smoke, FIDLEG and FINIG

Perspectives

Financial Services and Financial Institutes Act

Two bills with far-reaching consequences for the Swiss financial centre and Swiss financial institutes.

In June the Federal Council started the consultation period on two bills which - assuming they become effective as expected - will result in significant changes for many financial institutes:

  • The Financial Services Act (FIDLEG) and
  • The Financial Institutes Act (FINIG)

Together with the Financial Market Infrastructure Act, which was published at the end of 2013, FIDLEG and FINIG are the cornerstones of the Swiss financial market law.

To a large degree the new bills implement European law (e.g., the Markets in Financial Instruments Directive, MiFID; the EU Prospectus Directive; the regulation regarding OTC derivatives; central counterparties and trade repositories; EMIR, and the regulation regarding packaged retail and insurance-based investment product, PRIIPs). With the autonomous implementation, the Federal Council intends on the one hand to protect customers and market functions in Switzerland and to ensure on the other hand that financial institutes domiciled in Switzerland have access to the European domestic market.

In the interest of customer protection, the Financial Services Act addresses three core areas:

1. FIDLEG defines strict rules of conduct for client advisors.

Suitability tests: In accordance with FIDLEG financial institutes have to determine as part of an investment consultation or a wealth management engagement whether a particular investment is appropriate for a customer. As part of that process a client advisor has to obtain extensive information about

  • the knowledge and experience regarding the investment;
  • the investment goals, i.e., the investment time period, the risk awareness, the risk capacity and tolerance, any investment restrictions and the purpose of the investment;
  • the financial situation, i.e., income, assets and financial commitments; and
  • the personal (e.g., age, health), professional (e.g., self-employed, salaried) and familial (e.g., number of dependent family members) situation. 

Based on this information the financial institute then develops a risk profile of the client and determines an investment strategy with the client.

Adequacy test: For other financial services the adequacy test of a particular transaction for a customer is limited. The test only covers the customer’s knowledge and experience regarding such transactions. The investment goals and the financial situation do not have to be taken into account.

An adequacy test is not required in order to open an account or to deposit securities and for executing and conveying customer orders as long as they are initiated by the customer.

If the information received is qualitatively or quantitatively insufficient or if the financial institute realises that the investment is not appropriate for the customer, it has to refrain from a consultation and is not allowed to accept a wealth management mandate, even upon explicit authorization by the customer. The execution of a transaction (“execution only”) is still permitted. As part of the adequacy test there is only an obligation to provide a warning. The financial service provider still may execute the transaction for an informed customer.

2. FIDLEG defines detailed information requirements regarding the financial institute and its products and services.

FIDLEG provides comprehensive information requirements for the financial services provider. This includes the type of licence and supervision, the services and products offered and the related risks and costs.

FIDLEG requires that the financial services provider discloses its independence to the client, respectively whether it provides a customer service independently, whether or not it will perform a suitability test after concluding the consultation and whether the service in question involves a market analysis.

For securities publicly offered in Switzerland and intended for trading in accordance with the Financial Market Infrastructure Act, FIDLEG requires the prior publication of a prospectus. Exceptions from the obligation to publish a prospectus are available for certain offerings (e.g., for professional customers, investor groups of fewer than 150 people, minimum investment of CHF 100’000) and for particular types of securities (e.g., certificates of deposits, securities issued due to a corporate restructuring).

For all financial instruments offered to private customers a basic factsheet has to be developed under FIDLEG. Only stocks and similar shares (e.g., participation certificates) are exempt from this requirement. This also includes a risk and return profile for the financial instrument, the costs related to it, a minimum holding period, if applicable, and the liquidity profile of the financial instrument.

3. Enforcement of civil law claims

The measures provided by FIDLEG for the enforcement of civil law claims are not based on European law. About a quarter of the new regulations can be attributed to this part of FIDLEG.

In accordance with FIDLEG the customer has an unreserved and comprehensive right to obtain all documentation related to him at no charge from the financial service provider. Based on a ruling of the Federal Court from October 2012 (BGE 138 III 755), this includes among others the customer files, his risk and investment profile, his investment strategy, meeting minutes, instructions, contracts etc. It does not include personal notes prepared by the bank employee.

FIDLEG also provides for a reversal of the burden of proof. In the case of a lawsuit, the burden of proof that all legal information and education requirements were met is on the defending financial services provider. If this proof can not be provided, FIDLEG assumes that the customer would not have entered into the transaction.

FIDLEG also envisions ombudsmen for the resolution of disputes between financial services providers and customers, and it requires that financial services providers become members and participants. Furthermore FIDLEG provides for a Court of Arbitration or alternatively a Fund for Litigation Costs which has to be funded by the financial services providers. A private customer may submit a motion for the assumption of costs (court fees, lawyer’s fees and compensation payments). The lawsuit is at no charge for the customer except for cases of malevolence and intentional acts. The Fund for Litigation Costs covers the cost for the trial phase in case of an approving judgment.

Finally, FIDLEG also establishes the possibility of a class action lawsuit for private customer and consumer protection organisations as well as group settlement proceedings between class litigants and one or several financial services providers.  

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