In This Issue: "Federal Council releases revised drafts of and report to the parliament on the new Federal Financial Services Act and new Financial Institutions Act" Client Alert November 2015 Federal Council releases revised drafts of and report to the parliament on the new Federal Financial Services Act and the new Financial Institutions Act After the conclusion of the consultation procedure regarding two important drafts of legislation which are expected to significantly affect the provision of financial services in Switzerland, i.e. the Federal Financial Services Act (FinSA) and the Federal Financial Institutions Act (FinIA), the Federal Council has released revised drafts of these two Acts as well as a report to the parliament ("Botschaft") explaining its reasoning behind the individual provisions. The envisaged Acts will impact the responsibilities of financial intermediaries, the risks related to financial services litigation and the current Swiss regulatory regime as a whole. The following is a short summary of the main changes that these two Acts shall introduce (for a general overview, see our client alert of July 2014; for an overview of the additional guidance, see our client alert of June 2015). Scope The new FinSA aims, inter alia, at protecting clients of financial services providers (FSPs) and at generating a level playing field for all FSPs. It also shall, in principle, implement the EU MiFID rules in Switzerland. This shall strengthen the reputation and the competitiveness of the Swiss financial market. The FINIA in turn aims at investor protection and ensuring the functionality of the Swiss financial market. Affected financial service providers The FinSA will apply to all FSPs that offer financial services in Switzerland or to clients in Switzerland on a cross-border basis. "Financial services" will be broadly defined and will cover not only the sale or purchase of financial instruments, but also other services such as asset management and personalized investment advice. Appropriateness and suitability tests depending on the services provided and the classification of customers Financial service providers (FSPs) offering investment advisory or discretionary asset management services will be generally obliged to conduct appropriateness and suitability tests. The extent of the clarification duties will depend on the type and level of service. An FSP shall perform an appropriateness assessment when it provides transaction-related investment advice, i.e. the FSP will need to clarify the knowledge and experience of its client and will need to verify the appropriateness of the financial instrument for the client prior to recommending it. If the FSP provides portfolio-related investment advice or portfolio management services, it will need to conduct a suitability assessment, i.e. clarify the financial means and investment goals of the client in addition to the client's knowledge and experience prior to providing advice or For further information please contact: Dr. Markus Affentranger +41 44 384 12 86 email@example.com Dr. Marcel Giger +41 44 384 13 16 firstname.lastname@example.org Theodor Härtsch +41 44 384 12 11 email@example.com Dr. Anette Waygood +41 44 384 13 36 firstname.lastname@example.org Baker & McKenzie Zurich Holbeinstrasse 30 8034 Zurich Switzerland 2 November 2015 making the investment. As a matter of exemption, FSPs do not have to perform any assessments in the case of execution only transactions or transactions at the client's request that are not within the framework of an advisory service (reverse solicitation). The new draft FinSA intends to introduce a segmentation of clients into retail clients and professional clients, whereas institutional clients will form a subgroup of the latter. Provided certain conditions are met, clients will be able to choose between the classification as a retail client or as a professional client (opting system). Accordingly, FSPs may rely that professional clients have the necessary financial means and knowledge and may thus refrain from conducting an appropriateness or suitability test. Training and Continued Professional Development of Client Advisors The revised draft FinSA will oblige individuals acting as client advisors on behalf of an FSP to demonstrate proper education for their task on a continuing basis. FSPs shall determine the mandatory minimum requirements of education and continued professional development specific for the individual industry sector in the form of self-regulation. The Federal Council reserves the right to supplement these minimum requirements, should it deem it necessary. Ensuring an adequate level of education and continued professional development will be the responsibility of both the individual client advisor as well as the FSP on behalf of which the client advisor is acting. Registration of Client Advisors of Swiss and foreign FSPs In future, individuals acting as client advisors on behalf of an FSP will need to register as a client advisor in a newly created register, unless the FSP is licensed, acknowledged or registered by FINMA or is a collective investment scheme. This will particularly affect client advisors of foreign FSPs acting on a cross-border basis who will be required to register in order to be able to offer financial services in Switzerland, even if the FSP itself is already subject to supervision abroad. Transparency in the case of inducements from third parties Despite some criticism in the consultation process, the revised draft of the FinSA intends to introduce complete transparency regarding all inducements received by FSPs from third parties. In accordance with the current case law, FSPs will need to disclose the type and amount of inducements received from third parties prior to entering into an agreement. FSPs will either have to reimburse these inducements to their clients or may retain these inducements if the client has waived his or her right of reimbursement. However, the draft FinSA does not intend to ban the acceptance of inducements. The revised draft no longer contains the provision according to which FSPs may only refer to their services as "independent" if they do not accept any inducements from third parties. Uniform provisions on prospectus requirements and introduction of a key information document The current prospectus requirements for shares, bonds and other listed financial instruments shall be generally extended to all equity and debt securities and aligned to internationally recognized standards. Exceptions will apply depending on the type of security and offering. Considerable simplifications 3 November 2015 shall apply to small and medium entities, the details of which shall be further refined in the coming months. It is expected that these provisions will reflect the provisions of the EU Prospectus Directive. In addition, a key information document shall become available for all kinds of financial instruments offered to retail clients. An exception shall apply for the offering of shares or if an equivalent document based on foreign requirements is available. Lower financial barriers on clients initiating legal proceedings The FinSA shall strengthen the position of private clients in legal proceedings against FSPs by improving the current mediation procedure before the "Ombudsman (for banks)". Previous suggestions to introduce either a new arbitration body to deal with litigation in the financial sector, a new fund to support the financing of proceedings against FSPs or reverse the burden of proof have been discarded. Instead, the draft FinSA proposes to exempt clients from the requirement of paying a deposit on court costs or providing similar securities. In addition, the risk of litigation cost shall be further reduced for clients by – provided certain conditions are met – having the FSP bear its own legal costs even if the FSP wins the dispute. Such conditions shall include that the relevant value in dispute does not exceed CHF 250'000 and that the proceeding has previously been conducted before the Ombudsman. This shall strengthen the Ombudsman and foster an efficient completion of proceedings. Finally, provided certain conditions are met, it shall be in the discretion of the court to allocate the court costs among the client and the FSP. Specific Supervisory Organization for Non-Qualified Asset Managers and Trustees The draft FinIA is set to introduce a differentiated supervisory regime for certain financial institutions, including portfolio managers, managers of collective assets, fund management companies and securities firms. Moreover, the draft envisages that asset managers of individuals (private clients) and of Swiss occupational benefit schemes (Pensionskassen) as well as trustees will require a license. Qualified asset managers, i.e. managers of collective investment scheme or of Swiss occupational benefit schemes, shall be supervised and licensed by FINMA. Non-qualified asset managers, i.e. asset managers of individuals and trustees, shall be supervised by a new specific supervisory organization (SSO). The SSO shall be an independent body but also licensed by and subject to the supervision of FINMA. The SSO shall exercise its prudential supervision based on the risk profile and structures of non-qualified asset managers. As a result, small asset managers with a lower risk profile and simple structures may be audited only every four years rather than every year. Impact and Next steps The revised drafts confirm that the new legislation will have a considerable impact on market players. Whilst asset managers shall now become regulated, FSPs generally will have to accept new burdens (and costs) to comply with additional duties and obligations. This will require a review of the existing business model by each market participant and subsequently lead to changes, for example in the internal guidelines (e.g. training and continued professional development of client advisors) and other relevant documentation. The Swiss parliament is expected to debate the published drafts during the course of 2016. While so far, there is no published timeline for this new legislation to become effective, it can be expected that the new laws will enter into 4 November 2015 force in 2017 / 2018. An entry into force in 2017 would coincide with the implementation of MiFID II by the member states of the European Union. Baker & McKenzie Zurich will continue to monitor the developments and is happy to discuss with you any potential consequences of the evolving legislation.