This article was written by Stefan Simon and Urs Hofer, partners at HSW Legal in Zurich. It originally appeared in the September 2018 issue of Citywire Switzerland magazine.
On 15 June 2018, the Swiss Parliament finally approved the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA). The former aims to create a level playing field for the provision of financial services and the offering of financial instruments, while FinIA establishes a uniform authorisation and supervision regime. That includes independent asset managers (called ‘portfolio managers’ in FinIA) who handle assets on behalf of clients through a mandate and in connection with the provision of a financial service within FinSA’s remit (portfolio management or investment advice, for example). There will be a public consultation on the implementing ordinances from October 2018 to February 2019, and the Federal Council will bring the new acts into force by January 2020.
Thankfully, FinSA and FinIA provide for certain transition periods. For the new licensing requirement, portfolio managers will have six months from FinIA coming into effect to notify Finma of their activities. Full compliance with the new requirements will only be required within the first three years of FinIA, and portfolio managers affiliated with a selfregulatory organisation may continue to perform their activities until a further decision is issued by Finma. Other specific transitional provisions also apply, including on affiliation with a yet-to-be established ombudsman. The implementing ordinances are expected to include yet more important transitional periods too, in particular with regard to the application of the FinSA client categorisation and business conduct rules.
Portfolio managers and their industry associations hit out at the ‘overly complex’ dispatch for FinSA and FinIA adopted by the Federal Council in 2015. These voices became less heated when the Swiss Parliament reduced some of the red tape to a more tolerable level and accepted practice-oriented two-level supervision for portfolio managers and trustees in September 2017. Under this model, which is arguably in line with international standards, Finma will be responsible for authorisations and enforcement actions, but the day-to-day supervision will be entrusted to non-governmental organisations licensed by Finma.
The mostly favourable comments from stakeholders might seem to suggest that the new laws do not require significant implementation efforts, but this is not the whole story.
Getting up to speed
As financial service providers covered by FinSA, portfolio managers should be in a good starting position to ensure compliance with the FinSA conduct rules and the related organisational requirements, which have mainly been transferred over from existing civil
law. The licensing and organisational requirements for portfolio managers under FinIA will not be as onerous as for managers of collective assets and will take into account the wide range of differently sized players in the asset management sector. In particular, portfolio managers will be allowed to rely on outsourcing to qualified third parties.
However, each portfolio manager needs to be registered correctly and must have an organisational structure appropriate for the complexity of its business and the risks it faces. It must also ensure the good reputation, professional qualifications and proper business conduct of the persons entrusted with its administration and management, as well as of its qualified shareholders. The management must consist of at least two qualified persons, but an organisation with only one qualified person can receive authorisation if proper business continuity is maintained.
FinIA also requires an adequate risk management strategy and an effective internal control function, which can be either outsourced or carried out by a qualified employee. If performed in-house, the persons in charge of these tasks must not be involved in the activities that they supervise. An audit must be performed annually or every four years, depending on the portfolio manager’s business operations and risk profile. The required minimum share capital of CHF 100,000 in cash, the additional financial guarantees (professional liability insurance or collateral) and the need to have funds to cover at least 25% of the fixed costs will put an extra financial burden on portfolio managers.
Portfolio managers should be taking steps to review their business models and internal organisations now to prepare for compliance with these new licensing requirements.