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The effect of FIDLEG on cross-border financiers

Martin Liebi, PricewaterhouseCoopers Legal, Attorney-at-law, Zurich, 4 September 2019

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In this article we summarise the new rules for non-Swiss financial service providers, their client advisors outside Switzerland who provide cross-border financial services for Swiss customers and non-Swiss creators of financial instruments for the Swiss market. Threshold amounts are given for HNWs who qualify for a relaxation of the rules.

The provision of cross-border financial services by non-Swiss financial service providers to Swiss clients, as well as the creation of financial instruments for the Swiss market, will be regulated comprehensively by the new Swiss Financial Services Act (FIDLEG, also known as FINSA). The Act will probably come into force on 1 January 2020 and the duties for non-Swiss financial service providers whose clients are in Switzerland are informative, documentary, behavioral, related to conflicts of interests and organisational. They are also obliged to keep a list of client advisors who have clients in Switzerland on a client advisor register and to affiliate themselves (as "non-Swiss financial service providers having clients in Switzerland") with the Swiss Ombudsman for Financial Services.

In principle, FIDLEG affects all non-Swiss financial service providers who purchase, sell or distribute financial instruments, receive or transmit orders related to financial instruments, provide asset management or investment advice and grant loans to finance transactions with financial instruments (shares, bonds, funds, derivatives, and structured products related to clients in Switzerland). It does not matter whether they serve institutional, professional or retail clients. Professional investors have to have about US$2 million in wealth to be so classified, or US$500,000 in wealth plus a good knowledge of financial markets. Even marketing directed towards potential clients in Switzerland, with no client contracts as yet signed, will oblige the firms that do the marketing to obey FIDLEG.

FIDLEG-related duties include obligations to do with "client segmentation," information, documents, the rendering of accounts, a test for suitability and 'appropriateness,' conflicts of interest and organisation. People who advise clients must go onto the Register of Client Advisors and the non-Swiss service providers for which these 'client advisors' work must affiliate with the Swiss financial services ombudsman, which will be managed by the same company.

[Editor's note: According to Art 22 FIDLEG, 'client advisors' of domestic financial service providers who are not supervised in accordance with Art 3 Financial Market Supervision Act and 'client advisors' of foreign financial service providers may only do business in Switzerland if they are on a register of advisors. This register is maintained by a registration office in accordance with Art 31 FIDLEG. It requires the approval of FINMA, Switzerland's financial markets regulator, for its activities.]

People who advise clients will have to prove that they have enough knowledge of financial markets and of the applicable Swiss behavioral rules of FIDLEG. They can do this by means of an artificial intelligence-proctored test that is available online all day long. The Swiss client advisor register is currently in the throes of obtaining a licence from FINMA and the Swiss Federal Department of Finance has not yet pronounced the ombudsman fit for duty.

Creators of financial instruments for the Swiss market and distributors of financial instruments in the Swiss market are subject to more onerous documentary duties. The public distribution of securities in Switzerland will be subject to a more extensive set of prospectus-related rules in future. Swiss prospecti must be reviewed and non-Swiss prospecti must be 'recognised' by the newly established prospectus reviewing body run by both Swiss stock exchanges, SIX and BX. Approval for a reviewed or recognised prospectus is only valid for 12 months.

Firms may only offer financial instruments to private investors if it creates a so-called “key information document” or KID and hands it over to them before it makes the offer. It might only offer structured products to private investors if these are issued, guaranteed or secured "in an equivalent manner" by a Swiss bank, an insurance company, a securities firm or a corresponding non-Swiss institution.

If non-Swiss financial service providers and producers of financial instruments wilfully fail to place themselves on the client-advisor register, the authorities can imprison their personnel for up to three years. In the case of "non-diligent non-registration" they can levy a penalty of SFr250,000 per case. Non-compliance with financial instrument distribution rules can incur fines of up to SFr500,000 apiece.

* Martin Liebi can be reached on +41 58 792 28 86

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