In Switzerland, the term 'retrocession' generally refers to certain forms of fee-sharing arrangement between financial intermediaries (eg, banks, broker-dealers, portfolio managers, fund promoters and distributors of financial products).

In a landmark judgment of 2006,(1) the Supreme Court held that retrocessions paid to a portfolio manager by a custodian bank holding the client's assets were subject to a statutory restitution duty. The court determined that this duty derived from Article 400(1) of the Code of Obligations – a statutory provision which applies to agency agreements. In practical terms, this means that such retrocessions are, as a matter of principle, due to the client. The court also ruled that this restitution duty is not mandatory, meaning that it may be varied by the parties (ie, the portfolio manager and the client) in their private agreement. However, according to the 2006 decision, a contractual arrangement whereby the client agrees that the portfolio manager retains benefits received from third parties (eg, the custodian bank) in the course of asset management activities is valid only if:

  • the client has been duly informed of the existence of such benefits; and
  • the client has expressly waived its restitution claim.

In its decision, the Supreme Court did not detail the scope of information to be disclosed to the client, but this issue has, to some extent, been addressed in subsequent cantonal case law. Intense debate followed as to whether the 2006 decision could be transposed to the area of collective investment schemes and structured products. In practice, promoters of financial products frequently enter into agreements with other financial intermediaries (typically retail banks or other fund distributors). In this context, the fund promoter or manager generally pays a retrocession to the fund distributor, as a consideration for distribution services, as well as for certain related services.

Generally speaking, such retrocessions may be structured as:

  • a percentage of the issuance or redemption fee;
  • a percentage of the management fee; or
  • a discount on the issue price where the distributor underwrites the financial product.

The question as to whether this type of retrocession is subject to a restitution duty was addressed for the first time in a recent Supreme Court decision.(2)


A bank employee was accused of criminal mismanagement (under Article 158(1) of the Criminal Code), as he had allegedly embezzled retrocessions that his employer had received from various promoters of structured products. The lower court asserted that, assuming that the alleged embezzlement had not occurred, the bank would not have been authorised to keep the retrocessions and would have been under a duty to pass them on to its clients. Consequently, the lower court ruled that the employee could not be held liable for criminal mismanagement to the bank's detriment. Following an appeal lodged by the Zurich Attorney General, the Supreme Court had to determine whether the retrocessions were subject to a duty of restitution to the clients. The criminal conviction of the bank employee hinged on the answer to this question.


In its reasoning, the Supreme Court emphasised the distinction between the two contractual relationships existing in the case at hand:

  • the one between the promoter of the structured product and the bank, acting as distributor (ie, the distribution agreement); and
  • the one between the bank and the client.

Although it refrained from characterising this second contractual relationship under Swiss law, the court nevertheless reviewed whether the duty of restitution set forth in Article 400(1) of the Code of Obligations (which, as a matter of principle, governs only agency and agency-related agreements) applied to the present case. In this context, the court distinguished this situation from the one that gave rise to the 2006 decision, which related to private wealth management services. In the structured products industry, the recipient of a retrocession (ie, the bank, which distributes the relevant financial products) renders certain services to the payor of the retrocession. These services, which are set forth in the distribution agreement, include promotional activities in relation to financial products and assistance in the course of the distribution process. On this basis, the court concluded that the retrocession should be characterised as a consideration for services and could thus be retained by the bank. This suggests that, regardless of the arrangements in place with the client, a financial intermediary is entitled to keep retrocessions received if those retrocessions were paid as a consideration for services rendered to the payor of the retrocessions (ie, the promoter of the structured product).


This Supreme Court decision clarifies the scope of the 2006 landmark case law – which triggered a significant amount of turmoil in the Swiss financial industry – and establishes a certain level of legal certainty with regard to payment flows taking place in the distribution of structured financial products. The scope of this decision may be extended to retrocessions paid as part of the distribution of collective investment schemes.

The position taken by the Supreme Court echoes the views expressed by two financial industry professional organisations in the wake of the 2006 decision, namely the Swiss Funds Association (in its 22/06 circular dated December 5 2006) and the Swiss Bankers Association (in the 2010 version of its Portfolio Management Guidelines).

However, the Swiss courts may have more to say on the subject of retrocessions; the 2011 decision was made by the Criminal Law Bench of the Supreme Court and has not been published in the Official Court Reporter (unlike the 2006 decision, which was rendered by the First Civil Law Bench and was published in the Official Court Reporter).

The question of whether a retrocession received by a financial intermediary ought to be passed on to the client arises only if the client relationship is characterised as a Swiss law agency relationship. If this is not the case (typically in an 'execution only' scenario), the financial intermediary would have good arguments to claim that no (contractual) duty of restitution deriving from Article 400(1) of the Code of Obligations arises and that the various hurdles that must be cleared before being entitled to keep retrocessions are not applicable.

Financial intermediaries which receive retrocessions and wish to retain them should ensure that the contractual documentation governing their client relationships is drafted in such a way as to minimise the risk of being forced to pass the retrocessions on to the clients. This applies in particular to the level of information provided to the clients with respect to retrocessions.

For more information please contact Philipp Fischer at Lenz & Staehelin by telephone (+41 58 450 7000), fax (+41 58 450 7016) or email ([email protected]).


(1) Case 4C.432/2005, March 22 2006.

(2) Case 6B_223/2010, January 13 2011.