At the end of October 2018, the Federal Council initiated the consultation procedure on the ordinances implementing the FinSA (draft FinSO) and the FinIA (draft FinIO). The final versions of these orders are expected to be adopted in November 2019.
One of the major changes brought about by these laws concerns independent asset managers (IAMs) and trustees, which will now have to be authorized by FINMA and will be supervised by a supervisory organization (SO). FINMA will authorize and supervise the SOs, which may request authorization as soon as the laws come into force. Several self-regulatory organizations (SROs) have already come forward to announce the creation of entities that will file such a request (Chapter 1).
In addition, the FinSA provides for new obligations in terms of conduct and organization, which affect in particular the IAMs (Chapter 2)
1. FINMA AUTHORIZATION FOR IAMS AND TRUSTEES
1.1. Players affected by the new FINMA authorization for IAMs and trustees as foreseen by the FinIA
First, the IAMs are affected by this new FINMA authorization. The FinIA does not use the terms external asset managers or independent asset managers, but refers to them as "portfolio managers" 1 and describes them as follows: "A portfolio manager is a person mandated to manage assets on a commercial basis in the name of and on behalf of clients" 2.
Thus, if an IAM has the power to dispose of its clients' assets, then the FinIA is applicable to it. To the contrary, for example, a company that provides investment advice but cannot dispose of its clients' assets, particularly if it does not have power over their bank accounts, should in principle not be subject to the FINMA authorization. If this company thus only exercises a mere advisory activity, it must nevertheless comply with the code of conduct of the FinSA, including in particular the obligation to obtain the registration of its client advisors (individuals) in the register of advisors (see 1.2. Register of advisors below).
Secondly, the trustees will have to obtain a FINMA authorization. They are defined as follows: "Who on a commercial basis manages or disposes of a separate fund for the benefit of the beneficiaries or for a specified purpose based on the instrument creating a trust".
1.2. Register of advisors
Companies offering financial services or financial instruments, which are however not subject to FINMA authorization under the FinIA will still be required to comply with the rules of the FinSA. This includes, for example, investment advisors or distributors of financial products, as in particular distributors of collective investment schemes.
For example, these companies will have to ensure that their client advisors 3 are registered in the register of advisors, knowing that this register has yet to be created.
It should also be noted that, unlike IAMs subject to FINMA authorization, client advisors registered in this new register will not be subject to prudential supervision, although they are required to comply with the code of conduct provided for in the FinSA (see 2. FinSA obligations below).
1.3. FINMA authorization conditions for IAMs and trustees
As regards the FINMA authorization conditions for IAMs and trustees, the FinIA already defines them in broad terms, i.e. mainly an adequate organization, financial guarantees, guarantee of an irreproachable activity and affiliation to an ombudsman's office. The draft FinIO provides some clarification on these requirements.
The IAMs and the trustees will have to organize themselves in such a way as to be able to fulfil their legal obligations. However, the explanatory report of the Federal Department of Finance (Explanatory Report) specifies that their organization can and must be adapted in particular to the number of their clients and the amount of assets under management.
As for their management, it will in principle be composed of at least two qualified managers who must have 5 years' professional experience in asset management or within the framework of trusts and adequate training in the corresponding field.
In addition, both the IAMs and trustees will need to have a risk management and an internal control (including the Compliance function). The persons in charge of these tasks will in principle not be entitled to take part in the activities they are supervising. However, the draft FinIO states that if the business model poses few risks and if certain thresholds are not exceeded (number of employees or annual gross income), "these tasks do not have to be independent of income- generating activities". These terms used in the draft FinSO are not very explicit and the example given in the Explanatory Report unfortunately does not provide a clear understanding of what this means in practice for IAMs, so that clarification on this point is to be expected in the consultation. In any case, the draft FinIO confirms the possibility of outsourcing the Compliance function.
Finally, the draft FinIO foresees additional organizational requirements for larger structures (especially if their gross annual income exceeds certain thresholds), such as having an internal audit or a board of directors whose majority of the members is not part of the body responsible for the management.
The minimum capital of the IAMs and the trustees must be CHF 100'000.–, fully paid in and maintained at all times.
Equity must constantly amount to at least one quarter of the fixed costs of the last annual accounts, up to a maximum of CHF 10 million. The definition of the components of equity is based on the rules applicable to asset managers of collective investment schemes.
In addition to capital and equity, the FinIA provides that IAMs and trustees must dispose of appropriate guarantees. The draft FinIO specifies that these guarantees will be considered appropriate if the relevant provisions regarding equity are adhered to. However, the IAMs will be able to opt for a professional liability insurance, whereas half of the maximum annual sum insured may be deducted from their equity.
1.4. Authorization procedure and supervision of the IAMs and the trustees
With regard to the authorization procedure, the IAMs and the trustees will first have to obtain confirmation of an affiliation with an SO, which they will be entitled to obtain according to the FinSO if their internal regulations and organization ensure compliance with the requirements of supervisory law, in particular the obligations to combat money laundering and the provisions of the FinSA which apply to them.
In this respect, FINMA is expected to issue ordinances, or even model authorization requests, explaining the information and documents to be submitted by the IAMs and trustees.
2. FINSA OBLIGATIONS
The IAMs, as well as any person or entity providing financial services, such as banking institutes, securities firms, managers of collective assets and of occupational pension schemes and investment advisors ("financial service providers"), must comply with the rules laid down by the FinSA.
As for the trustees, the Explanatory Report made a welcome clarification since it stipulates that they are not subject to the obligations of the FinSA, unless "their activity includes [...] asset management".
The FinSA, supplemented by the draft FinSO, essentially establishes the following rules:
- Organizational rules: financial service providers must have an organization and issue internal regulations adapted in particular to their size, the services offered and the risks they pose. This will include defining in writing the processes required to provide their services, taking measures to avoid conflicts of interest and establishing internal controls. They will also have to carefully select their employees and ensure their training. In this respect, neither the FinSA nor the draft FinSO define the minimum appropriate training for client advisors. The draft FinIO merely states that the qualified managers of an IAM must have "training in asset management equivalent to the experience necessary to carry out an audit of an asset manager". The State Secretariat for International Finance SIF announced on 9 September that the requirements for professional experience and training of qualified managers at IAMs will be refined in the draft FinIO. The question of the minimum appropriate training for client advisors should not a priori be defined more precisely in a FINMA ordinance or circular, but will likely be determined by the industry.
- Client classification: financial service providers will also have to classify clients into different categories, i.e. private, professional or institutional clients, in order to adapt the level of legal protection for each client category, with private clients benefiting from the highest protection.
- Documentation obligation: The FinSA and the FinSO provide for extensive obligations regarding the information to be provided to clients. In particular, financial service providers will have to provide their address, the type of supervision to which they are subject, and numerous details regarding the financial services they offer, including their main characteristics, the rights arising from them for clients and the risks and costs associated with these services. They will also be required to inform their clients of their economic relationships with third parties and, where applicable, of any conflicts of interest that may arise. In addition, they will be responsible for recording in writing all reviews carried out as part of the "suitability and appropriateness test".
The FinSA therefore requires a significant documentation effort for financial service providers and requires the adaptation of their contracts and the drafting of standard documents for clients.
It is important to note that unlike the FinIA, which gives the IAMs and trustees six months to report to FINMA, and then three years to comply with the authorization conditions and file an application for authorization with FINMA, the transitional provisions of the FinSA now grant financial service providers, including IAMs, two years, until 31 December 2021, to adapt to the new rules of conduct and organizational requirements.
In any event, financial service providers should therefore begin to anticipate these changes and adapt their organization, internal procedures and documentation.
1 The term IAM will be used in this article for the sake of clarity.
2 The law distinguishes between IAMs and managers of collective assets. This category includes managers of collective investment schemes and of occupational pension schemes. In principle, they are subject to authorization and supervision by FINMA.
3 Client advisors are natural persons who perform financial services on behalf of a financial service provider or in their own capacity as financial service providers (article 3 letter. e FinSA).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.