ARTICLE
14 January 2025

New FINMA Circular On The Rules Of Conduct For Financial Service Providers Has Come Into Force

On 1 January 2025, the new FINMA circular 2025/2 on the "Rules of conduct under FinSA/FinSO" entered into force. Although the circular applies only to institutions supervised by FINMA or a supervisory organisation...
Switzerland Finance and Banking

On 1 January 2025, the new FINMA circular 2025/2 on the "Rules of conduct under FinSA/FinSO" entered into force. Although the circular applies only to institutions supervised by FINMA or a supervisory organisation, in practice it will also have an effect on other financial service providers. There is a six-month transitional period for parts of the circular, which expires on 30 June 2025.

Why this circular?

Banks, industry associations and industry-related organisations had spoken out against the introduction of a circular during the consultation procedure. However, FINMA stuck to its decision to introduce it because its supervisory activities, and particularly on-site supervisory reviews, had shown that there was room for improvement at the majority of the institutions audited. FINMA is obliged to create transparency about its practices. The circular is deliberately concise and addresses issues that have been raised repeatedly in practice.

Key points

The circular addresses the requirements for implementing the rules of conduct under the FinSA and provisions on the organisation of financial service providers.

In addition to clarifications and explanations regarding the duty to provide information (article 8-9 FinSA), the performance of appropriateness and suitability tests (article 11-12 FinSA), dealing with conflicts of interest (article 25 FinSA) and compensation from third parties (article 26 FinSA), the circular addresses the following topics in particular, which have been the subject of some controversial discussion among experts:

Information on contracts for difference (article 8-9 FinSA):

Article 8 FinSA states that financial service providers must inform their clients about the general risks associated with financial instruments. The circular contains information on how to provide appropriate risk disclosure for contracts for difference (CFD). The topic was included in the circular because during on-site supervisory reviews FINMA found that risk disclosure for these products, which are particularly difficult for retail clients to understand and involve a high degree of risk, was often inadequate. Contracts for difference typically have a leverage effect, which means that clients participate disproportionately in rising or falling values of the underlying asset relative to their capital investment. There is a risk that customers may lose more money than they have invested.

In the course of its supervisory activities, FINMA came to the conclusion that retail clients in particular are often unaware of these risks. Consequently, it now wants to set certain minimum standards in the circular. The draft of the circular still stipulated that financial service providers must inform their clients about the current proportion of clients who lose money with the financial service provider through contracts for difference and who have to provide additional funds in connection with such financial instruments. This proposal was heavily criticised during the consultation process. The required key figures are dynamic and must be regularly updated. Furthermore, the calculation is difficult for new market participants who do not yet have a track record. This criticism was taken into account in the final version of the circular. Financial service providers must now provide quarterly information on the percentage of retail clients who have lost money on contracts for difference in the last 12 months, who have suffered a total loss of their margins when closing out their positions, or who have had to pay a negative balance after closing out their positions. It is therefore not only about transactions in which a margin call occurred. The consultation report shows that execution-only transactions must also be included in the calculation.

While the calculation frequency has thus been aligned with EU law compared to the preliminary draft, the protection afforded to retail investors in the case of contracts for difference under EU law remains more extensive than that afforded to retail clients under the FinSA. In its consultation report, FINMA therefore stated that only new market participants without a track record can rely on the standard risk warning in the notice on product intervention decisions by the European Securities and Markets Authority on a transitional basis.

The duty of financial service providers to provide information about possible additional funding obligations, the potentially unlimited risk of loss, the functioning of the margin and the counterparty and market risk (including slippage) was adopted unchanged from the draft into the final version of the circular.

The changes to the key figures to be provided to clients represent an improvement over the preliminary draft. In our view, basing the information on the "current proportion" of clients who lose money or have to pay additional funds to the financial service provider with CFDs could have led to a false picture in the case of dynamic key figures, since this could have given the impression that CFDs are low-risk financial instruments, for example during a good phase in which correspondingly few clients lose money. In terms of customer protection, this information could have been counterproductive. The effort required on the part of financial service providers to carry out these calculations is likely to be considerable, whichever way you look at it. It remains to be seen whether they will increase investors' risk awareness.

Securities Lending (article 19 FINSA):

The FinSA states that financial service providers may only borrow financial instruments from clients as a counterparty or broker them as an agent (so-called securities lending) if the clients have been informed in advance in a separate agreement and have expressly agreed to the procedure. The circular contains a range of information that must be provided to clients in advance as part of the risk disclosure for securities lending.

The information in the circular is based on FINMA Circular 2010/2 "Repo/SLB", which was repealed when the FinSA came into force. We welcome the clarification from FINMA regarding the continuation of its existing practice in the area of securities lending, from the perspective of transparency and legal certainty.

Corporate finance and M&A services (article 3 para. 3 (b) FinSO):

FINMA's comments on corporate finance and M&A services were also highly controversial during the consultation process. According to article 3 para. 3 (b) FinSO, advice on the structuring or raising of capital, on corporate mergers and on the acquisition or disposal of participations and the services related to such advice are not considered financial services within the meaning of the FinSA. This is an exception whose interpretation in practice does indeed repeatedly raise questions. FINMA's suggestion in the draft, to focus on whether the service was provided "for companies" and whether the companies pursue entrepreneurial purposes and do not act as investors, would not have simplified the application of the exception in practice, but merely shifted it, since most companies pursue various purposes. In its response to the consultation feedback, FINMA stated that the demarcation issues are complex and that it will not be providing any guidance on corporate finance and M&A services.

Since the applicability of the exemption clause has far-reaching consequences, including registration requirements, particularly for market participants that are not subject to FINMA supervision, the decision not to provide any guidance on these services is to be welcomed.

Conclusion

The new circular clarifies selected questions of interpretation regarding the FinSA, but also raises new issues. The slimmed-down format deliberately chosen by FINMA means that the consultation report must be consulted for an understanding of various aspects of the circular. Even if the circular does not apply to companies not subject to FINMA, there is a risk that civil courts will take it into account in legal disputes regarding a lack of information. We therefore recommend that other financial service providers familiarise themselves with this circular and review their existing processes for the information provided to clients and what is documented and train their employees accordingly.

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.

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