FinSA/ FinIA - Our blog series providing essential insights (Post 4)
What financial service providers need to know
The new Financial Services Act (FinSA), which comes into force on 1 January 2020, introduces various obligations for all financial service providers. When advising clients or managing their assets, financial service providers must always take into account their knowledge, experience, financial circumstances and investment objectives. In order for them to be able to make an investment decision, they are dependent on sufficient information about the financial services and financial instruments offered.
However, due to the different levels of knowledge and experience of clients, their need for protection can vary significantly. In the interests of proportionate and appropriate financial market regulation, FinSA therefore requires financial service providers to classify their clients (art. 4 FinSA).
Customer segmentation is of central importance because it determines the scope of the obligations, which financial service providers have to fulfil towards their customers.
Duties of conduct under FinSA
The FinSA and the Financial Services Ordinance, (FinSO) oblige financial service providers to comply with numerous obligations in their dealings with their customers. In addition to various information, documentation and accountability obligations (art. 7 - 16 FinSA), these include the duty to exercise due diligence and transparency in the processing of client orders (art. 17 - 19 FinSA). In addition, for the first time, an explicit obligation to conduct adequacy and suitability tests is laid down at the legislative level (art. 10 to 14 FinSA, art. 16 and 17 FinSO).
In essence, the duties of conduct provided for in the FinSA and FinSO correspond to those already in existence under current law and the relevant industry standards. However, they are now regulated uniformly for all financial service providers in one legislative act and are also much more detailed in their form.
For financial service providers, this means that in future they will have to inform their customers in more detail about the financial services and financial instruments they offer and document this procedure.
Customer segmentation under FinSA
The client's details are decisive for classification in one of the categories, unless there are grounds for suspicion. In this case, the financial service provider is obliged to obtain further clarification from the client.
In terms of client segmentation, the FinSA essentially distinguishes between two main categories of clients: private clients and professional clients. The group of professional clients further contains the category of institutional clients as a subgroup. This results in the following client categories with increasing levels of protection:
1. Institutional clients (art. 4 para. 4 FinSA)
- Financial intermediaries supervised in Switzerland
- Insurance firms supervised in Switzerland
- Foreign financial intermediaries and insurance undertakings subject to equivalent prudent supervision
- Central banks
- National and supranational public bodies with professional treasury operations
2. Professional clients (art. 4 para. 3 FinSA)
- Public corporations with a professional treasury
- Pension plans with professional treasury
- Companies with a professional treasury
- Large companies
- Private investment structures with professional treasury for wealthy clients
The scope of what constitutes a professional client is modelled on the Collective Investment Schemes Act (art. 10 CISA) and also the MiFID II provisions. However, according to FinSA, the client segments are not congruent with those of the Collective Investment Schemes Act. In FinSA, for example, clients with long-term asset management and investment advisory contracts are not per se considered professional clients.
According to the draft ordinance, a public corporation, pension fund, company or private investment structure is considered to have a professional treasury if it entrusts a professionally qualified person experienced in the financial sector with the management of its financial resources on a long-term basis.
Large enterprises within the meaning of art. 4 para. 3 FinSA are defined as enterprises, which exceed two of the following sizes: Balance sheet total of CHF 20 million, sales revenue of CHF 40 million, equity of CHF 2 million.
3. Private Clients (art. 4 para. 2 FinSA)
Conversely, private customers are all those customers who cannot be assigned to either of the two categories (art. 4 para. 2 FinSA). Unless they declare that they want to be considered professional customers (so-called opting-out option).
Reduced duties of conduct vis-à-vis professional clients
The aim of the customer segmentation under FinSA is to be in line with the guiding principle of the responsible investor. Thus, the law establishes the presumption that professional clients have the necessary knowledge and experience and are therefore in a position to assess or bear the financial investment risks (cf. art. 13 para. 3 FinSA). In this sense, institutional clients have the lowest level of protection with regard to the financial service provider's duties of conduct, since the level of knowledge and experience of these market participants is generally comparable to that of the financial service provider (art. 20 and 22 FinSA). Thus, the rules of conduct pursuant to art. 7 et seq. FinSA generally do not apply to institutional clients, while professional clients can opt-out of compliance with certain rules of conduct (art. 20 FIDLEG). Furthermore, professional clients are generally not required to carry out suitability and appropriateness tests (art. 13 para. 3 FinSA).
In the event that a customer wishes to increase or even waive the level of protection to which he is legally entitled, the FinSA provides for the possibility of opting-in or opting-out under certain conditions, which allows customers to switch segments at their own request (art. 5 FinSA).
With an opting-out, the level of protection is reduced by switching to a higher customer category, while with an opting-in, the level of protection is increased by switching to a lower customer category. The declaration of change to another category must be submitted in writing and covers all financial services provided by the financial service provider to the customer. For this reason, after a declared opting-out a customer may not claim that the financial services provider was obliged to clarify or warn on any issue at all.
It remains to be seen whether the implementing ordinance for the FinSA, the Financial Services Ordinance (FinSO) will still be adapted with regard to customer segmentation and the duties of conduct by the Federal Council after the consultation process. The Federal Council is expected to decide on this on 6 November 2019.
In its media release of 9 September 2019, the State Secretariat for International Finance Matters (SIF) announced that a transitional period of two years would apply to the implementation of the customer segmentation obligation and the associated duties of conduct following the entry into force of the FinSA/FinIA on 1 January 2020 (originally only one year was planned).
For financial service providers, however, this means that they should allow sufficient time to allocate their customers to the individual categories and take the resulting measures.