FinSA / FinIA – Our blog series with the most important findings for the business world (post 6)
The new has been in force since 1 January. The new law lays down various conduct obligations for financial services providers, which are based on the EU directive MiFID II and are intended to considerably simplify market access for Swiss financial services providers to the EU financial market - subject to the conclusion of a corresponding agreement with the EU (see blog article on the framework agreement between Switzerland and the EU). This blog contains an overview of the most important regulatory innovations in the area of conduct obligations, in particular the obligation to conduct an appropriateness and suitability test in accordance with FinSA.
Introduction of various conduct obligations at regulatory level
From a supervisory perspective, FinSA and the Financial Services Ordinance (FinSO) (German only) combine, in a uniform enactment, the conduct obligations that previously had separate statutory regulations for each individual sector or were defined in industry standards.
The scope of the conduct obligations under FinSA depends on the customer segment to which the respective customer is assigned (see blog post Customer Segmentation under FinSA). Accordingly, the conduct obligations do not apply to dealings with institutional clients, and professional clients also have the option of waiving compliance with the conduct obligations by the financial service provider (Art. 20 FinSA).
The main obligations under the code of conduct are as follows:
- Provision of information (Art. 8 f. FinSA)
- Transparency and care (Art. 17 ff. FinSA)
- Documentation (Art. 15 FinSA)
- Accountability (Art. 16 FinSA)
- The obligation to carry out an appropriateness and suitability test (Art. 10 ff. FinSA).
Of particular importance for investor protection are the obligations to carry out appropriateness and suitability tests, which have been standardized at the statutory level for the first time. These oblige financial services providers who provide investment advice or asset management services to always clarify before providing the financial service whether the respective financial service or financial service product is appropriate or suitable for the client.
Obligation to carry out an assessment of appropriateness
If the investment advice is provided only in relation to individual transactions, without including the entire client portfolio, the financial service provider is obliged to carry out an appropriateness test. This means that he must inquire about the knowledge and experience of his client and check whether the financial products are appropriate for the client before recommending them (Art. 11 FinSA). Indications that can be used to assess the client's level of experience and knowledge include the client's age, education and professional situation. The purpose of the standard is to ensure that the client's level of knowledge and experience is sufficient to be able to correctly evaluate the financial service offered and assess the associated financial risks.
Obligation to carry out an assessment of suitability
The suitability test anchored in Art. 12 FinSA goes one step further than the appropriateness test pursuant to Art. 11 FinSA: In contrast to the appropriateness test, the financial service provider has to take into account not only the knowledge and experience of the client but also their financial circumstances and investment objectives. The scope of this is specified in the FinSO: The financial circumstances include information on the client's income and assets; the investment objectives, on the other hand, provide information on the timescale and purpose of the investment as well as the client's risk tolerance (Art. 17 para. 1 and 2 FinSO). On the basis of this information, the financial service provider draws up a risk profile tailored to the individual client and uses this profile as a basis for recommending an appropriate transaction (cf. Art. 17 para. 3 FinSO). In doing so, he may rely on the information provided by the client unless there are indications that it does not correspond to the facts (Art. 17 para. 4 FinSO).
Ensuring investor protection when carrying out the appropriateness and suitability test
In the event that the information provided by the client is not sufficient for an assessment of the appropriateness or suitability of a financial instrument, the financial service provider must inform the client before providing the service that an assessment cannot be provided (Art. 14 para. 1 FinSA). Furthermore, the financial service provider is only permitted to recommend a financial transaction if the client fully understands the risks involved and is able to bear them financially. If, on the other hand, he believes that a financial instrument is not appropriate or suitable for his clients, he must advise them against it before providing the service (Art. 14 para. 2 FinSA). In this context, the FinSA specifies that a lack of knowledge and experience can be compensated by educating clients (Art. 14 para. 3 FinSA). In the event of a negative recommendation, the client remains at liberty to retain the service. In this case, the financial service provider must document that it has advised the client against using the service (Art. 15 para. 1 (b) FinSA).
Exemption from the duty to review (Art. 13 FinSA)
As with the other duties of conduct, the principle that they are only fully applicable to retail clients applies to the appropriateness and suitability test. With regard to professional clients, the law presumes that they have the necessary knowledge and experience and that the investment risks associated with the financial service can be borne by them (Art. 13 para. 3 FinSA). For this reason, only a limited aptitude test is carried out. In particular, this should clarify the client's investment objectives and whether the investment is compatible with these objectives. Thus, the financial service provider does not need to have comprehensive knowledge of the financial situation of professional clients. However, if there are doubts as to whether the professional client has a sufficient understanding of the transaction, the financial service provider must nevertheless conduct an appropriateness or suitability test.
Exemption from the duty to review for execution only transactions
Pursuant to Art. 13 para. 1 FinSA, neither an appropriateness nor a suitability test is carried out for the mere execution or transmission of client orders. In this context, it is important to note that the initiative to execute this business must come from the client himself. Before the financial service provider provides such a service, it must inform the client accordingly that no appropriateness or suitability test will be carried out (Art. 13 para. 2 FinSA). However, if the financial service provider has already provided advice prior to such a transaction (pursuant to Art. 11 para. 1 FinSO), a suitability test must nevertheless be carried out in the case of portfolio-related investment advice. In the case of institutional clients, this review is not necessary (Art. 20 para. 1 FinSA).
Transaction-related vs. portfolio-related investment advice?
The main difference to the appropriateness test (Art. 11 FinSA) in the suitability test is that the client's portfolio is taken into account (see Art. 12). A distinction is therefore made between transaction-related and portfolio-related investment advice. In this context, however, the question arises as to whether portfolio-related investment advice - and thus an obligation to carry out a suitability test under Art. 12 FinSA - also exists if only part of the client's portfolio is taken into account and not the entire portfolio (see Art. 11 FinSA).
This seems to be the understanding of the Federal Council, at least, when it states in its explanatory statement on the FinSA and FinIA (German only) that transaction-related investment advice under Art. 11 FinSA is only given if the advice takes individual transactions into account and does not take into account the entire portfolio or other parts of the portfolio. It remains to be seen whether the courts will follow this statement and interpret Articles 11 and 12 FinSA in the same way with regard to the distinction between transaction-related and portfolio-related investment advice.
Takeaways for financial service providers and investors
As the rules of conduct of the FinSA are essentially based on the corresponding rules of Mi-FID II, most of the provisions are almost identical in content to those of MiFID II, although the FinSA is formulated in a much more reader-friendly manner.
In comparison to EU regulation, however, it is striking that the FinSA's code of conduct is based much more on the principle of the "responsible investor".
For example, EU law does not distinguish between transaction-related and portfolio-related investment advice. Rather, MiFID II requires a suitability test to be carried out for every piece of investment advice and asset management service (c.f. Art. 25 MiFID II). Accordingly, investor protection under FinSA is weaker than under EU law.
Although a relatively long transition period of two years is foreseen for the implementation of the FinSA conduct of business requirements, this means that financial service providers should still allow sufficient time to adapt their internal processes to comply with them. After all, the new provisions on suitability and appropriateness testing do not pose a major hurdle for Swiss financial service providers who serve EU clients and are therefore already MiFID-compliant. Also in view of the fact that most code of conduct obligations were already provided for in the old law and in various industry standards, the expense for most financial service providers should be limited.