functioning of a service as well as on the rights and obligations arising therefrom. It must be made clear whether the service provided is purely transaction-related or portfolio-related or whether it is asset management. It is envisaged that the information obligations increase with the intensity of the financial service and the relationship of trust between the financial service provider and the client. „Execution-only clients only have to be informed about the general risks associated with financial instruments.
In the case of investment advice and asset management, on the other hand, there are regularly additional duties to inform and possibly advise, especially if the financial service provider is informed about the personal knowledge and circumstances of the client. Art. 8 E-FIDLEV specifies the content and application of the duty to inform under Art. 8 FIDLEG. Information on one-off and ongoing costs must be provided before the service is provided. One-off costs are in particular custody fees, termination fees, product costs for the acquisition of a financial instrument and transaction costs. Ongoing costs are understood to be, in particular, management fees, advisory fees or recurring custody fees.
The costs are to be stated as precisely as possible and estimates of costs incurred are to be presented in a comprehensible manner. In accordance with the E-FIDLEV, clients must be informed in such a way that they have sufficient time before concluding the contract to understand the information with a view to concluding the contract to open the client relationship or to provide the financial service.
b) Adequacy review
In line with MiFID II, the FIDLEG provides for an obligation to review the appropriateness and suitability of financial services. The FIDLEG regulates this central aspect in four articles (Art. 10 to Art. 14 FIDLEG).
According to Art. 12 FIDLEG, a suitability test must be carried out if investment advice is provided taking into account the client portfolio or asset management. Art. 17 E-FIDLEV specifies how financial service providers must fulfil the requirements of the suitability test.
In particular, the financial circumstances are to be determined on the basis of the origin and amount of the regular income, the assets as well as current and future financial obligations of a client. In addition, the FIDLEV requires that financial service providers may determine the client’s investment objectives on the basis of the information provided by the client, in particular on the duration and purpose of the investment, the risk capacity and risk tolerance, as well as any investment restrictions.
An important clarification is made by Art. 17 para. 3 FIDLEV, which states that a financial services provider may only rely on the information provided by the client unless there are indications that this information does not correspond to the facts. This clarification establishes a legal presumption of the reliability of the client’s information.
c) Documentation and accountability
Art. 15 FIDLEG imposes on financial service providers a duty to document the information collected from clients, the financial services agreed with them and the financial services provided to clients. In the case of investment advice, the clients‘ needs and the reasons for a recommendation that led to the purchase of a financial instrument must also be documented.
The accountability is in accordance with Art. 16 para. 1 FIDLEG, which is clarified by the provision of Art. 19 para. 2 lit. b FIDLEV, which states that the documentation must be handed over at the client’s request.
Organisation
In Art. 23 et seq., the E-FIDLEV specifies the requirements of Art. 21 et seq. FIDLEG on the internal organisation of financial service providers. In principle, there is a broad discretion in the application of the organisational provisions. A financial service provider must ensure that it can comply with the provisions of the FIDLEG by means of an appropriate organisation and internal regulations. This means that the financial service provider must provide for internal processes for the provision of services as well as careful selection and training of personnel, whereby the requirements for the operational organisation and internal regulations depend on the size, complexity and legal form of the respective financial service provider and the financial services it offers as well as the risks arising therefrom. The remuneration system of a financial service provider must not create incentives to disregard legal regulations or to harm clients.
In connection with the establishment of an appropriate organisation of a financial service provider, measures must also be taken in particular to prevent clients from being disadvantaged by conflicts of interest which may arise in the provision of financial services. If the disadvantage of a client cannot be excluded, the financial services provider must disclose this to the client. The E-FIDLEV lists the following three types of conduct that are inadmissible in any case due to conflicts of interest for financial service providers:
Switching client custody accounts without an economic reason that is in the client’s interest;
Exploiting information to the detriment of the client; and Manipulation of services in the context of issues or placements of financial instruments to the detriment of the client.
What is important for practice is that retrocessions, i.e. compensation that the financial services provider receives from third parties in connection with the provision of financial services, such as commissions, discounts or commissions, continue to be permissible under the FIDLEG, provided that the client has been expressly informed of the type and scope of the compensation or the calculation parameters (if the amount cannot be determined in advance) before the financial service is provided or before the contract is concluded. It is also permissible for the financial service provider to retain the retrocession if the client waives it on the basis of the above-mentioned information. However, if the client does not waive it, the financial service provider must pass on the retrocessions received in full to the client. The regulation corresponds to the provisions on the mandate in Art 400 CO.
It is important to note that financial service providers working for pension funds or collective investment schemes are obliged to disclose the retrocessions received in connection with the provision of services to the pension fund or collective investment scheme.
Art. 27 para. 1 FIDLEG provides that financial service providers must take measures to prevent the improper exploitation of insider information. Art. 30 E-FILEV supplements this provision and defines to whom such measures should apply, namely to all persons working for the financial services provider who are able to exploit such insider information. Persons close to the employees are also covered by the provision. This is intended to prevent circumvention transactions.
Advisor register
Art. 28 para. 1 FIDLEG obliges client advisors of domestic financial service providers who are not subject to prudential supervision according to Art. 3 FINMASA and client advisors of foreign financial service providers who are active in Switzerland to register in a register of advisors.
The registration requirement applies, for example, to pure investment advisors, i.e. persons who provide pure investment advice to clients but do not make investment decisions for their clients. This also makes it clear that non-supervised Swiss financial service providers can only employ client advisors registered in the advisor register.
Art. 31 of the Draft Supervision Ordinance grants an exemption from the registration requirement: an advisor of a financial service provider that is prudentially supervised abroad, that is part of a financial group that is subject to consolidated supervision by FINMA and that offers its services only to professional and institutional clients, is exempt from registration in the Advisor Register.
Entry in the register of advisors requires the following proof:
- The client advisor must have sufficient knowledge of the rules of conduct of the FIDLEG and the specialist knowledge required for his activity;
- The client advisor himself or the financial service provider for whom he works must have taken out professional liability insurance or there are equivalent financial guarantees;
- The client advisor himself/herself as a financial service provider or the financial service provider for which the client advisor works is affiliated to an ombudsman institution.
The new legislation nor the implementing ordinance under it specify in what form the necessary expertise and knowledge of the FIDLEG must be proven. Accordingly, it can be assumed that the register of advisors will have discretion regarding the decision whether a client advisor fulfils the registration requirements or not.
It can be assumed that the client advisor will have to prove at the time of registration by means of documents and, if necessary, on the basis of an oral interview, that he has the necessary knowledge and skills.
The advisor register is maintained by a registration office, which must be approved by FINMA.
Prospectus for securities
The term „prospectus“ can be found in various places in the FIDLEG. However, the term is not defined in more detail. The FIDLEG understands the term „prospectus“ – in particular due to the liability and penalty provisions contained therein – in each case only as a prospectus in the narrower sense.
Pursuant to the FIDLEG, anyone who makes a public offer to acquire securities in Switzerland or who applies for admission of securities to trading on a trading venue pursuant to the Financial Market Infrastructure Act is obliged to publish a prospectus in advance. In this context, any invitation to acquire a financial instrument that contains sufficient information on the terms of the offer and the financial instrument itself is deemed to be an offer.
Pursuant to E-FIDLEV, the offer must be made with the purpose of wanting to sell the financial instrument. As a result, not every advertisement has the necessary degree of concreteness and finality that would justify and thus establish the obligation to publish a prospectus.
The E-FIDLEV specifies the concept of a prospectus. In principle, any document that meets the requirements of the FIDLEG and has been approved by a review body or is still to be reviewed in connection with a public offering or admission to trading in Switzerland or is automatically recognised in accordance with the regulations of a review body is deemed to be a prospectus.
The prospectus under the FIDLEG must be distinguished from private placement memoranda that have been prepared voluntarily and have not been approved by a review body or have yet to be reviewed, or from an offer or listing document prepared abroad and not used in Switzerland. Accordingly, unaudited private placement memoranda, among others, are not covered by the prospectus requirement.
The E-FIDLEV does not place high demands on the terms „public“ or „addressed to the public“. An offer is public if it is addressed to the public.
Pursuant to Art. 37 to 49 FIDLEG, the prospectus requirement generally applies to public offers and admissions to trading of securities (i.e. standardised securities, uncertificated securities, derivatives or book-entry securities suitable for mass trading). Thus, the prospectus requirement covers not only equity securities (such as shares), but also derivatives (if offered in the form of an issue), structured products and units in collective investment schemes, provided they are securities.
The prospectus requirement applies both to the offering of new securities and to the public offering of existing securities („secondary offering“). In the case of a secondary offering, there are certain exceptions if a valid prospectus already exists and the issuer consents to its use.
The FIDLEG provides for exceptions to the prospectus requirement. In the case of a public offering, the prospectus requirement does not apply if it is only addressed to professional investors or to fewer than 500 investors. Furthermore, certain exemptions apply according to the type of securities. In the case of public offers in connection with certain transactions, such as conversion, the exchange and exercise of rights associated with financial instruments, in the context of a merger, demerger, conversion or transfer of assets, no prospectus is required.
Information sheet for financial instruments
Art. 80 E-FIDLEV substantiates Art. 60 para. 1 FIDLEG to the effect that the obligation to prepare a basic information sheet arises as soon as a financial instrument is offered to private clients in Switzerland. The basic information sheet must be provided to the private client before subscription or before conclusion of the contract and contains essential information to enable the investor to make an informed investment decision and to compare different financial instruments.
Annexes 9 to 13 of the E-FIDLEV set out in detail what the content of the basic information sheet must contain and what form the basic information sheet must take. At a minimum, the basic information sheet must contain the following:
- Easily understandable information on the type and characteristics of the financial instrument;
- Risk and return profile, indicating the maximum loss that investors are likely to incur on the capital invested; and
- The cost of the financial instrument and the minimum holding period.
A key information document need not be produced in the following cases:
- For financial instruments that may be acquired for private clients exclusively under an asset management agreement;
- If securities are offered in the form of shares and equivalent securities, such as participation or dividend-right certificates and convertible bonds; or
- Where debt securities of a non-derivative nature are offered (such as bonds with interest rates linked to reference rates or with inflation protection).
- A key information document becomes obsolete if a document exists under foreign law that is equivalent to the key information document. In this case, the foreign document may be used instead of the basic information sheet.
Ombudsmen
The FIDLEG provides that disputes concerning legal claims between clients and financial service providers are to be settled, if possible, through a mediation procedure. The mediation procedure is carried out by the ombudsman institution to which the client’s financial service provider is affiliated, in accordance with Art. 98 E-FIDLEV. If several ombudsman institutions are involved, it is to be assumed that they will agree on the competence. The ombudsman institutions must be recognised by the Federal Department of Finance.
The proceedings before the ombudsman’s office take place in camera and are confidential. According to Art. 99 E-FIDLEV, which substantiates Art. 80 FIDLEG, the proceedings should be inexpensive or free of charge, as well as quick, fair and unbureaucratic. The ombudsman’s office should only collect cost-covering contributions from financial service providers.
It is important that the parties are not obliged to go through a mediation procedure before the ombudsman’s office first. As usual, an appeal can be made immediately to a civil or arbitration court or to an administrative authority. In addition, a lawsuit can also be filed during the proceedings. In principle, the financial service provider is obliged to participate in the proceedings if a client has submitted a request for mediation. However, this does not apply to a client.