FinSA / FinIA – Our blog series providing essential insights (Post 5)
In the case of independent (also individual or external) asset management, the independent manager of individual client portfolios "asset manager" has the mandate to invest the client's assets at his own discretion, but within the framework of the agreed specifications. Until now, asset managers were generally not subject to a licensing requirement, but only had to join a recognised self-regulating organisation in order to ensure compliance with money laundering legislation. In contrast, the managers of collective investment schemes are already subject to authorisation under current law.
This blog provides an overview of the most important new regulatory developments regarding the licensing requirements for asset managers under FinIA and FinSA (German only), which will come into force on 1 January 2020 (see press release of 6 November 2019).
Professional management of individual client assets
Under the new financial market legislation, the professional management of individual client assets will require FINMA approval. Asset managers are considered professional if they meet one of the following criteria:
- the asset manager achieves gross proceeds of more than CHF 50,000 per calendar year;
- the asset manager enters into business relationships with more than 20 contracting parties per calendar year, which are not limited to a single activity;
- the asset manager maintains business relations with at least 20 contracting parties per calendar year; or
- the third-party assets under management exceed CHF 5 million at any time.
Activities for economically (e.g. group companies) or family-related persons are not taken into account for the determination of professional management activity. The same applies to persons who exclusively manage assets within the framework of employee participation plans or do so within the framework of a statutory regulated mandate, e.g. execution of wills or administration of estates.
The licence issued by FINMA should not be confused with the current supervision, which is carried out by a supervisory organisation licenced by FINMA. Since FINMA will only be empowered to approve a supervisory organisation when FinIA comes into force, therefore the law provides for a transitional period of three years within which financial institutions previously affiliated to a self-regulatory organisation must join a supervisory organisation. The asset manager must also be affiliated to an ombudsman.
Minimum capital, own funds and other collateral requirements
Regardless of the type of company – sole proprietorships, trading companies and cooperatives are permitted – the asset manager must have paid in a minimum capital of CHF 100,000 in cash. Furthermore, own funds must always be available, which must amount to at least one quarter of the fixed costs of the last annual financial statement (maximum CHF 10 million). The fixed costs are the sum of the following expense items:
- Depreciation on fixed assets;
- Value adjustments, provisions and losses;
- Operating expenses; and
- Personnel expenses.
Voluntarily paid bonuses (so-called gratuities, to which no legal entitlement exists) and cash payments dependent on the business result may be deducted from personnel expenses.
Finally, a professional liability insurance policy must insure financial losses arising from the activity of the asset manager.
All financial service providers must ensure adequate organisation through internal rules and appropriate operational organisation. The concrete requirements depend on the complexity of the business activity. First and foremost, the asset manager must operate sufficient risk management and have independent internal compliance measures in place to ensure adherence with all legal obligations. The persons who perform these tasks must not be involved in the activities they supervise. In the case of small asset managers – i.e. companies with five or fewer full time employees or an annual gross income of less than CHF 2 million – the requirement for the personnel and organizational separation of risk management and compliance on the one hand and profit-oriented activities on the other may be waived.
On the other hand, FINMA may require an independent internal audit from asset managers with particularly complex business activities and high gross income (more than CHF 10 million).
Furthermore, the employees must be sufficiently qualified for the respective activities. For management personnel, for example, this means that they must be able to prove that they have five years' professional experience and at least 40 hours of appropriate training. In future, management must consist of at least two persons who meet these requirements. In addition, precautions must be taken to ensure qualified succession in the event of the incapacity or death of the managing director.
Finally, the asset manager must ensure that conflicts of interest in the provision of financial services preclude discrimination against the client or, if this is not possible, are disclosed. This also includes distribution losses or retrocessions. However, the legislator refrains from a total ban if a qualified consent has been obtained from the customer.
Place of management
For a licence to be granted, the asset manager must actually be managed from Switzerland. If the company is part of a financial group, general directives and decisions within the scope of group supervision may be taken by a foreign group company if it is subject to appropriate consolidated supervision by foreign supervisory authorities.
In any case, the asset manager must be represented by a person domiciled in Switzerland. This person must either be a member of the management body or – if FINMA so requires – the body responsible for ultimate management, supervision and control.
Time is of the essence
The granting of FINMA approval for independent asset managers is subject to certain conditions, which will present a legal challenge for many asset managers, especially smaller ones. In addition, the original grandfathering for asset managers who have been in business for more than 15 years was rejected by parliament. Although the Federal Council extended certain transitional periods (in particular with regard to the requirements for organisation, rules of conduct and ombudsmen), time is still short:
Asset managers who are currently subject to a self-regulatory organisation must in any case report to FINMA within six months of the ordinance coming into force – i.e. by 30 June 2020 – and become subject to a supervisory organisation within three years. Financial service providers should therefore ensure in good time that all licensing requirements are met in order to avoid unpleasant surprises.