Sweeping changes to Switzerland’s financial services landscape are in the final stages of implementation. The changes will increase investor protection and bring Swiss regulation into line with its neighbouring EU financial regulatory regime.
The changes have wider implications for many businesses including the introduction of new licensing and regulatory requirements for external asset management companies.
What is Fidleg?
Fidleg – Switzerland’s Financial Services Act – is a set of rules for financial service providers either based in Switzerland or providing services to clients based in Switzerland. It is a comprehensive legal framework which hopes to increase investor protection by bringing Switzerland’s regulatory regime into line with the EU’s MIFID/MIFID II directive. Fidleg also incorporates parts of the EU’s PRIIPs and prospectus directive regulation.
Switzerland started phasing in the act on 1 January 2020 and companies have until the end of 2022 to comply or obtain a new license to conduct their business.
What does Fidleg mean?
The changes also include increased regulation of portfolio managers by the Swiss Financial Market Supervisory Authority (FINMA).
As well as authorisation requirements, portfolio managers will have to comply with new regulatory requirements regarding the offering of financial services under the Financial Services Act.
These include information duties, client classification, checks as to the suitability and appropriateness of investments, and duties in relation to conflicts of interests
Does the Swiss Financial Market Supervisory Authority affect me?
Portfolio managers who conduct business in Switzerland will need to obtain authorisation while foreign portfolio managers with a permanent Swiss presence will need to be regulated through a subsidiary, branch or representative office to carry out their activities in Switzerland and therefore also obtain authorisation from FINMA.
Portfolio managers are deemed to act on a commercial basis if they reach any of the following thresholds:
- Yearly gross earnings of more than CHF 50,000;
- More than 20 ongoing business relationships per year; or
- Unlimited power of disposal over third-party assets exceeding CHF 5 million.
Is my business FINMA compliant?
Lamara von Albertini, of von Albertini Compliance Services, told FinNews that some portfolio managers risked violating the new regulations before having applied for a FINMA license.
She wrote: “The initial experience shows that the implementation of Fidleg is underestimated by many financial service providers.” She added that the more complex the company’s business model, “the bigger the stumbling blocks can be”. However, “even smaller financial institutions should not underestimate the implementation of Fidleg and, above all, should not neglect it.”
Customer segmentation and Fidleg
Von Albertini said assigning clients to the three legal client categories can be complex. In a briefing by asset manager Schroders, Prof Rolf H. Weber explained that Fidleg required banks to introduce customer segmentation. Clients are allocated to one of three categories: private clients, professional clients and institutional clients.
The transmission of documentation and Fidleg
Whether in paper or electronic form the amount of documentation clients will need to be provided with, will increase substantially. Prof Weber said this would be “also continually with each investment and at the end of each quarter”. Clients will be obliged to not only read but also study the content of the documentation.
Choice of products, authorisation and Fidleg
Prof Weber said that any product offerings will be “strictly focused on the client’s personal investor profile” which could mean the choice of products is restricted. He added that clients needed to be aware that “independent asset managers and trustees, who were previously not directly authorized and monitored by FINMA are now considered providers of financial services if they manage assets commercially on behalf and for the accounts of their clients”.
This was of particular concern to clients who had relationships with banks via independent asset managers and who “should therefore expect high standards in the expertise, experience and reliability of these third parties”.
Von Albertini points out that structured products were particularly affected as special attention would need to be “paid to the scope for retaining third-party remuneration” due to “increased transparency requirements”.
Appropriateness of advice
von Albertini points out that a special feature of Fidleg is a reduced appropriateness test.
“This raises the question of whether clients are sufficiently protected because each individual transaction has an impact on the risks of an overall portfolio. For the financial service provider, it can be difficult to prove in individual cases whether transaction-related or portfolio-related advice took place.”
By the end of 2021 financial service providers must have trained their staff in Fidleg. Smaller financial institutions that outsource their compliance and risk management function cannot claim ignorance and will need to still exercise due diligence.
How we can help
ZEDRA can act as a qualified, regulated third party in Switzerland.
We can also help with annual administration and make sure you fulfil all your regulatory requirements including:
- Transaction monitoring, and compliance audit regulation, once a year
- Coordination of the new license process with external lawyers
- Support with organisation of the proper compliance process in line with new regulations and insourcing of compliance function upon request and need
- Support with regular back office services of that EAM, such as accounting, VAT, tax compliance and payroll
For more information, please contact Vadim Neumann.