The draft law of the Federal Council concerning the FinSA and FinIA* regulations was likely to spell the end for a majority of the profession, and the Self Regulating Organizations (SROs) strongly opposed it. For your information, the FinSA and FinIA regulations aim to strengthen investor protection by regulations implementing a set of rules for financial service providers, but also by standardizing the regulatory framework in which they will practice on a daily basis. Fortunately, the majority of Parliament wanted a solution tailored to SMEs and not a financial center composed solely of banks and major institutions.
On June 15, 2018, both laws were adopted by the Federal Chambers.
Please find below the upcoming requirements, key dates and costs for Asset Managers related to FinSA / FinIA.
* FinSA for Financial Services Act (rules of conduct towards the clients) – FinIA for Financial Institutions Act (authorization, supervision, governance)
FinSA and FinIA: recognition for independent wealth managers
With the FinSA / FinIA laws, independent wealth managers are finally recognized by law as another component in the financial system, on an equal footing with the banks. The names of “external manager” or “third party manager” will no longer be used.
FinSA / FinIA recognize not only the independent wealth managers, but also their supervision. They will benefit from a FINMA authorization and they will be subject to an official prudential supervision just like banks.
From the Self-Regulatory Organisation (SRO) to the Supervisory Organisation (SO)
In this context, SROs participate in FinSA / FinIA working groups. They work closely with FINMA for the development of the surveillance model. Supervision of independent asset managers will be carried out by supervisory bodies (without status of authority) under the authorization of FINMA.
FinSA Empowers Financial Service Providers
The FinSA complements FinIA by obliging all financial market players (independent wealth managers, trustees, securities firms, etc.) to classify their clients according to two categories: private clients and professional clients (including institutional clients). All customers will be able to change categories if they wish to do so. Please note that the FinSA classification does not exactly follow European MIFID rules and in some cases, the asset manager will have to operate a double classification.
The FinSA places responsibilities on financial services providers
The obligations of the financial service providers will depend on the nature of the services provided and the client’s class. In summary, service providers will have to offer a level of advice in relation to the nature of the product concerned, the client’s knowledge and experience in financial matters (private or professional class).
At a minimum, they will have to inform their customers about:
- all their legal licenses as well as the authorizations and surveillance to which they are subject
- all conflicts of interest and possible retrocessions
- the recourse to a mediation procedure
Independent asset managers forced to justify their recommendations
The duties of independent asset managers will be strengthened with the FinSA law. They will be required to check the adequacy of the given advice based on their client’s investment objectives and their financial capacity. In case of a risk criteria or if the asset managers believe that a transaction is inappropriate, they will be required to inform their client. They will also have to document all actions and recommendations.
Conditions required to become an Asset Manager
Only the professionals who have the training and skills required by the FinSA law will be entitled to practice as Asset Managers (waiting for further details that will be issued in relation to the new laws).
New requirements, dates and costs of the laws FinSA / FinIA
Step 1: The FinSA and FinIA laws come into force on January 1, 2020
Step 2: The declaration to FINMA must be made between January 1, 2020 and June 30, 2020 as an independent asset manager.
Starting January 1, 2020:
– FinSA recognizes independent wealth managers and their supervision.
– The independent wealth managers benefit from a FINMA authorization, just like the banks.
– Independent wealth managers are subject to prudential oversight, just like banks.
Independent wealth managers will benefit from a transition period to become compliant.
From the Self-Regulatory Organisation to the Supervisory Organisation
As of January 1, 2020, the FinSA Act replaces partially the Code of Conduct. The new rules become immediately applicable and are almost unchanged. They mainly focus on client information and reporting.
The supervisory system for independent wealth managers will be essentially:
– an annual (or biannual) audit
– AML + FinSA rules coupled with the current rules of the Code of Conduct
At the same time, from January 2020, the activity related to the Self-Regulatory Organisation (SRO) will be transferred to the new Supervisory Organisation (SO), in a ratio of 1: 1. There is no new affiliation procedure. The legal details are still to be determined, but in this context, a member’s transfer declaration will be sufficient.
Regarding the FinIA law, on the other hand, it will take several years for the transition.
The transitional period of the FinIA for affiliation to the SO and the filing of a FINMA application for authorization extends from 1 January 2020 to 31 December 2022. Initially, affiliation to the SRO is sufficient.
To assess the suitability of the candidate, several conditions are required:
– Implementation / Outsourcing Compliance / Risk Management
– A minimum capital of CHF 100,000, paid in cash
– Equity corresponding to minimum 25% of the annual expenses
OS pre-review of the organization will result in additional audit and OS costs depending on the size of the organization. The approval of the application by FINMA authorization application must imperatively be made by December 31, 2022. Attention, you cannot wait until November 20, 2022 to request the pre-examination by the SO.
Costs for OS membership
The cost for the FINMA application is estimated between CHF 2’000 – 10’000 depending on the size and complexity of the file. Billing will depend on the time spent.
The annual membership fee (including the FINMA supervisory fee) should average the current SRO fee. However, a tax proportional to the size of the business would be more equitable than the current fees.
The audit will be part of a multiannual cycle with a risk-oriented approach. The audit cost is estimated between CHF 3’000 – 15’000 depending on the size and complexity of the company.
For an unaudited year, a self-declaration submitted to the SO should suffice. The cost is estimated at CHF 1,000 – 3,000 depending on the time spent.
FinSA and FinIA, benefits for all!
By facilitating the analysis and comparison of financial products, the FinSA and FinIA laws reassure investors. They allow investors to make their choice in complete transparency. Litigation risks between clients and financial service providers will be reduced over time.
But the FinSA and FinIA projects also have benefits for asset managers, despite the increased regulation. Remember that offering international products to a professional clientele is only possible if it is subject to strict prudential supervision in the country of origin. The provisions of FinSA and FinIA go in this direction. Furthermore, the new laws aim to offer investors a prudential protection comparable, at least, to their market, which should facilitate access to foreign markets, including extra-European markets (Asia or South America).
In conclusion, the strengthening of the supervision of wealth managers allows Switzerland to adopt practices equivalent to other financial centers. FinSA and FinIA offer asset managers increased international opportunities, while ensuring the high quality of financial services.