Switzerland is in the process of revising – or even reconceptualising – the regulatory framework governing its financial infrastructure, Swiss and foreign financial service providers and the distribution of financial products in Switzerland. It intends to integrate the key elements of the European Market Infrastructure Regulation and the EU Markets in Financial Instruments Directive into its regulatory system.
In June 2014 the Federal Council initiated a consultation on the draft Financial Services Act(1) and the draft Financial Institutions Act.(2)(3) The Financial Services Act sets out the prerequisites for providing financial services and offering financial instruments. The Financial Institutions Act, on the other hand, foresees a differentiated supervisory regime for financial institutions. The consultation closed in October 2014 and Parliament is expected to debate the two drafts during the Spring 2015 session.
Further, in September 2014 the Federal Council adopted the dispatch on the draft of the Financial Market Infrastructure Act. Parliament is expected to discuss the bill during the 2015 Spring and Summer sessions. Entry into force is anticipated for the start of 2016. The act governs the organisation and operation of financial market infrastructures. It will consolidate the provisions that are currently dispersed across various federal acts into a single law and adjust them to international standards.(4)
While there has been much discussion regarding the actual duties of financial institutions and privileges granted to customers by the proposed legislation, little attention has been paid to the criminal law provisions stipulated in the drafts.
Financial Services Act
Article 119 of the draft Financial Services Act refers to two information duties. First, an investor must be provided with a prospectus that contains the essential information for the investor's decision (Article 42). Second, a producer must issue a key information document where a financial instrument is offered to retail clients (Article 58). This document must lay out the necessary information for taking an educated investment decision and a comparison of different financial instruments (Article 61).
Any person who wilfully fails to prepare or publish in a timely manner such a prospectus or key information document shall be liable to a maximum three-year custodian sentence or monetary penalty. Giving false information, omitting important facts or failing to include all of the prescribed details in the documents will be punished equally. This provision is not entirely new to Swiss law. The Collective Investment Scheme Act contains a similar provision (Article 148(1)(f)).
Article 120 of the draft Financial Services Act foresees a fine of up to Sfr500,000 for any person who wilfully offers in-house funds to the public or advertises for such funds. Equally liable is any person who offers structured products to retail clients without providing them with the key information document, unless the offeree is subject to a discretionary management agreement. Similar provisions are in place in the Collective Investment Act (Article 149(1)(c) and (e)).
Finally, Article 121 of the draft Financial Services Act imposes a maximum Sfr50,000 fine for any person who violates:
- the duty of information (Articles 7 to 9);
- the duty to assess suitability and appropriateness of the financial instruments or services offered to a specific client (Articles 10 to 13 and Article 14(2)); or
- the duties in relation to the acceptance of benefits associated with the provision of financial services (Article 26).
Committing any of the acts in Articles 119 to 121 through negligence entails a less severe punishment.
The penal provisions of the draft Financial Services Act will not revolutionise the Swiss regulatory regime. However, the scope of application of the provisions has been significantly widened by the draft act.
The provisions included in the Collective Investment Scheme Act apply solely to the distributors and managers of Swiss collective investment schemes and foreign collective investment schemes distributed in Switzerland. In contrast, the draft Financial Services Act applies to all financial service providers, client advisers, securities dealers and issuers of financial instruments (Article 2). The term 'financial service providers' also covers entities incorporated outside Switzerland, but offering their services to clients in Switzerland (Article 3(e)).
Hence, under the Financial Services Act – contrary to existing law – the criminal provisions cover the distribution of any financial service or product. Further, foreign financial institutions may be subject to criminal liability. Non-compliance with the relevant provisions of the act might lead to a custodial sentence of up to three years for the employees of the foreign financial institution.
Financial Institutions Act
Under Article 119 of the draft Financial Institutions Act, any violation of professional secrecy – whether disclosure or inducement of disclosure – entails a custodial sentence of up to three years or a monetary penalty. If the perpetrator has obtained a pecuniary advantage for himself or herself or another person the penalty is elevated to a maximum five-year custodial sentence. This provision corresponds to the existing regulations in the Banking Act (Article 47), the Securities Exchange Act (Article 43) and the Collective Investment Schemes Act (Article 148).
Pursuant to Article 120 of the draft Financial Institutions Act, any person accepting deposits from the public without the required authorisation shall be liable to a custodial sentence of up to three years. This provision corresponds to Article 46(1)(a) of the Banking Act.
Violation of record-keeping and accounting rules applicable to securities firms and banks leads to a custodial sentence of up to three years or a monetary penalty (Article 121 of the draft Financial Institutions Act). This corresponds to existing provisions in the Banking Act (Article 46(1)(b)), the Securities Exchange Act (Article 42a(1)(a)) and the Collective Investment Schemes Act (Article 148(1)(g)).
According to Article 122 of the draft Financial Institutions Act, a fine of up to Sfr500,000 will be imposed on any person who violates the provisions on protection against confusion and deception (Article 14), as well as any notification obligations.
Committing any of the acts specified in Articles 119 to 122 through negligence is also punishable but entails a less severe punishment.
Regarding the definition of 'punishable conduct', the criminal provisions are largely known from existing legislation. Yet, the scope of application of the provisions is enlarged. The most notable change in comparison to existing legislation is the extension of the criminal provision on violation of professional secrecy to portfolio managers.
Financial Market Infrastructure Act
The Financial Market Infrastructure Act governs the organisation and operation of financial market infrastructures and the conduct of financial market participants in securities and derivatives trading.
As with the draft Financial Institutions Act, the draft Financial Market Infrastructure Act contains criminal provisions on the violation of professional secrecy, confusion and deception, as well as non-compliance with notification obligations and violation of record-keeping and disclosure duties.
Moreover, the act incorporates a number of criminal provisions in regard to the stock exchange, which at present are found in the Securities Exchange Act. However, the draft Financial Market Infrastructure Act applies not only to stock exchanges, but also to multilateral trading facilities.
Finally, Article 31(3) of the Financial Market Infrastructure Act foresees that in the context of trading the Swiss Financial Market Supervisory Authority (FINMA), the competent prosecution authority, the takeover board and trading supervisory body shall exchange all information which they require within the context of their collaboration and in order to carry out their tasks. This means that FINMA must make available information that it has collected in the course of its supervisory activity and obtained through reporting and cooperation obligations imposed on financial services providers by regulatory rules (eg, Article 41 of the draft Financial Institutions Act) to the prosecution authorities which will use this information in criminal investigations. Under the proposed legislation, a financial service provider could thus be compelled to submit information to FINMA, which in turn can be used by the prosecution authorities to make a criminal case against the financial service provider. This information exchange clashes with the fundamental principle of nemo tenetur. The extent to which court practice will restrict the use by prosecuting authorities of information and evidence collected by FINMA in administrative (regulatory) proceedings remains to be seen.
Many of the criminal provisions contained in the proposed legislation are already in place (including in the Banking Act, the Stock Exchange Act and the Collective Investment Act). However, the scope of application of the proposed acts is larger than in existing legislation.
One major issue is the criminal provision in the Financial Services Act on the prospectus and key information document, which applies to all financial service providers. Even foreign financial service providers which offer services to Swiss customers are subject to this provision. The maximum penalty of three years' imprisonment for failure to comply with the provision on the prospectus or key information document presents a serious threat to foreign financial service providers and its employees.
The far-reaching information exchange between the supervisory authority and prosecution authorities contradict the fundamental principle of nemo tenetur.
For further information on this topic please contact Bernhard Loetscher or Nino Sievi at CMS von Erlach Poncet Ltd by telephone (+41 44 285 11 11) or email (firstname.lastname@example.org or email@example.com). The CMS von Erlach Poncet Ltd website can be accessed at www.cms-vep.com.
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