Findings of cross-sector investigation
Proposed courses of action


In the aftermath of the Lehman Brothers failure, the Federal Financial Market Supervisory Authority (FINMA) conducted a full-scale investigation among Swiss financial services providers on the distribution of capital-protected structured products. It published its findings in March 2010. The investigation focused on how the savings of clients of Swiss banks came to be invested in Lehman products that lost their value in such spectacular fashion.

Although the investigation did not reveal any serious breach of applicable Swiss supervisory law, it established that under the existing regulatory regime both investment advisory and asset management clients, and in particular retail clients, often lacked adequate protection.

Based on these findings, FINMA launched a cross-sector examination of the existing distribution rules. In November 2010 FINMA published the findings of this investigation with the aim of promoting a constructive dialogue with regard to enhancing the protection of retail clients in relation to the purchase and marketing of financial products. The interested Swiss public is invited to contribute to the discussion by mid-April 2011.

Findings of cross-sector investigation

In its analysis, FINMA pinpointed the point of sale as the linchpin of the client-distributor relationship and outlined a variety of deficiencies. These deficiencies predominantly affect retail clients - that is, clients with average income and wealth levels who have only limited knowledge of the financial markets.

Information is valuable and all too often is difficult for retail clients to obtain. As a consequence, relationships between retail clients and distributors are regularly fraught with information asymmetries or power imbalances. Due to their lack of knowledge and experience, as well as the increasing complexity of both financial markets and products, retail clients are likely to find themselves in an inferior position with respect to their more sophisticated transaction partners.

When marketing financial products and handling the associated client information, the focus is on rules of business conduct. In this area, the law is largely inadequate - it merely sets out isolated duties to acquire and provide information in relation to client needs. There are also only isolated provisions on the disclosure of costs associated with a service or product and of an institution's own interests and conflicts of interest.

In FINMA's view, it is also inequitable that some financial services providers are subject to no licensing requirements under the existing legislation, but rather are able to provide their services free from supervisory standards. It found that transparency with regard to financial products must also be improved at product level. Prospectuses for investment products must make clients aware of the material risks.

FINMA concluded that the law as it stands does not adequately protect the interests of retail clients when financial products are bought and marketed.

Proposed courses of action

As a result of this conclusion, FINMA has put forward various proposals on how the protection of retail clients could be improved. Implementation of the proposed measures would make a major contribution to strengthening the protection of retail clients and to Switzerland's reputation as a leading financial centre. FINMA proposes the introduction of:

  • an obligation to provide a comprehensible description of the risks associated with financial products;
  • improved documentation requirements at the point of sale;
  • rules of business conduct in client contact at the point of sale;
  • stricter regulation of cross-border distribution of foreign financial products in Switzerland;
  • simpler product rules and rules of conduct for business with qualified clients;
  • a registration requirement at the point of sale for financial services providers that lack prudential supervision; and
  • provisions to implement binding, simple and fast settlement of disputes with retail clients.

These proposals include broader and more uniform duties to produce a prospectus. The requirements for such a prospectus should not differ among financial products but be general in nature and applicable to all products. The content should be in non-technical language. Additionally, post-distribution publicity should be provided for all products.

Generally, transparency must be improved. Retail clients should have a clear picture of their investment schemes, necessitating the provision of information on products and strategies, in particular with regard to the associated risks and benefits, costs and taxes. Distributors should also disclose potential conflicts of interest and third-party remuneration received, which could potentially influence its decision-making process. On the other hand, distributors will be obliged to acquire the necessary information about their clients in order to establish each client's specific investment needs.

These additional information requirements are coupled with improved documentation duties, which are intended to bolster the retail clients' position in subsequent litigation. Should a cause for litigation arise, then retail clients would be provided with a chance to have their case settled expeditiously. To achieve this, an ombudsman's office should provide for a binding, simple and swift settlement of disputes between distributors and retail clients.

The proposals also focus on the rules of business conduct for financial service providers and on how clients are to be provided with information on such products. Furthermore, FINMA proposes stricter and more consistent regulation of cross-border distribution of foreign financial products in Switzerland.

Costs of protective measures
FINMA has recognised that the costs of such protective measures must not exceed the costs of the deficiencies that these measures are intended to combat. It thus proposes to narrow the field of application of the new measures to the retail client segment, exempting qualified clients as they usually have the necessary knowledge, experience and skill to look after their best interests themselves.

Additional requirements at the point of sale for financial services providers that lack prudential supervision should ensure that fields remain unsupervised.

Introduction of Financial Services Act
In order to eliminate the existing regulatory fragmentation, with its resulting omissions and conflicting solutions, FINMA is also proposing to introduce a general Financial Services Act. However, experience has shown that even with clear political backing, it takes several years before such a legislative project can enter into force. In the interim, FINMA is contemplating the implementation of a Federal Council ordinance on rules of business conduct in securities trading and the distribution of collective investment schemes, even though this would be limited to those financial service providers which are already subject to prudential supervision by FINMA.


It remains unclear how well these proposals will translate into legal distribution rules. However, it is likely that the proposals will have an impact not only on secondary market trading activities, but also on the primary and grey market activities of financial services providers and issuers.

For further information on this topic please contact Mark-Oliver Baumgarten at Staiger, Schwald & Partner AG by telephone (+41 58 387 80 00), fax (+41 58 387 80 99) or email ([email protected]).