Two years have passed since the Financial Services Act (FinSA) entered into force in Switzerland, with 31 December 2021 marking the end of the agreed transition period offered to foreign funds and their managers to adapt to the new rules. Now that some of these rules have been clarified by various texts of application and self-regulations, and that some observable practice exists, the time has come to review the rules on fund distribution in Switzerland.

This article focuses on funds aimed at Swiss-based professional and institutional clients (qualified investors) whether UCITS or alternative funds. It does not cover distribution rules for funds aimed at retail investors for which a stricter regime applies (including an approval from FINMA, the Swiss Financial Market Supervisory Authority).

Since the attractiveness of Switzerland is essentially linked to the significant size of the market of high-net worth individuals (HNWIs), a specific focus is given to the rules fund promoters must follow to approach such individuals by following a simplified process which avoids the tedious registration of a fund with FINMA.

The scope of FinSA

• Activities covered by FinSA are defined as financial services and include portfolio management, investment advice, receipt and transmission of orders, granting of loans to finance transactions, and acquisition or disposal of financial instruments. The activity of fund distribution falls under the scope of “acquisition or disposal of financial instruments”¹.
• Financial instruments within the scope of FinSA are not only funds, but also include equity securities, debt instruments, structured products, derivatives, deposits, and bonds.
• FinSA applies to financial services providers. Companies (fund managers or third-party fund promoters) can be considered financial services providers, but their employees or independent individuals (placement agents, distributors, etc.), who come under the definition of client advisers, can also be classed as such.
• The territorial scope of FinSA application is limited to financial services provided “in Switzerland or for clients in Switzerland”². Distribution activity of a foreign fund manager promoting its fund in Switzerland from abroad is considered to take place in Switzerland and the manager must therefore respect FinSA rules. For example, a foreign private equity fund manager who fully delegates the marketing of its fund in Switzerland to a placement agent is not submitted to FinSA obligations itself, but these obligations fall on the placement agent considered a financial services provider.
  

Main exemptions and out-of-scope activities

Under FinSA, only interactions with end-investors are qualified as financial services. For instance, FinSA obligations do not apply to a foreign promoter who distributes a fund to a Swiss bank (the bank is a professional intermediary and not the end-investor). Nevertheless, if the bank then invests in the funds for its clients in the frame of a discretionary portfolio or advisory investment mandate, FinSA will apply to the bank for the financial service it performs for its clients.

Reverse solicitation is another exception. FinSA stipulates that a financial service is not deemed to be provided in Switzerland if requested at the express initiative of clients. However, fund promoters should consider reverse solicitation as an exception and, to avoid future concerns or disputes, should keep evidence that the solicitation was truly initiated by the client.

FinSA and distribution of foreign funds

The first obligation of a financial services provider is to classify its clients in one of three categories as different FinSA rules apply to each one. The categories defined by FinSA are:

• Private
• Professional
• Institutional

Figure 1: Client segmentation obligation

Under certain circumstances, clients can ask to change category and opt-in (get more protection) or opt-out (get less protection).

Beside these main requirements, fund promoters (fund managers, third-party marketing companies, but also client advisers) must respect FinSA rules of conduct and organization.

Code of conduct

FinSA defines rules of conduct which apply to financial services providers. However, some rules do not apply to fund distribution activities (but only to portfolio management or advisory activities for instance). Exemptions are also based on client segmentation:

Figure 2: Code of Conduct rules

For professional clients, rules of conduct can be waived with their express written consent. In practice though, to obtain the consent of each client may be complex and not well received. It may therefore be easier to apply FinSA rules of conduct to this whole category of clients.

To fulfil some of the obligations of information, the insertion of Swiss disclosures in the fund offering and marketing documents or the provision of a separate ‘FinSA information’ document containing all disclosures required by FinSA are often used as efficient practical solutions.

Organization rules

FinSA organization rules apply to fund promoters irrespective of the segment of clients to whom the fund is distributed.

However, a principle of proportionality exists depending on the size, complexity, legal form, and financial service provided. In addition, these obligations are limited to fund distribution activities of fund promoters. They do not apply to fund management activities if they are performed outside Switzerland.

FinSA’s organization rules:

1/ Adequate internal organization structure

Financial services providers must ensure that they fulfil their FinSA duties through internal regulations and appropriate organization of operations.

2/ Knowledge, capabilities, and experience of employees

FinSA requires fund managers, third-party marketing companies, and client advisers to be able to demonstrate their knowledge and experience in fund distribution, but also their knowledge of the FinSA rules. More specifically, a client adviser who applies to enter a Client Adviser Register must provide evidence they have completed a training on FinSA rules.

3/ Adequate measures to prevent conflicts of interest

Specific attention should be given to Swiss rules on conflicts of interest and especially on retrocessions which may differ from other jurisdictions (e.g. EU rules on retrocessions). FinSA provides for an extensive definition of conflict of interests and implores financial services providers to prevent them via: organizational precautions and measures, disclosures rules, documentation of conflicts of interest, rules on compensation from third parties, and rules on staff transactions.

As a general principle, if organizational measures cannot be taken to prevent disadvantages to clients (or only with a disproportionate amount of effort), the financial services provider must disclose the conflict of interest in an appropriate manner.

In the context of fund distribution, a potential conflict of interest may arise if a fund manager uses the services of a placement agent or third-party marketer. FinSA rules on conflicts of interest and retrocessions will impose specific obligations to the third-party marketer.

4/ Information and consent from clients on remuneration coming from third-parties

A third-party marketer may accept compensation from a fund manager only if they have expressly informed the investors in advance of such compensation—its scope and its type—and the investor has given express consent to such compensation. Without this consent, the compensation must be fully passed on to the investors. If the amount cannot be determined in advance, the financial services provider must inform its clients of the calculation parameters and the ranges (e.g. a percentage of the amount that the client will acquire). Upon the investor’s request, the amounts effectively received must be disclosed.

Specific rules to market a foreign fund to HNWIs

By default, HNWIs are considered private clients and belong to the same category as retail investors.

However, HNWIs can ‘opt-out’ and instead be considered as professional clients. This opting-out allows fund promoters to distribute foreign funds not registered with FINMA to these HNWIs.

To distribute funds to HNWIs having opted-out, the foreign fund promoter must take a few additional steps:

• Before advertising or offering a fund to HNWIs, a Swiss representative must be appointed by the fund: a local point of contact for Swiss investors and FINMA. This requirement stems from the Swiss Collective Investment Scheme Act (CISA).
• Similarly, a Swiss paying agent must be appointed: a Swiss bank that a Swiss investor could use as intermediary to invest or receive proceeds from the fund.
• Additionally, the company promoting the fund (fund manager and/or third-party marketer) must affiliate with a Swiss Ombudsman, and its employees—in charge of marketing for Switzerland—must enter a Swiss Client Adviser register.
  

¹ FinSA Art.3 let. c. cipher 1., and FinSO (Financial Services Ordinance) Art. 3.2.
² FinSA Art. 3 let. d., and FinSO Art. 2 .1.