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Swiss Portfolio Managers: Update FINMA Authorisation Practice

By Juerg Locher | August 24, 2021

Swiss portfolio managers need a FINMA licence by 31 December 2022 at the latest and must be supervised by a supervisory organisation. There are good reasons to submit the application for authorisation already this year. Read more in our last article “FINMA Unterstellung von Schweizer – Praktische Aspekte“.

FINMA’s practical experience, which is explained below, now confirms that asset managers should not wait to submit their application until deadline but should certainly address the licensing requirements relevant to their business model at an early stage.

Some “first movers” are already licensed

In its publication (“First experiences in the asset manager and trustee licensing process”; the link to this publication can be found at the end of this article), FINMA shares its initial experiences and expectations for the potential applicants. So far, 95 applications have been received and 36 asset managers approved (as of April 2021). No applications have yet been rejected, which is a positive development at first glance. However, it must be taken into account that these “first-approved” asset managers include almost exclusively asset managers who are part of a domestic group company (e.g. the bank-licensed Aquila AG) and are thus integrated into a “setting” that FINMA has long known about and monitored. Only eight “independent” asset managers appear (as of the beginning of August 2021) on the FINMA list of authorised asset managers.

Risk-based authorisation practice

FINMA confirms to keep an eye on the riskiest business models to ensure uniform and high-quality standards of Swiss asset managers. Only those applicants who correctly assess, manage and adequately monitor their business risks will receive FINMA’s seal of approval. FINMA therefore demands from applicants “willingness to make the necessary adjustments, e.g. in terms of organisation e.g. in terms of organisation, processes, resources, etc.”. In addition, FINMA expects the filing application to be of a “high quality” and must be submitted via the correct process (in particular prior supervisory organisation).

In any case, FINMA makes it unequivocally clear that “without the implementation of the necessary adjustments (possibly increase resources, separating risk and compliance, outsourcing to external service providers), authorisation will not be granted”.

Separation of risk/compliance and independent Board of Directors (practice examples)

In its publication FINMA sheds some light to two key issues, namely for which business models (i) operational separation of risk and compliance and/or (ii) the appointment of an independent board member is mandatory.

Based on the law the above-mentioned requirements (i) and (ii) do not have to be fulfilled

  • if less than 5 full-time employees or an annual gross income of less than CHF 2 million and if the applicant does not pursue a “business model with increased risks” (requirement (i) does not have to be met);
  • if less than 10 full-time employees and annual gross revenues of less than CHF 5 million and if applicant’s “type and scope of the activity” does not require this (requirement (ii) does not have to be met).

Hence, in addition to the clearly defined thresholds, the legislator cumulatively mentions two conditions that require interpretation (“no business model with increased risks” and “type and scope of activity”), which are neither explained in more detail nor exemplified in the law or in the literature. This leads to legal uncertainty and gives the authorities, FINMA in particular, a great room for discretion. Regarding the election of an independent board member, FINMA adds the phrase “or risky business model” to the legal terminology “type and scope of activity” in its publication and clarifies that it also assesses this aspect mainly from a risk perspective.

In its publication, FINMA states that the interpretation of the term “business model with increased risks” lies within the competence of FINMA and lists several examples for which, in principle, an operational separation of risk control is necessary (even below the thresholds mentioned!). This applies in particular to asset managers, who

  • Manage assets of investment funds and pension funds under the “de minimis rules”;
  • use foreign custodian banks;
  • have a certain heterogeneous foreign client structure or client structure with a focus on a certain foreign region;
  • use investment instruments with potential conflicts of interest;
  • have an unlimited client power of attorney;
  • manage a high volume of investments: AuM > CHF 1 bn.

FINMA also lists examples of what it considers “risky business models” (practically identical to those mentioned above) and further explains for each example the risks and the expectations for the applicants, including whether a separation of risk and compliance from the operating units needs to be made:

  • Involvement of foreign custodian banks;
  • use of investment instruments with potential conflicts of interest;
  • foreign client structures;
  • compensation from third parties (retrocessions, etc.).

While FINMA clearly affirms the separation of risk and compliance functions for the first two examples, the third example (“foreign client structures”) is only a possible reason for separation. FINMA does not provide any information on separation if compensation from third parties (“retrocessions”) is accepted but points out the well-known risks in this regard (no valid client waiver, civil and criminal law risks).

FINMA unfortunately does not explain which cases are to be subsumed under a “heterogeneous foreign client structure or client structure with a focus on a specific foreign region”, although this would be desirable for legal and planning certainty.

“Investment instruments with potential conflicts of interest” is also broadly defined and FINMA mentions the management of investment funds and actively managed certificates (AMC) as practice examples. According to FINMA, these instruments involve fraud risks and collection of undisclosed “double dips” (double charged fees). The question is whether FINMA exceeds its discretion here, as these risks are already regulated by the FinSA rules of conduct (including the duty of loyalty, transparency and accountability) at product and service level.

Whether the above examples also require the additional appointment of an independent board member is not clear from the publication.

Early action is required!

Based on the FINMA publication and the examples mentioned therein, FINMA seems to be restrictive regarding the separation of risk and compliance and the need for an independent board member.

Asset managers who have doubts whether they must comply with one or the other (or even both) requirements should better seek advice at an early stage. Fulfilment of both requirements (or even just one of them) may require additional and costly resources (additional staff or outsourcing solutions, election of additional board members, etc.) and may even spell the end for smaller structures. The decision as to whether the requirements must be met should therefore be clarified at an early stage and not left to “coincidence”. Asset managers who must fulfil these requirements can still make any organisational or procedural adjustments to their business model or look for a suitable or alternative solutions for the specific case. If the “problem” only arises during the authorisation process, it will probably not be possible to find a suitable and sustainable solution (under time pressure).

The FINMA publication referred to above can be retrieved here:

The clock is ticking for client advisers according to FinSA!

By Dominik Speich | November 18, 2020
Caplex FinSA

On 20 July 2020, FINMA (the Swiss Financial Market Supervisory Authority) approved the first registration office for client advisers (the BX Swiss AG). Client advisers who are subject to registration must therefore be entered in a recognized Register of Advisers by 19 January 2021.

What is the Register of Advisers?

The Register of Advisers is a publicly accessible register in which certain client advisers of domestic and foreign financial service providers must register. Pursuant to paragraph 28 FinSA, client advisers of Swiss financial service providers not subject to supervision pursuant to paragraph 3 FINMASA (the “Financial Market Supervision Act”) and client advisers of foreign financial service providers may carry out their activities only if they are entered in a Register of Advisers. However, only the client adviser himself, i.e. the natural person, is obliged to register. Legal entities cannot be registered.

The registration in the Register of Advisers is intended to ensure, on the one hand, that client advisers are aware of their obligations and treat clients appropriately. On the other hand, the Register of Advisers shall give clients the possibility to check the professional qualifications of their client advisers. However, the registration does not lead to a prudential and ongoing supervision and, accordingly, not to any supervisory review by FINMA or any other authority.

Who is considered a client adviser and is subject to registration?

According to paragraph 3 lit. e FinSA, those natural persons who perform financial services (such as investment advice, asset management or distribution of collective investment schemes) in their own capacity or of a financial service provider are qualified as client advisers. With the expiry of the FINMA distributor license at the end of 2019, all distribution and placement agents of collective investment schemes must therefore also be entered in the Register of Advisers, unless the financial institution is or will be subject to supervision by FINMA (e.g. as a manager of collective or individual assets). However, employees of financial service providers without client contact or employees who only support the financial service in a subordinate manner, e.g. working in the back office or performing administrative tasks for the client adviser (e.g. sales administration), are not required to be registered.

It is important to note that client advisers of prudentially supervised domestic financial service providers are exempt from the registration requirement. This refers in particular to client advisers of banks and of investment firms, but also of asset managers. Client advisers of foreign financial service providers who are subject to prudential supervision in their country of origin are also exempt from the obligation to register, provided that they provide their services in Switzerland exclusively to professional or institutional clients.

What do client advisers have to fulfill for the registration?

In order to be entered in the Register of Advisers, client advisers who are subject to registration must meet the following requirements in accordance with paragraph 6 FinSA:

  • they must have sufficient knowledge of the code of conduct set out in FinSA;
  • they must have the necessary expertise to perform their activities;
  • they must get a professional liability insurance or provide equivalent financial guarantees;
  • they themselves or the financial service provider for whom they work must be affiliated to an ombudsman.

In addition, the registration may be refused if the client adviser has been convicted of a criminal offence or has been entered in the criminal register for criminal offences against property, or if the client adviser is prohibited from performing an activity or practising a profession due to a violation of supervisory regulations pursuant to paragraph 33 FINMASA.

Since the registration requirements must be permanently complied with, financial institutions with client advisers are recommended to take organizational measures in this regard (e.g. an internal responsibility directive and/or a special FinSA directive, participation in further education or appropriate trainings). Violation or non-compliance with the registration requirements could also have undesirable consequences for the responsible financial institution, because financial service providers themselves are subject to the obligation to ensure that only client advisers work for them who are entered in the Register of Advisers. The lack of the ongoing supervision of whether the entry requirements for the Register of Advisers still exist is countered by the fact that the registration must be renewed every two years.

Is there a need for action?

As a financial service provider, you must check whether you provide a “financial service” within the scope of your business model and whether you are therefore considered a client adviser subject to registration in accordance with FinSA. As a rule of thumb, the person who is subject to registration is the person who provides investment advisory services without being subject to a licensing requirement under the Financial Institutions Act, or the person who offers financial services to clients in Switzerland from abroad, unless the foreign financial service provider in question restricts itself to professional and institutional clients. As already mentioned, client advisers must be entered in a Register of Advisers by 19 January 2021. After the end of this transition period until 19 January 2021, client advisers who are subject to registration must be entered in a Register of Advisers prior to commencing their activities, and also the registration requirements must be met at that time. Thus, if your financial institution has client advisers who are subject to registration, you should register them as soon as possible. In addition, you should ensure ongoing compliance with and monitoring of the registration requirements by means of internal instructions and directives as well as by appropriate contractual clauses.

CapLex advises “Fit4School, Mutschellen”

By Juerg Locher | October 22, 2020

CapLex supports “Fit4School, Mutschellen” in the incorporation, implementation and structuring of the supporting learning and coaching centre at Mutschellen (AG).

CapLex On Air

By Juerg Locher | May 25, 2020

We are very happy that after intensive preparation we can finally go live with CapLex KIG.

CapLex KlG combines about 15 years of legal expertise with correspondent industry experience. As “Business embedded Lawyers” we do not work in the ivory tower but create constructive and practical solutions together with our clients. We look forward to welcoming you at our office at Badenerstrasse 125 in the heart of Zurich from 1 April 2020.

Attention Fund Providers: Standstill period due to Covid-19 is extended!

By Juerg Locher | May 25, 2020

Attention Fund Providers: Standstill period due to Covid-19 is extended!

COVID-19 has been causing volatile stock markets for days now, which also presents a challenge for fund management companies, initiators and managers of collective investment schemes. Some fund providers intend to do short-term adjustments to the investment guidelines stipulated in the fund prospectus and fund contract in order to reduce price losses, redemptions and liquidity shortage. However, amendments to fund contracts may only be made if the FINMA has approved these amendments and no investors have objected to them (30-day objection period pursuant to Art. 27 para. 3 CISA). But now, the Federal Council has decided that the deadlines in civil and administrative proceedings have been suspended since 21 March 2020 and that the standstill will last until 19 April 2020 (instead of 7 days before and 7 days after Easter). This standstill also applies to the 30-day objection period pursuant to Art. 27 para. 3 CISA. If you intend to publish an amendment to the fund contract today, it will be approved by FINMA and come into force on 20 May 2020 at the earliest (changes reserved). If you still wish to do short-term amendments to the fund contract and fund prospectus, you should limit yourself to amendments which do not require approval by the FINMA (and which are also not subject to the 30-day objection period). We will be happy to support you with a corresponding analysis.

A knowledge that does not reach into the future is no knowledge.

Hans Peter Dürr