SWISS FINANCIAL SERVICES NEWSLETTER Special Edition Investment Management August 2013
KPeople 2010 | 03
Contents 04 07 10 15 19 22
Asset Management The pivot of Switzerland’s future financial center
Changes in auditing Potential impacts for their implementation
Impacts of FATCA For swiss investment advisors and collective investment vehicles
Representatives of foreign collective investment schemes Need for action
Equivalence The magic word for EU-compliant regulations in Switzerland − as shown by EMIR
FSA The new Financial Services Act
The supervisory authority becomes aware of real estate funds Reduction of the maximum lending limit from 50% to one-third of the market value
GIPS 2010: erste Erfahrungswerte
02 – SWISS FINANCIAL SERVICES NEWSLETTER – August 2013
Editorial Dear Reader, Switzerland as a financial center is still primarily seen as a wealth management location. The decline in the offshore business due to mounting international pressure on so-called tax havens shows how necessary it has become to shift the core activity of independent investment management from managing client relationship to implementing investment processes and methods. Both the launch of new products and the trend for ETFs (Exchange Traded Funds) and structured products to become increasingly available on the retail market strengthen the role of market participants in investment management. With Black Rock or State Street, companies which until recently were perceived as a pure developers of products and investment strategies for institutional investors, come into the limelight. Not wanting to miss out, large banks are also once again more active in the investment management market. Our article on the effects of FATCA on Swiss investment advisors and collective investment schemes highlights the latest developments, thereby making it easier for the individual market participant to assess the situation at hand. At all levels of financial market supervision, new regulations are now gradually being phased in that were initiated in the wake of the turmoils on the international financial markets three to four years ago. For competition's sake, Switzerland always aims at achieving regulations that are comparable to those of the EU. Standardizing regulation of financial services and the distribution of financial products makes it easier to harmonize the various requirements with each other (e.g. for the distribution of funds in comparison to structured
products). It is therefore to be hoped that Swiss legislators will adjust Swiss laws to reflect these international developments and that they avoid an unnecessary “Swiss Finish”. Whether FSA, MiFID II, AIFMD, FATCA, CISA or EMIR − the global financial market is shifting at a tearing pace. Dr. Gérard Fischer, CEO of Swisscanto group, compares the different standards in the financial market with quality criteria in the wine industry. The label “Appellation d’Origine Controlée (AOC)“ is nothing more than a standard in viticulture that on the one hand makes the process more complex and expensive but on the other hand is indispensable for the quality guarantee when marketing the wine in question. Similarly, we need minimum standards for all asset management providers to improve investor protection. Moreover, best-practice standards and codes of conduct should improve the quality so that Swiss asset management can advance to a “premier cru” in the market. We hope that this issue of the Swiss Financial Services Newsletter − Investment Management serves as food for thought for you to improve your daily business. Should you have any further questions please do not hesitate to contact us. Sincerely yours,
Markus Schunk Head of Investment Management, KPMG Switzerland
Asset management The pivot of Switzerland’s future financial center By Dr. Gérard Fischer, CEO of the Swisscanto Group
04 – SWISS FINANCIAL SERVICES NEWSLETTER – August 2013
As is well-documented, diversification, i.e. the spreading of funds to different investment categories, is one of the main principles of investing. What should seem to be quite obvious for private investors apparently is not so for Switzerland as a financial center. Despite its enormous significance for Switzerland’s economy, its focus is rather one-sided. Switzerland is still mainly acknowledged as a place where wealth management is offered, and in effect, these financial activities still generate the most important part of the income. The continuous pressure on Switzerland's banking secrecy and with it, the decrease in offshore business transactions, show that Switzerland must urgently diversify its financial services. In Switzerland, independent asset management focusing on the implementation of investment processes and methods rather than client management is still in its infancy. If these activities were to be completely independent of client relationship management, investment banking or other banking operations, this would certainly help avoid conflicts of interests. Strengthening asset management as a separate line of business would therefore represent an important step to a better diversification of Switzerland as a financial center. Dependable frameworks and good infrastructure absolutely necessary Due to its form of government and legal system, Switzerland is actually an ideal place of business for financial service providers. However, these days, clients are wooed with sometimes rather unfair means which is why it is all the more important to maintain and improve Switzerland's qualities as a place of business. This includes offering a good framework. Here, a good example would be taxes, which are fair, predictable (e.g. no retroactive implementation) and not too high, so that companies will not move away to other locations simply due to this fact. But asset management also relies on a well-functioning infrastructure. This includes stock exchanges and markets. Asset managers invest on behalf of their clients. This requires capital markets that are transparent, efficient and well-functioning, straightforward and well-documented valuation procedures, stock exchanges that are adequately regulated as well as easy and inexpensive access to these market places. These conditions are important in order to keep costs low and fair in investors’ interest. For this to happen, effective rules and regulations are required that ensure that no single market participant or groups thereof have preferential access to information or trading facilities or that they can manipulate the market in any way. Room for improvement in education Should asset management in and from Switzerland become more significant, this will require more well-educated specialists. Portfolio managers are already being trained very well with special training courses (e.g. CEFA, CIIA, CFA). However, what remains amiss is the training possibilities for asset managers who should acquire more expertise on financial instruments, legal regulations regarding the financial markets and the financial economy. Various institutes, such as the Swiss Finance Institute, already offer certain training courses
which could be ramped up to cover the additional knowledge required by such specialists. In turn, asset managers could also improve the practical side and their innovative capacity by improving their collaboration with the institutes. However, quality is mainly informed by competition. So what are the prerequisites for a healthy, competitive landscape? Quality assurance standards Just as in any other industry, asset management also needs certain standards. These serve to mitigate disadvantages or undesirable risks for investors and to provide some orientation. In order to illustrate how standards help, I would like to draw a parallel to the world of viticulture: whether vines are grown in Bordeaux, Burgundy or in another region where quality is venerated, there are always very strict rules that must be followed. AOC (Appellation d'Origine Controlée) rules are nothing else than standards, which require an effort but which a vintner must respect in order to be able to use this quality seal when marketing his or her wine. The French wine standards, which are currently considered best in class and which have been copied by many wine-growing areas, prescribe – down to last detail and according to region – which grapes may be grown, when the vines may be pruned, the maximum harvest possible, the minimum degree of alcohol, how and how long the wines must be stored before they are sold, etc.
«Accessing markets abroad is a cornerstone to the success of Switzerland’s asset management industry.» In the asset management industry, we need minimum standards for all providers so that no one gets ”indigestion” from the product. Moreover, ideal standards and codes of conduct should improve the quality so that Swiss asset management advances to a “premier cru” in the market. Know-how and quality are developed by the fact that many providers compete for market share. This competition creates transparency on the services provided and costs for the client and allows all providers to participate in the market under the same conditions. Rules and requirements should apply to both domestic and international providers. They should be free of loopholes and promote competition. They should not create entry barriers which could call forth oligopolistic structures. Competition that functions well is the best guarantee for quality and the best protection against abusive actions.
Asset Management – the pivot of Switzerland’s future financial center
Access to the global market: crucial for Swiss providers Asset management is an international business. Investments are global but clients and products are both domestic and international in origin. If Swiss asset managers can only offer their products and services in Switzerland, they will suffer from a systematic disadvantage in regard to know-how, economies of scale and distribution. This is also detrimental to Switzerland as a financial center, for instance in the European context. Instead, Switzerland could be an ideal alternative to London and act as a second domicile in Europe for many, provided the future legal framework allows it. It is necessary to have an efficient and well-established mutual market access in order to avoid an exodus of financial providers from Switzerland and in order to allow asset managers broader development.
«Clearly defined industry standards help guide investors and on top of that, promote competition.» Appropriate supervision Asset management is in a special situation as the investment activities bear special risks for the investor. Applying the normal rules and regulations will not take into consideration the industry's special aspects, especially when complexity increases and conflicts of interest abound. The supervisory authorities should be guided by clearly defined objectives, thereby avoiding being excessive. Ideally, regulation creates transparency, promotes competition and prevents abusive behavior. Supervision that is adequate for asset management should address three areas: 1. requirements for persons active in this industry regarding expertise and integrity 2. codes of conduct for activities and rules for products, such as investment funds 3. rules on how such a company should be organized
«Ideally, regulation creates transparency, promotes competition and prevents abusive behavior.»
CONCLUSION Switzerland should also follow the principle of diversification in the financial sector, building up several successful mainstays. Promoting asset management should not be seen as a competition to wealth management, investment management or the lending business but rather as an ideal complement to these industries. In an international environment not lacking in creative ideas on how to harness personal assets, there is a real need for a safe location that nevertheless offers excellent investment opportunities. Switzerland has decades of experience in successfully managing such monies and thus a competitive edge, which it should take advantage of.
Dr. Gérard Fischer Dr. Gérard Fischer has been the CEO and Chairman of the Executive Board of Swisscanto Group since 1 March 2003. He is also the Vice President of the Swiss Fund Association (SFA), after having been its President from 2005 to 2009. He has been a member of the Board of Directors since 2003. Gérard Fischer studied economics at the University of Basel, where he earned his doctoral degree (Dr.rer.pol.) in 1989. He began his career in 1985 working in UBS's Quantitative Investment Research department. In 1989, he joined the Private Banking division of Bank Vontobel AG in Zurich. From 1992, he began building up the fund business in Switzerland and later also in Germany, Austria and Italy. He was then also entrusted with further expanding the institutional asset management in these same markets. In 1999, Mr. Fischer became the CEO, CIO and a member of the European Management Committee of Scudder Investments AG, which belonged to the Zurich Financial Services Group, where he was responsible for the institutional asset management, the retail business as well as portfolio management in Switzerland. After the sale of Zurich Scudder Investments to Deutsche Bank AG he became the CEO of Deutsche Asset Management Switzerland and a member of the Board of Directors of DWS Investments Switzerland. As CEO and CIO he was responsible for developing the institutional asset management and the retail business of DWS in Switzerland. He is a member of the Board of Trustees of Swisscanto Investment Foundation, Chairman of the Board of Directors of Swiss Fund Data AG and member of the Board of Trustees of Werner Abegg Foundation.
Dr. Gérard Fischer CEO of the Swisscanto Group +41 58 344 43 00 email@example.com
06 – SWISS FINANCIAL SERVICES NEWSLETTER – August 2013
Changes in auditing Potential impacts for their implementation By Astrid Keller and Heinz Weidmann
What is the new FINMA circular's aim? The FINMA circular 2013/3 ”Auditing” entered into force on 1 January 2013 and is applicable for all supervised entities concerned for the fiscal year beginning on 1 January 2013. It replaces its predecessors, the SFBC circulars 07/2 ”Audit” and 07/1 ”Audit report”. The basic audit is now defined in a standard audit strategy, which approximately corresponds to the previous risk analysis/audit strategy, albeit with differently segmented audit areas. Based on the risk analysis, the FINMA may prescribe additional audits for individual supervised entities and also mandate third parties with case-by-case audits. According to the FINMA, the amended circular aims at „enhancing the audit quality provided by audit firms, thereby improving the audits’ meaningfulness and added value for the supervisory authority”1. The following paragraphs provide an overview of the main changes to the current situation as well as certain foreseeable consequences these will have in practice. It is first of all striking that two circulars, namely ”Audit” and ”Audit report”, were replaced by a single circular; however, it is now supplemented with 14 appendices with risk analyses and standard audit strategies tailored to the respective licensees. In addition, it also includes instructions for the risk analysis, standard audit strategy and reporting (for fund management companies, asset managers, representatives of foreign collective investment schemes, SICAV/SICAF, partnerships for collective investments as well as custodian banks). And all this is completed by detailed report templates. The templates for all types of licensees are currently available as drafts only. It would be ideal to have the final templates available as soon as possible as reporting uncertainties may result in follow-up audits and an additional collection of necessary data.
Explanatory report on the FINMA circular ”auditing” dated 7 August 2012
Changes in auditing – potential impacts for their implementation
Old versus new When comparing the old with the new circular, the following amendments particularly catch the eye: a) Audit planning
leaves room for interpretation necessary to carry out a regulatory audit. • The so-called materiality principle no longer applies to the regulatory audit.
• It is now mandatory to submit the risk analyses to the FINMA; the supervised entity is merely to be informed of the submission. Assessing the inherent as well as the control risks has become more complex due to the predefined tables. Moreover, the audit consequences of this assessment are also influenced by the applicable supervision categories (explained below). In addition, there are other audits mandated by the FINMA in addition to the ones already defined in the standard audit strategy which may be scheduled outside the normal auditing timeline.
• If necessary, the audit firm complements the standard audit strategy based on the risk anaylsis and submits this addition to the FINMA, who must then approve it.
• In addition, notices of reservation that recur on a regular basis must be flagged as such. As a rule, the report must still be prepared in one of Switzerland›s official languages. Exceptions are explicitly provided for, but must be approved by the FINMA.
• In contrast to banks and securities dealers, the institutions are allocated to supervision categories (SC), which in turn determine certain audit intervals for individual audit areas. For example, the compliance with the code of conduct for SC3 would be audited every three years, for SC4 every four years and for SC5 every five years with audit depth audit. • The annual in-depth audit has been dispensed with all together. • The financial audit and the regulatory audit must now be carried out separately. The FINMA can even demand that they are performed by two separate leading auditors. b) Performance of the audit • For fund management companies, the rules foresee new audit areas for specific products (e.g. minimum assets, reporting requirements, investment policies). • A limited cooperation with internal audit is only allowed every two years for each audit area. • No reference is made to accepted auditing standards (e.g. Swiss Auditing Standards (SPS) or International Standards on Auditing (ISA)) for the regulatory audit; instead, the new circular defines its own auditing standards. • New audit depths are “audit“ and “critical assessment“. The relevant auditing principles are broadly described in margin no. 35 et seqq. of the circular “Auditing“. Among other things, these include a systematic audit planning, comprehensive and sufficiently detailed audit documentation and evidence of process and results-oriented audit procedures. The terminology used in these auditing standards is similar to the accepted auditing standards but
08 – SWISS FINANCIAL SERVICES NEWSLETTER – August 2013
• The template designed according to margin no. 53 et seqq. of the circular corresponds to a highly detailed and rigid reporting framework that resembles a checklist. Violations of regulatory provisions or the company›s articles of incorporation, regulations or directives which are of significance in regard to regulatory matters will cause a notice of reservation, regardless of whether this violation has already been remedied or not.
Regulatory audit procedure using an example We have shown an example of a possible audit timeline for a fund management company including the collective investment schemes it manages below. Note that the risk analysis and audit strategy for the following year must be submitted to the FINMA no later than six months after the end of the financial year. These must therefore be submitted at the same time as the audit report on the previous year's regulatory audit. In addition, the FINMA may also stipulate additional audits outside of the timetable of the standard audit strategy. The fiscal year of our example’s fund management company corresponds to the calendar year, whereas the funds close on 30 September and 31 December, respectively. What immediately catches the eye is that the audit planning in the form of a risk analysis and audit strategy needs to be addressed earlier than before. On the other hand, the beginning of interim audits due to potential changes by the FINMA will most likely start later than before, as the FINMA must approve the audit strategy „usually within 3 months after submission“, as mentioned in the guidelines. The applicable audit depth remains uncertain until the approval has been granted. The reporting deadlines, however, remain the same. Challenges Only the practical application of the FINMA's requirements will tell whether its aims are realistic, but certain challenges are already clearly foreseeable: • As explained above, compared with the FINMA's previous requirements, the planning for the new audit approach is far more complex and work-intensive, requiring a more detailed segmentation of audit fields and a more structured reporting.
Financial year audited Risk analysis/ Audit strategy
Report of audit firm Statutory audit**
FINMA's approval of audit strategy
Possible additional interventions by the FINMA as per maring no. 31 of circ. ”Audtiting”
Audit of real estate funds
Audit of securities funds
1) Statutory and long-form audit report of previous year
4) Statutory and long-form audit report
2) Annual financial statements real estate fund
5) Quarterly report as per art. 105 para. 2 CISO-FINMA
3) Financial statements securities fund
6) Reports regulatory audit
* Includes statutory audit, regulatory audit of fund management company and products ** Fund Management Company
• For most audit fields, the risk analysis process will result in the audit depth critical assessment to be applied. The application of the audit depth audit will be determined more by the specifications of the multi-year planning (with three to five-year audit intervals) than by the actual risk analysis. The periodic application of the audit depth audit to all audit areas therefore does not fundamentally differ from the previous provisions, but it may take place more frequently, depending on the supervision category. • It remains to be seen whether the supervisory authority will intervene that much more. • The generic wording of the auditing standards in the new circular will also lead to more individual interpretations and is going to need clarification after its initial application. • Moreover, it is to be expected that doing away with the materiality concept will lead to more notices of reservation. • Most probably, the audit firms will need to substantiate the definitive yes/no answers; thus it remains to be seen whether the announced shortening of the regulatory reporting will indeed turn out to be correct.
CONCLUSION Whether the new audit concept will meet the set objective of improving the quality of audits therefore mostly depends on the FINMA's further provisions and interventions that should be as clear and practicable as possible. Apart from institution-related details, these should also include a clear definition of the audit areas and expectations in regard to reporting as well as a generally more intensive exchange of information between the FINMA, the audit firms and the institutions to be audited.
Astrid Keller Partner Audit Financial Services +41 58 249 28 82 firstname.lastname@example.org Heinz Weidmann Senior Manager Audit Financial Services +41 58 249 35 21 email@example.com
Impacts of FATCA For swiss investment advisors and collective investment vehicles By Michael Schneebeli
At the release of the proposed regulations, pure investment advisors seemed to be out of scope of the FATCA regulations. This has dramatically changed with the introduction of the “Investment Entity” status in the final regulations. It should be noted that a number of Swiss investment advisor (IA) will still not be directly affected by the regulation. Moreover, the Model II IGA between Switzerland and the United States has provided some relief.
If you are an investment advisor, you need to ask yourself the following questions today: • Does my firm qualify as a legal entity under US law?
Swiss “specialties” that are only relevant in the IGA II. Typically, the following steps need to be taken in order to evaluate the impact of FATCA on an organization; we have added the aspects that need to be clarified specifically for Swiss investment advisors:
• Are my business activities classified as investment advice? • Do I qualify as Swiss investment advisor under the IGA II? • Do I provide custodian services to my clients (e.g. if you have a license as a securities dealer)? • Am I managing “special structures“ or legal entities (e.g. as trustee) on behalf of my customers for which I bear responsibility that they become FATCA-compliant? In the past, the discussion around FATCA regulations centered on banks. However, the release of the final regulations and the subsequent Intergovernmental Agreement (Model II IGA) has provided some detailed clarification for the investment industry. This article deals on the one hand with the implications for Swiss investment advisers (“Unabhängige Vermögensverwalter”) and on the other hand with the consequences for collective investment vehicles (funds). Going through the main requirements of the FATCA regulations, it becomes apparent that the required activities were not first and foremost designed for investment advisors. Therefore a number of special rules were implemented (e.g. the “Investment Entity”) in order to consider the activities of a pure investment advisor. Furthermore, there are
10 – SWISS FINANCIAL SERVICES NEWSLETTER – August 2013
1. Do I qualify as a Foreign Financial Institution (FFI) (e.g. ”Investment Entity”)? This step is also relevant for investment advisors because as an IA, you will need to ask yourself if you even qualify as such an institution. In Switzerland, there are IAs that operate as “Einzelgesellschaft” (sole proprietorship) or as “Einfache Gesellschaft” (unregistered partnership) under the Swiss Code of Obligations. These legal forms do not qualify as legal entities under US law as there is a designated single person responsible who is fully liable for all activities. Therefore, such an IA could be viewed as an individual, who also carries out activities that could be considered activities of a financial institution. 2. Should you come to the conclusion that indeed you qualify as an FFI, you need to clarify if your entity has so-called financial accounts. Pure IAs typically have no financial accounts as these are deposited with a custodian bank. Consequently, the reporting and withholding obligations of FATCA are not applicable. This is why the IGA II specifically addresses the case of Swiss investment advisors. 3. If you hold financial accounts (this will mostly be the case if your entity is licensed as securities dealer), you will need to evaluate whether the account owners qualify as US persons.
The implementation will depend on the outcome of the 3 steps listed above. Furthermore, your FATCA status can have further implications for structures for which you provide management advice. Simply put, the FATCA status of a structure, in which several individuals invest, holds the FATCA status of an Investment Manager, i.e. if you are an FFI and you manage a trust’s assets, the trust itself will become an FFI (depending on the country where the trust is incorporated). Given all these facts, assessing the implications of FATCA
on your business as well as the requirements to be fulfilled is crucial for every investment advisor. Furthermore, even if you turn out to be an IA not qualifying as “Institution” under US law, the custodian bank will still expect you to identify your customers using the FATCA identification rules as well as to monitor and notify them of a potential status change. When performing the analysis, you should also ensure that all relevant investment vehicles are considered.
The most significant requirements we expect for the most typical set-ups of Swiss investment advisor are as follows:
Swiss investment advisor that qualifies as ”Investment Entity”
Einzelgesellschaft (sole proprietorship)
Identify status of custody bank
Monitor status of custody bank
Other „legal” form without license as security dealer
Identify status of custody bank
Monitor status of custody bank
Register with IRS
Securities Dealer (licensed in CH)
Identify status of clients
Monitor status of clients
Reporting of client data
Withholding / Reporting NPFFI
Register with IRS
Impact of FATCA – for swiss investment advisors and collective investment vehicles
Investment funds / collective investment schemes (CIS) Shifting the focus to investment funds and considering the Model II IGA as well as the final regulations, there is a total of five classification options available for investment funds in Switzerland (see Illustration below).
The Swiss investment management industry profits considerably from the Model II IGA. Most prominently, Annex 2 of the IGA states that an investment entity which is a collective investment vehicle subject to the collective investment scheme legislation of Switzerland will be treated as a registered deemed-compliant FFI provided all of the units of the collective investment vehicle are held by or through financial institutions that are not non-participating FFIs.
Qualified Collective Investment Vehicle
Owner-documented FFI Registered DeemedCompliant FFI
Swiss collective investment scheme landscape Given the structural organization of Swiss collective investment vehicles where these are required by law to place their fund assets with a Swiss custodian, it can be assumed that the majority of the Swiss fund vehicles will qualify as registered deemed-compliant. The due diligence, withholding and reporting obligations are then carried out by the custodian bank (and distributors). These custodians will most likely be participating FFIs. Update on Model II IGA for investment advisors Annex 2 of the IGA further clarifies duties for investment management professionals: as such, Swiss fund managers of Swiss and foreign funds that are FATCA-compliant should qualify for the registered deemed compliant status as well. If a fund chooses to enter an FFI agreement (PFFI) directly with the IRS, it may outsource the identification of US shareholders and non-participating FFIs as well as the related reporting to third-party service providers.
12 – SWISS FINANCIAL SERVICES NEWSLETTER – August 2013
Redemption of physical shares Another important consideration with respect to the IGA for the investment management industry concerns the transitional rules for the redemption of physical shares in bearer form. For all CISs aiming to be FATCA-compliant this means that any issuance of such shares is prohibited as of 31 December 2012. Should this be done nonetheless, they must be redeemed prior to the entry into force of the IGA (approval by the Swiss Parliament is expected to take place in the third quarter of 2013). In any case, CISs must have policies in place to force redemption of the remaining outstanding physical shares prior to 1 January 2017. Due diligence requirements with regards to the identification of US accounts and non-participating FFIs apply at the time of redemption. Moreover, the subsequent reporting procedures should also be kept in mind.
Following are two examples of possible Swiss collective investment schemes as observed in practice. While in example 1, the Swiss contractual fund (an open-ended collective investment scheme) qualifies as a registered deemed-compliant FFI, the KGK (Swiss limited partnership for collective investment schemes) in example 2 (e.g. a closed-end private equity fund) is required to enter an FFI agreement with the IRS.
Example 1: Swiss contractual fund (as a registered deemed-compliant FFI) As outlined above, this fund structure is addressed in the Model II IGA and benefits from simplified FATCA requirements for the involved parties. The custodian bank may be the only participating FFI in this fund supply chain. Similarly, investment entities with variable capital (such as SICAVs) are treated as contractual funds.
Collective Investment Agreement Custodian Bank
• Fund Manager: registered deemed-compliant FFI • Fund: registered deemed-compliant FFI • Custodian: participating FFI
Example 2: Swiss limited partnership for collective investment schemes (as a participating FFI) General Partner (Swiss AG)
Private Equity and various other alternative investment vehicles that are structured in a closed-end form do not qualify for the provisions with regards to „certain collective investment vehicles” outlined in the Model II IGA.
Limited Partners (qualified investors)
• KGK: participating FFI • General Partner (fund manager): registered deemedcompliant FFI • Custody- and Paying Agent: participating FFI KGK Custody Agreement
Custody- and Paying Agent
Other considerations for funds • Swiss pension funds classify as exempt beneficial owners. • For real estate funds, the FATCA approach differs depending on whether they carry out direct investments or indirect investments (through real estate holding companies). • Swiss fund managers of non-Swiss funds have to consider the regulations relevant to the fund’s domicile (IGA I, IGA II or final regulations). Next steps This shows that FATCA requires participants across the entire investment industry to review their supply chains thoroughly. Even though the Swiss Parliament has not yet concluded the necessary legislative process, it is still crucial to meet the necessary deadlines.
Both, investment advisors and investment funds as well as their fund managers that qualify as registered deemedcompliant FFI, should consider the following next steps: • Registration process will start as of 19 August 2013. • The registration has to be completed by 25 April 2014 latest. • Upon registration, a receipt of ”Global Intermediary Identification Number” (GIIN) can be obtained. For investment advisors and/or fund vehicles that do not qualify for certain simplified procedures described above, more stringent requirements apply in the process of an eventual FFI agreement.
Impact of FATCA – for swiss investment advisors and collective investment vehicles
Practical implications for swiss investment advisors If you are a Swiss investment advisors the following questions (in this sequence) need to be considered: 1. Do you qualify as a legal entity for the purpose of FATCA? a. If yes, are you an FFI, based on the FATCA definition? b. If no, you are an active NFFE and the analysis stops here. 2. If 1a) response was ”yes”. Do you qualify as an investment entity? a. If yes, do you manage collective investment funds? b. If no, you are an active NFFE and the analysis stops here. 3. f 1a) and 2a) response was ”yes” you are an FFI 4. If 1a) and 2) response was ”yes” but 2a) was ”no”, then you qualify as a registered deemed compliant FFI to the extent that you fulfill the requirements set out above on Swiss investment advisors. Some additional questions arising at this stage are: • Do I act as a trustee on behalf of my clients or do I offer fiduciary services which may require extended documentation?
Practical Implications for funds and fund management companies If you are a fund or a fund management company sponsoring individual funds, some of the following questions need to be answered: • Is a non-participating Financial Institutions (NPFFI) holding a (debt) interest in one of my funds? If so, will this affect my status as deemed-compliant FFI as set forth in Appendix II of the Model II IGA? • As a Swiss qualified collective investment vehicle, did I issue physical shares in bearer form after 31 December 2012, which should be redeemed prior to entry into force of the IGA II agreement in order to comply for the simplified procedures? Do I have sound policies in place to force redemption of the remaining outstanding physical bearer shares in due time (incl. due diligence)? • Does an umbrella fund have to register a sponsoring entity or each fund individually? • As a fund manager, do I know which are the relevant regulations applicable at the fund’s domicile (IGA I, IGA II, final regulations)? • How will the FATCA regulation impact my business model?
• How will FATCA interact with other emerging legislations? • Will the client on-boarding and monitoring process need to be enhanced? • What additional responsibilities do I have as a Swiss investment advisor going forward? • How does the FATCA regulation impact my business model?
CONCLUSION Although the implementation of FATCA has been postponed by six months, there is now need for action to clarify all issues raised in this article.
• Do I have financial accounts? • Do I have US accounts? • Can I continue to act as a US SEC-registered investment advisor and / or does FATCA impose additional requirements on existing and future US clients?
14 – SWISS FINANCIAL SERVICES NEWSLETTER – August 2013
Michael Schneebeli Partner, Head of Regulatory Services Audit Financial Services +41 58 249 41 06 firstname.lastname@example.org
Representatives of foreign collective investment schemes Need for action By Silvan Meyer
The revision of the Federal Act on Collective Investment Schemes (CISA) made the requirements for representatives of foreign collective investment schemes more stringent and introduced the licensing requirements for representatives of foreign collective investment schemes dealing with qualified investors (â€?representative lightâ€?). All representatives of foreign collective investment schemes must critically analyze their operational organization, prepare new representative and distribution agreements and, where appropriate, apply for a license.
Resentatives of foreign collective investment schemes – Need for action
Notifying FINMA and applying for licensing and approval Banks, securities dealers, insurance companies and asset managers of collective investment schemes that already act as distributors must now apply to FINMA for an additional license. They may continue their activities up to the moment they receive a decision regarding their license. The amended rules stipulate that a representative is required for the distribution of foreign collective investment schemes to qualified investors in Switzerland. Relevant documents1: action required The relevant documents of foreign collective investment schemes that are already admitted for distribution to retail investors in Switzerland may need to be adjusted to reflect the amendments in art. 120 para. 2 CISA (prerequisites for approval). Where necessary, the relevant documents of foreign collective investment schemes distributed to qualified investors must also be adapted to reflect the amended provision of art. 120 para. 2 lit. c CISA (naming of the collective investment scheme) and art. 120 para. 2 lit. d CISA (appointment of a representative and a paying agency) as well as art. 123 CISA (commissioning of the representative to assume its duties). Operational organization: action required To fulfill their obligations, representatives of foreign collective investment schemes must have an appropriate operational organization in place. Representatives must adhere to the code of conduct of a relevant industry organization recognized by FINMA. In addition, persons entrusted with carrying out the obligations as a representative must dispose of appropriate expertise and the staff must be sufficiently qualified for the activities foreseen. Additionally, an adequate and appropriate risk management, an internal control system and a compliance function are required. Moreover, it is vital that the control functions are segregated from operational activities. In the light of the above, representatives are forced to analyze their company's articles of association, their organizational rules as well as internal directives and adapt them where necessary. Representative obligations: action required Representatives of foreign collective investment schemes for non-qualified investors In principle, CISA’s revision does not affect the obligations of representative of foreign collective investment schemes for non-qualified investors. Incorrect or missing information in the annual financial statements, the interim/annual report, prospectus or simplified prospectus/KIID or in any other documentation are still punishable by law. Illegal, incorrect or misleading information in the advertising of a collective investment may also constitute a criminal offense. However, what is new are the extended information requirements as per art. 20 para. 1 lit. c KAG. According to the explanatory report on the revision of the Ordinance on Collective Investment Schemes (CISO) of 13 February 2013, licensees must ”voluntarily” and comprehensively inform clients about fees and costs of collective investment schemes. Representatives 1
«Banks, securities dealers, insurance companies and asset managers under CISA that already act as representatives must now apply to the FINMA for an additional license.» receiving retrocessions or similar commission payments by the fund provider (”upstream”) must disclose these. In addition, transparency concerning remunerations paid to distributors (”downstream”) is also a must. No transitional provisions are foreseen for the above-mentioned information requirements in the revised CISA concerning the representatives of foreign collective investment schemes for non-qualified investors. It should therefore be assumed that representatives must comply with these obligations already today. Thus, representatives are obliged to analyze their control processes and, where applicable, initiate the necessary measures. Representatives of foreign collective investment schemes for qualified investors (representative “light”) The representative ”light” must make sure to provide investors with the relevant documents of the foreign collective investment schemes (art. 131a para. 2 CISO). According to art. 133 para. 5 CISO, publication and notification requirements do not apply to foreign collective investment schemes that are only distributed to qualified investors. Art. 131a para. 2 and art. 133 para. 5 CISO therefore contain exemptions from regulatory obligations applying to foreign collective investment schemes (”product-related exemptions”). Regarding the requirements and the prerequisites for a license, CISA does not make a distinction between the representatives of foreign collective investment schemes for nonqualified investors and the representative ”light”. All representatives are therefore subject to the licensing requirements and have to meet the same conditions to obtain it. Neither CISA nor CISO indicate any exemptions from regulatory obligations addressing the representative ”light” as a CISA licensee (”institution-based exemptions”). Against this background, the exemptions for representatives «light» may be limited to the following: • exemption from product-related publication and notification requirements; • exemption from the obligation to obtain the FINMA’s approval prior to terminating the mandate as a representative. Due to the fact that the FINMA circular „Distribution of Collective Investment Schemes” exists only as a consultation draft and the „SFA Guidelines for the Distribution of Collective Investment Schemes” have not yet been revised, an exhaustive list of regulatory exemptions for representatives ”light” is currently impossible.
Relevant documents: simplified prospectus respectively KIID, prospectus, fund contract, articles of association, investment regulations and all other required documents according to foreign law, which documents are in accordance with the documents pursuant to art. 15 para. 1 CISA
16 – SWISS FINANCIAL SERVICES NEWSLETTER – August 2013
Representation agreements The agreement’s main contents are now explicitly stated in art. 128 para. 3 CISO and apply to representatives of foreign collective investment schemes for non-qualified investors as well as for representatives ”light”. According to this provision, the representation agreement must address the following: • the rights and obligations of the foreign collective investment scheme and of the representative, in particular in regard to the notification, publication and information obligations as well as a code of conduct; • how the collective investment scheme is distributed in Switzerland; and • the foreign collective investment scheme's accountability towards the representative, in particular with respect to changes to the prospectus, and the foreign collective investment scheme's organization. The representation agreement must in particular regulate the representative’s information obligations as per art. 20 para. 1 lit. c CISA. The agreement should take into account the different productrelated notification and publication requirements. It is now required that representatives must conclude a representation agreement with the foreign fund management company or the foreign collective investment scheme, respectively, with regard to the distribution of foreign collective investment schemes to qualified investors. Consequently, representatives will not be able to forgo concluding new representation agreements or adjusting already existing ones. Distribution agreement
Both the representation and the distribution agreement must enable CISA licensees and their representatives to comply with the information obligations pursuant to art. 20 para. 1 lit. c CISA. In addition, the distribution agreement must oblige the distributor to take minutes when selling collective investment schemes. The „SFA guidelines for the Distribution of Collective Investment Schemes” must be declared an integral part of the distribution agreement.
«Representatives must now conclude new representation and distribution agreements.» Distribution agreement for the distribution of foreign collective investment schemes to qualified investors If domestic or foreign financial intermediaries in Switzerland or from abroad into Switzerland wish to distribute collective investment schemes to qualified investors, their representative must conclude a distribution agreement with the domestic or foreign financial intermediary (art. 19 para. 1bis CISA, art. 30a and art. 131a CISO). Website The offers and the advertising for collective investment schemes reserved exclusively for banks, securities dealers, fund management companies and insurance companies may not be visible to either non-qualified investors or to other qualified investors (art. 3 para. 4 CISO). The consultation draft of the FINMA circular „Distribution of Collective Investment Schemes” defines the requirements of the disclaimer and/or access restrictions. No explicit transitional period is foreseen regarding art. 3 para. 4 CISO. Therefore, it is advisable to immediately start reviewing one’s website.
General Aspects The existing distribution and placement agreements must be adjusted as a result of the CISA revision. Especially important are the amended definitions of ”distribution” and ”qualified investor”. For assessing and adjusting the distribution contracts the following questions are key: 1. Does the distribution fall under CISA? 2. Is the collective investment scheme domiciled in Switzerland or abroad? 3. Is the collective investment scheme being distributed to qualified investors? 4. Is the collective investment scheme being distributed to non-qualified investors? 5. Does the distribution happen in/to/from Switzerland?
Resentatives of foreign collective investment schemes – Need for action
CONCLUSION The revised CISA contains new challenges for representatives. It is important to start planning and implementing the measures necessary for complying with the new statutory provisions now in order to be ready within the designated transitional periods. Representatives will have to deal with a very long ToDo list. Call to action for the institution • For representatives ”light” having been active prior 1 March 2013, there is a notification obligation by 31 August 2013 and a transitional period until 28 February 2015 (art. 158d para. 1 and 2 CISA). There is a transitional period for applying for a license and complying with statutory provisions. This means that representatives «light» must apply for their license by 28 February 2015 and adjust their articles of association, organizational rules, internal directives as well as their representation and distribution agreements by 28 February 2015. • For representatives such as banks, securities dealers, insurance companies and asset managers of collective investment schemes having been active prior 1 March 2013, there is a transitional period until 28 February 2014 (art. 144c para. 1 CISO). This means that representatives such as banks, securities dealers, insurance companies and asset managers of collective investment schemes must apply for a license by 28 February 2014 and adjust their articles of association, organizational rules, internal directives as well as their representation and distribution agreements by 28 February 2014. • Representatives that already have a license as a representative or remain exempt from the licensing requirement (fund management companies) must adjust their operational organization (risk management, internal control system and compliance) until 28 February 2014 to reflect the new regulations (art. 144c para. 3 CISO). This also means that the articles of association, the organizational rules and internal directives must be adapted to the new provisions until 28 February 2014. For concluding new agreements for the distribution to qualified investors there is a transitional period until 28 February 2015 (art.144c para. 5, art. 30a, art. 131a CISO). There are no transitional periods for distribution and representation agreements for the distribution to non-qualified investors, which means that these contracts must be adapted immediately. • All representatives which became active for foreign collective investment schemes after 1 March 2013 must comply with statutory provisions immediately. Call to action for products • For adjusting the relevant documents for foreign collective investment schemes that have already been admitted for distribution to retail investors in Switzerland before 1 March 2013, there is a transitional period until 28 February 2014 (art. 158d para. 5 CISA). • The relevant documents of foreign collective investment schemes that are distributed to quali-fied investors must also be adjusted by 28 February 2015 (art. 158d para. 4 CISA). • All representatives would be well advised to review their websites immediately.
Silvan Meyer Senior Manager Legal Financial Services +41 58 249 53 79 email@example.com
18 – SWISS FINANCIAL SERVICES NEWSLETTER – August 2013
Equivalence The magic word for EU-compliant regulations in Switzerland âˆ’ as shown by EMIR By Renate Schwob, Head of Swiss Financial Market at SBA
The European Market Infrastructure Regulation (EMIR) is another attempt at improving the transparency of the financial markets, reducing systemic risks and preventing market abuse in the wake of the financial crisis. This regulation has caused far less of a stir in these parts than MiFID II, the new version of the Markets in Financial Instruments Directive that directly aims at restricting access to the EU market for non-EU market participants. That EMIR has been overshadowed by MiFID II may also have something to do with the fact that it addresses a limited business area covered by specialists: OTC trading in derivatives. MiFID II (as did MiFID I), however, addresses the entire industry of asset management and investment advisory services, thereby directly and extensively influencing relationships between financial institutions and their clients. As to the impact on Switzerland, the key issue remains the same for EMIR, MiFID and other EU regulations: can Switzerland offer supervision and regulation of a business segment and its respective market participants that is equivalent, so that Swiss market participants may also access the EU market and not have to face any competitive disadvantages? Or, in other words: how will Switzerland pass the equivalency test foreseen in all EU regulations for non-EU market participants?
Equivalence – the magic word for EU-compliant regulations in Switzerland − as shown by EMIR
«EMIR’s reason for being is the regulation of over-the-counter (OTC) derivatives transactions.» Background EMIR’s reason for being is the regulation of over-the-counter (OTC) derivatives transactions. On 26 September 2009, the G20 Heads of State in Pittsburgh agreed that all standardized OTC derivatives contracts must be cleared through a central counterparty (CCP) and be reported to a trade repository (TR) no later than the end of 2012. They reaffirmed their decision in June 2010. The United States implemented these regulations with the Dodd Frank Act, the EU with the EMI Regulation. The European answer to the requirements decided on in Pittsburgh came into force on 16 August 2012. The European Securities and Markets Authority (ESMA) was made to issue Regulatory and Implementing Technical Standards for a total of 21 articles, which then needed to be adopted by the EU Commission. In the meantime, this process has practically come to a close. Main focus In a nutshell, standardized OTC-traded derivatives must be cleared through a central counterparty and transactions must be reported to a trade repository where they can be viewed supervisory authorities. These EMIR obligations apply to both financial and non-financial counterparties. The former category comprises investment firms, credit institutions, insurance companies, investment funds and their management companies, as well as hedge funds and their managers. The relevant definitions can be found in the corresponding EU regulations. The latter category includes all other companies acting as market participants in OTC derivatives market. Intra-group trades are exempt from the clearing obligation. In regard to non-financial counterparties, EMIR defines an intragroup trade as an OTC derivative contract entered into with a non-financial counterparty which is part of the same group. In order to qualify for the exemption however, the counterparties involved must be fully consolidated and they must be subject to appropriate centralized risk assessment, measurement and control procedures and that the respective counterparty is established in a EU member state or a non-EU jurisdiction with a regulation and supervision deemed to be equivalent to that of the EU commission in the given context. The definition of intra-group trades in the case of financial counterparties is basically identical. Again, the condition is the full consolidation of the counterparties and the existence of centralized risk assessment, measurement and control procedures and, if the counterparty is domiciled in a non-EU country, an equivalence decision by the EU commission. Moreover, the counterparty must also be a financial counterparty, a financial holding company, a financial institution or a provider of ancillary services as defined in EMIR. EMIR stipulates that for non-financial counterparties clearing obligations only arise if positions in OTC derivatives contracts exceed the threshold as set out for each derivatives category in ESMA's technical regulatory standards.
20 – SWISS FINANCIAL SERVICES NEWSLETTER – August 2013
Thus, despite the introduction of a clearing obligation for certain standardized derivatives contracts, there will still be derivatives contracts that do not have to be cleared. However, for such contracts EMIR imposes on both financial and non-financial counterparties the duty to measure, observe and mitigate operational and default risks using risk reduction techniques. Both centrally cleared and not centrally cleared OTC derivatives contracts must be reported to a trade repository (TR). ESMA has already developed the data records that must be sent to the TR. The requirement that the counterparties must identify themselves by a so-called Legal Entity Identifier (LEI) gave rise to some discussions. The LEI is supposed to facilitate assessing the counterparty risk not only in regard to individual exposures but also allows identifying the counterparty’s group affiliation, thus disclosing an entire group’s exposure. The debate focused on data protection aspects as certain countries are unmistakably eager to make use of the LEI beyond the OTC derivatives business, for instance in securities transactions and soon maybe also in payment operations, which would ultimately enable them to create transaction profiles for individual companies and groups.
«In a nutshell, standardized OTC-traded derivatives must be cleared through a central counterparty and transactions must be reported to a trade repository where they can be viewed supervisory authorities.» Further, EMIR stipulates the conditions for the authorization and supervision of CCPs and TRs, and regulates the corresponding procedures. It also regulates the recognition of a CCP domiciled in a non-EU country. In this regard, ESMA will play a leading role as it will decide whether a CCP located or licensed in a non-EU country or may also be recognized in the EU. This decision in turn is based on the European Commission's equivalence decision as well as a cooperation agreement between the ESMA and the competent authority in the non-EU country. Similar provisions are foreseen for TRs located in non-EU countries. The European Commission is also expected to assess whether the regulation and supervision in the non-EU country is of equivalence; if it comes to a positive conclusion, it recommends that the Council negotiate an international agreement with that relevant non-EU state, thus granting access to the data in their TRs. ESMA has also specified the technical regulatory standards on which information must be transmitted to a TR and how it must be archived there in a retrievable manner.
Impact on Swiss market participants The Swiss market should be regulated in such a way that Swiss market participants are on an as equal footing as possible to their counterparties in the EU and that also Swiss CCPs and one day even TRs wishing to offer their services within the EU can be granted access to the EU market without further issues.
«The Swiss market should be regulated in such a way that Swiss market participants are on an as equal footing as possible to their counterparties in the EU and that also Swiss CCPs and one day even TRs wishing to offer their services within the EU can be granted access to the EU market without further issues.» A first step towards facilitating the latter issue was made by amending the Ordinance on the Federal Act on the Swiss National Bank (NBA); however, it only addresses the future services of Swiss CCPs in the EU while, strangely enough, TRs are not even mentioned in the draft. However, Switzerland should also keep in mind the possibility to offer such services through own structures in the future. It is therefore to be hoped that the draft will be amended based on the results of the consultation procedure. For Swiss market participants engaging in OTC derivatives transactions, the most important aspects will be that they are exempt from having to use a clearing house for groupinternal transactions and for non-financial companies, that they will not have to use a clearing house if they do not reach the threshold thus being able to benefit from the exemption from the clearing obligation.
Due to the revised ordinance on the NBA, ESMA›s equivalence recommendation for Swiss CCPs could be already available in July 2013. However, Switzerland does not dispose of an applicable law in regard to the previously described exceptions to the clearing obligation for market participants. Whether a transitional agreement can be negotiated depends to no small degree on how much the Swiss market is affected by the exclusion from the exemptions to the clearing obligation. If this exclusion is not done away with, the OTC derivatives industry in Switzerland will suffer the same fate as other industries before it: cross-border transactions will no longer originate in Switzerland and the Swiss financial center will once again find itself on the losing side.
Renate Schwob Renate Schwob studied law at the University of Basel, Switzerland, and subsequently passed the bar exam and became a Notary Public licensed in the Canton of Solothurn. She went on to do her Doctorate in Law at the University of Basel, which she finished in 1980. After years of working in the public administration, she moved into the private sector and has been working in the banking sector for the last fifteen years. Between 1999 and March 2004 she was Head of the Legal & Compliance department of the Trading & Sales and Investment Management divisions at Credit Suisse. Renate Schwob has been the Head of Swiss Financial Markets and a member of Management at the Swiss Bankers Association since April 2004.
Dr. iur. Renate Schwob attorney-at-law, Head of Swiss Financial Market at SBA +41 61 295 93 93 firstname.lastname@example.org
Switzerland's response: a Financial Market Infrastructure Act, FMIA Recognizing, albeit a little late, that Switzerland as a financial center needs a regulation equivalent to EMIR and its technical regulatory standards, the Swiss Federal Council instructed the Federal Department of Finance (FDF) to prepare a consultation draft of such a law. The FDF presented the basic parameters of this draft at a hearing on 13 May 2013. It then became clear that it is not only a matter of regulating the so-called post-trading in regard to OTC derivatives transactions. Rather, existing regulations for trading platforms in the form of the Stock Exchange Act (SESTA) and for post-trading infrastructure in the form of the Banking Act, SESTA and NBA should be revised and merged into the new FMIA. Therefore, new rules on OTC derivatives trading would only form a small part of the new legislation. The FDF's schedule is ambitious as it plans to start the consultation procedure already in October 2013 and to submit the Swiss Federal Council’s message and act’s draft to the Parliament in February or March 2014.
FSA The New Financial Services Act By Dr. Armin Kühne
On 18 February 2013, the Swiss Federal Department of Finance (FDF) published a hearing report on the planned Financial Services Act (FSA), which contains proposals on how to close the loopholes in the current financial market legislation. By 28 March 2013, the FDF had received about 50 written opinions on these proposals which are presently being analyzed. Currently, the FSA draft for consultation has been set for October 2013. It is not expected that the FSA will enter into force before 2016. The FSA's objective is to improve the protection of clients which participate in the Swiss financial markets, to improve the competitiveness of Switzerland as a financial center and to level the playing field, eliminating competitive distortions between service providers. Uniform standards should be introduced for the distribution of financial products and for the provision of financial services, regardless of the institution's supervision status (i.e. whether it is a bank, securities dealer, insurance company, asset manager or fund management company). Swiss standards should primarily reflect the global IOSCO standards as well as the European Markets in Financial Instruments Directive (MiFID II).
22 – SWISS FINANCIAL SERVICES NEWSLETTER – August 2013
Overview of planned regulations In essence, the new FSA is to issue new provisions for the following1: • Codes of conduct for all financial service providers of all sectors • Minimum requirements regarding the training of client advisors • Documentation of products and prospectus requirements for financial products • Enforceability of claims • Cross-border transactions of foreign financial service providers into Switzerland • Consequences for asset managers In line with MiFID’s client segmentation, the individual provisions should take into account the different client segments, with a special focus on the differentiation between professional and retail clients.
«The codes of conduct and organizational measures mentioned in the hearing report basically seem to be fairly adequate but it should be kept in mind that the new rules will have to reflect international developments and should be compatible with EU legislation.» Codes of conduct for all financial service providers of all sectors Regardless of their FINMA supervision status, all financial service providers should follow the same minimum requirements for the conduct towards clients at their points of sale. All activities that could lead to a client's acquisition of financial products are to be considered as a financial service. The new rules should provide the client with the best possible transparency on the palette of services on offer, the transactions entered into and the relevant financial products. Moreover, the financial service provider’s duties of loyalty and due diligence prior to providing a service should be specified. Moreover, depending on the client segment being dealt with, different levels of duties of disclosure would apply, so that the client disposes of sufficient information to make an informed decision in regard to the financial service provider and the financial services and products on offer. These rules would apply especially to investment advisory services, the management of client assets as well as the acceptance and execution of orders regarding the sale and purchase of financial products. According to the hearing report, the new rules would have „effect based purely on private law” for non-regulated market participants.
From a material point of view, the financial service provider would have to perform an appropriateness test (i.e. to determine the client’s know how and experience), if providing investment advisory services and asset management also a suitability test (i.e. to determine the client’s risk appetite and risk capacity, taking into consideration the client portfolio’s risk diversification). When doing so, the institution would have to differentiate between retail and professional clients. If the client contacts the financial service provider himself/ herself and asks to have a certain transaction executed, the provider is entitled to carry out such an ”execution-only” transaction without having performed the appropriateness test or the suitability test beforehand. Financial service providers should document the agreements that they have concluded with their clients in regard to providing financial services. The client advisors are to record the client›s needs and the reasons for having recommended a particular product during consultations. Moreover, client orders and transactions executed on behalf of the client should be documented, as is the case for the results of the appropriateness test and the suitability test. The institution must render due account for the services provided and the related costs. From an organizational point of view, the FSA is to specifically focus on measures implemented to avoid conflicting interests and to promote transparency (e.g. possible payments from third parties) and on ensuring the necessary due diligence when handling client orders (e.g. best execution). The codes of conduct and organizational measures mentioned in the hearing report basically seem to be fairly adequate but it should be kept in mind that the new rules will have to reflect international developments and should be compatible with EU legislation. However, it is questionable whether a level playing field indeed exists if a non-regulated market participant will not be subject to a review of whether relevant rules have been adhered to properly. The enforceability based on private law rather than regulatory provisions does not have the same effect by far. In my opinion, a license for financial service providers under FSA should be considered, which would, for instance, also prescribe the licensing and compliance audit of the FSA provisions for investment advisors. Minimum requirements regarding the training of client advisors All natural persons who are in contact with clients and who offer or provide financial services are considered to be client advisors. This categorization includes investment advisors, insurance brokers and distributors. In order to ensure correct implementation of the code of conduct and adequate client consultation, the hearing report apparently requires client advisors to have to provide proof of sufficient understanding and knowledge of the code of conduct and expertise. Client advisors should only be allowed to execute their profession if
Hearing report of the FDF on the Financial Services Act (FSA), general direction of possible regulations, dated 18 February 2013, p. 3
FSA – The new Financial Services Act
they have been registered in a public register. Moreover, client advisors are obliged to complete sufficient training in regard to the code of conduct and the relevant expertise and must pass a mandatory test. They should also regularly attend mandatory refresher courses. Due to the obligation to register as client advisor and the introduction of the new code of conduct through the enactment of FSA, the hearing report proposes to remove the existing licensing requirement for distributors of collective investment schemes, as well as the duty to register for insurance brokers.
According to the hearing report, both the prospectus and the KID should be reviewed by the FINMA or a similar authority in order to check whether prospectus rules have been complied with. However, this should not be seen as an approval of the product described therein. This review of the prospectus was severely criticized by some during the hearing, in part due to the large number of prospectuses for which the costs would detrimentally affect competitiveness but also due to the prolonged time to market, which would negatively affect a product launch.
The creation of a public register for client advisors was in part heavily criticized during the hearing. Indeed, it is questionable whether it would not be preferable to implement an effective supervision of institutions, which corresponds better to the Swiss system of supervision. In my opinion, however, for consistency's sake, all financial service providers that provide financial services as per FSA (e.g. investment advisors) should also be subject to a license for financial service providers under FSA, provided they do not already have another license with higher requirements, i.e. under CISA, BA or SESTA. In my opinion, the license prerequisites for such a financial service license should depend on the level required in terms of assurance of proper business conduct, the code of conduct as well as expertise required of the client advisor. Requirements in regard to an adequate organization should be kept to a minimum so that also very small financial service providers could be in a position to fulfill the license requirements, such as for instance in terms of ICS, risk management and compliance. Should a financial service provider supply financial services under FSA and already dispose of a license which is subject to higher requirements (e.g. because it is licensed as a bank, securities dealer, fund management company, asset manager for collective investment schemes) it should also have to comply with the FSA but not need any further license as a financial service provider.
A product control must be prevented at all costs. As mentioned earlier, I am of the opinion that the focus of the supervision should be on the institution. For this reason, a quick control on whether the product documentation is complete is conceivable but it should not go as far as to assess its content. However, it remains questionable whether this would indeed improve investor protection.
Documentation of products and prospectus requirements for financial products All securities distributed in or from Switzerland to retail clients should be obliged to have a prospectus. Offers which are for professional clients only would be exempted from the duty to have a prospectus. Prospectuses are standardized and must contain information on the product, the issuer and other parties under obligation, such as guarantors, and inform the buyer of costs and risks related to the product. Special issuers (e.g. small or medium-sized enterprises or small caps) and certain products (e.g. subscription rights issues) should be subject to simplified requirements in regard to the prospectus (simplified prospectus). For complex financial products (e.g. structured products, collective investment schemes or insurance products with an investment component), retail clients should be offered a free standardized Key Investor Document (KID) prior to closing the deal. The KID should inform the client of all significant product characteristics, risks and costs and enable the comparability of different financial products.
24 – SWISS FINANCIAL SERVICES NEWSLETTER – August 2013
Enforceability of claims Civil proceedings are expected to be facilitated so that clients have a better chance at having their claims towards regulated and non-regulated financial intermediaries enforced under private law in case these breach the FSA. One of the main aspects of these facilitations will be the reversal of burden of proof in regard to the financial service provider’s adherence to the code of conduct. Any party subject to the code of conduct as per FSA should bear the burden of proof in civil proceedings that it has indeed complied with the provisions in regard to a particular client. It is also being discussed whether the financial service provider should take on the cost of litigation for civil proceedings and whether strengthening the ombudsmanship is a good option. In practice, with the current legal framework, it is indeed quite difficult to prove that a financial service provider has inflicted damages on investors or acted negligently. However, the expected introduction of new duties in regard to providing information and documenting actions, and therefore the improved transparency, will ameliorate the protection of investors substantially and will also make it easier for an investor to enforce his or her claims against a financial service provider. Therefore, it is probably not necessary to simplify civil proceedings against financial service providers. Cross-border transactions of foreign financial service providers into Switzerland Investors should enjoy equal protection when dealing with foreign financial service providers providing services in Switzerland as if they were dealing with Swiss providers. Crossborder financial services are financial services offered in Switzerland by a company domiciled abroad. Foreign service providers which offer services that are subject to licensing requirements in Switzerland should register in Switzerland or open a branch office here. Such a registration would enable the control of which foreign financial service providers are
active in the Swiss market. Prerequisites for registration would include the following in particular: • authorization and equal supervision in the country of origin • cooperation agreement between FINMA and the supervisory authority of the country of origin • professional indemnity insurance or deposit financial means which could be used to satisfy client claims • duty of disclosure to FINMA That foreign financial service providers have to respect codes of conduct that are equivalent to those of Swiss providers is probably largely uncontested. The moves to implement a mandatory registration or the mandatory opening of a branch office in Switzerland should depend on what the future EU legislation looks like. Consequences for asset managers Both nationally and internationally, attempts are being made to restrict asset management activities to licensed companies subject to supervision. Asset management companies’ clients and contractual partners also increasingly prefer to only work with licensed institutions. In Europe, asset management companies are generally under prudential supervision. A relevant Swiss law therefore is imperative so that Swiss asset management companies also have access to the European market.
«Therefore, it is probably not necessary to simplify civil proceedings against financial service providers.» The foreseen FSA expects all asset managers to be subject to the new FSA code of conduct. In view of the weaknesses of the current Swiss regulatory system in regard to the independent asset managers and in consideration of international developments and to facilitate cross-border market access, it is advisable and in the interest of the Swiss asset management industry to subject all asset managers to prudential supervision. The authorization would have to also fulfill the requirements to manage assets for pension funds and therefore meet the requirements of art. 48f of the Ordinance on Occupational Benefits 2 (OOB 2) (to enter into force on 1 January 2014). In my opinion, it would make the most sense that the FINMA provides this supervision. Most likely it would not be internationally accepted if this duty were to be delegated to a self-regulating organization; furthermore this would also increase the danger of conflicts of interest.
«Adjusting Swiss rules to international standards, specifically to MiFID II, closes certain loopholes and will facilitate market entry to the EU for Swiss financial institutions.» CONCLUSION By having a standardized regulation of financial services and the distribution of financial products, it is easier to harmonize the various regulatory requirements with each other (e.g. for the distribution of funds in comparison to structured products). This should level the playing field for all market participants. Adjusting Swiss rules to international standards, specifically to MiFID II, closes certain loopholes and will facilitate market entry to the EU for Swiss financial institutions. In this regard it should be noted that investors, which are considered to be consumers, based on the Lugano Agreement already now can sue their Swiss asset manager at a court located abroad. Factually, Swiss financial institutions active in the EU should adhere to EU standards already today. It is therefore to be hoped that Swiss legislators adjust Swiss laws to reflect the international developments and that they avoid an unnecessary “Swiss Finish”. However, this calls for future EU rules to be definitive and sufficiently concrete. However, certain Swiss financial service providers (specifically asset managers) cannot afford to wait for the new FSA to enter into force. Numerous European requirements (e.g. AIFMD, MiFID II) and Swiss regulations (e.g. revision of the Law on Occupational Benefits, LOB) will become valid beforehand. Despite the fact that the legislative procedures for the coming FSA is far from over, Swiss financial institutions should already now analyze the possible impacts of this new law and, if necessary, readjust their business models to the expected developments of the legal frameworks.
Dr. Armin Kühne Partner Legal Financial Services +41 58 249 28 37 email@example.com
The supervisory authority becomes aware of real estate funds Reduction of the maximum lending limit from 50% to one-third of the market value By Ulrich Prien and Alfonso Tedeschi
The finalized revision of the Collective Investment Schemes Act (CISA) became effective upon being passed into law by Parliament on 28 September 2012. For real estate funds, this meant lowering the maximum lending limit from 50% to a third of the market value, which, however, is complemented with an exception clause in case of a liquidity shortage. The Swiss Financial Market Supervisory Authority's (FINMA) reduced responsibility in regard to checking the fund agreements is a sign of optimism and implies an acceleration of the sometimes lengthy approval procedures. Domestic real estate funds have been around for about 75 years and therefore are the oldest types of investment funds in Switzerland. Swissimmobil Serie D was already launched in 1938, to be followed by Foncipars just five years later. In 2001, Swissimmobil Serie D and SIAT 63 were absorbed by Credit Suisse Real Estate SIAT. UBS Foncipars still exists as a separate investment vehicle and manages real estate funds to the tune of nearly CHF 900m, focusing mainly on Western Switzerland (the French-speaking region). Despite their long history, Swiss real estate funds remained wallflowers until the end of the Nineties. This has changed radically. In view of volatile stock markets and the low interest generated by bonds in the years immediately following the financial crisis, direct and indirect real estate investment schemes have gained in popularity. The low correlation with other investment categories makes real estate funds an important component in a diversified portfolio. Compared to direct investments in real estate, the funds are much more liquid and more diversified. Another advantage is the steady stream of income due to ongoing rent income. At CHF 30bn, investments in Swiss real estate funds is relatively small in comparison to the total of CHF 2,500bn invested in Swiss real estate, despite continuous growth.
26 â€“ SWISS FINANCIAL SERVICES NEWSLETTER â€“ August 2013
The supervisory authority becomes aware of real estate funds – Reduction of the maximum lending limit from 50% to one-third of the market value
The 20 largest real estate funds according to market capitalization and their debt ratio
Market capitalization in CHFm (left-hand scale) Debt ratio (right-hand scale)
Swissinvest RE Inv
CS REF GreenProperty
UBS Leman Foncipars
FIR Fonds Immobilier Romand
CS REF Hospitality
Swisscanto RE Ifca
UBS Swiss Swissreal
CS REF PropertyPlus
CS REF Interswiss
UBS Swiss Res Anfos
0% CS REF Siat
0 CS 1a Immo PK
CS REF LivingPlus
UBS Swiss Mix Sima
Market capitalization in CHFm
Average debt ratio (right-hand scale)
Source: Swiss Finance and Property and KPMG Real Estate, June 2013
Changed lending limits for real estate funds The growth in real estate funds together with the currently identified bubble tendencies in some market segments as well as the liquidation of numerous real estate funds in Germany has sensitized the regulators to the developments in domestic real estate fund industry. This is why the Collective Investment Schemes Ordinance (CISO) enacted in March 2013 stipulates that the lending limit of individual properties of a real estate fund may not exceed a third of the relevant market value. Due to the intervention of industry representatives, an exception clause was added. Exceptionally and temporarily, the maximum loan-to-value ratio may amount to 50% to preserve liquidity, provided the fund's regulations foresee this and investors’ interests are not unduly affected. Moreover, the audit firm must provide an opinion on whether the conditions have been fulfilled. As made clear in the graph above, none of the funds even remotely exhausts the set limit for the maximum loan-tovalue ratio. The average external financing ratio is about 17%
28 – SWISS FINANCIAL SERVICES NEWSLETTER – August 2013
and underscores that real estate funds, despite attractive financing spreads, do not tend to be highly leveraged. Rather, the higher potential loan-to-value ratio serves as a security buffer. In case of an increase in redemption of fund units, investors’ claims could be serviced relatively easily with borrowed capital. The option of being able to borrow money therefore protects real estate funds and thus their investors from being forced to sell individual properties in the fund's portfolio. Without the introduction of the exception clause, the loan-tovalue ratio of a third for each property would have meant that the fund could no longer have taken up any loans as in practice, real estate funds only leverage properties which due to their streams of income allow an advantageous financing. In a crisis, therefore, the original draft of the law would not have helped prevent liquidity shortages but rather accentuated these. It is a good thing that the Swiss Federal Department of Finance heeded the reservations the industry representatives had and that they integrated a passage which takes into account the reality in the real estate fund market.
High hurdles for new fund products As of lately, the FINMA has been rather restrictive in approving the setup of real estate funds as per Swiss law. At first sight, it may seem sensible to be this cautious in approving new real estate funds in view of the tendency to a bubble in certain market segments. However, seen from an economic perspective it should be acknowledged that (real estate) risks cannot be eliminated completely but can only be spread and better diversified. Diversifying risk is also an important function in a real estate fund. Limiting the investment vehicles is therefore rather disadvantageous for the general risk mitigation. Moreover, lengthy approval procedures in Switzerland cause the market to escape to other set-ups, for instance those of Luxembourg, which weakens Switzerland as a financial center. Market participants usually select the domicile which actively supports fund products.
ÂŤAccelerating the approval procedure could help to turn Switzerland into an important fund hub and encourage market participants to choose Swiss fund structures rather than foreign ones.Âť
CONCLUSION The Collective Investment Schemes Act which entered into force in March 2013 reduces the maximum lending limit for real estate funds from 50% to one-third of the market value. However, due to the built-in exception clause, local real estate funds will not have to severely curtail their business. The integration of this exception clause is most welcome, as a reduction of the lending limit without it would seriously affect fundsâ€ş current security buffers, thereby increasing their susceptibility to potential liquidity constraints. At the same time, the partial revision of the Collective Investment Schemes Act also includes new regulations that hint at an accelerated approval process for funds, which could boost Switzerland as a fund domicile.
Ulrich Prien Partner Real Estate +41 58 249 62 72 firstname.lastname@example.org Alfonso Tedeschi Senior Consultant Real Estate +41 58 249 28 83 email@example.com
Partial revision sparks optimism for approval process In the course of the partial revision of the Collective Investment Schemes Act (CISA) new rules for the approval of collective investment schemes entered into force. Up to now, the FINMA was obliged by law to check and approve the fund agreement in depth. The revised CISO however only foresees the checking of certain core elements of the fund agreement (focusing on investor protection). The other areas are in the responsibility of the market participants. Moreover, the FINMA has indicated that it intends to systematize and standardize the application process. Such measures cause much optimism in regard to future approval procedures. Accelerating the approval procedure could help to turn Switzerland into an important fund hub and encourage market participants to choose Swiss fund structures rather than foreign ones.
Pinboard KPMG regularly offers updates on topics and trends that regard the financial services sector. Find more information at kpmg.ch/financialservices Evolving Investment Management Regulation Light at the end of the tunnel? June 2013 The third issue of Evolving Investment Management Regulation brings together the key regulatory issues affecting asset managers and investors in the Americas, AsiaPacific, Europe and the Middle East, highlighting implications for now and the future. Alternative Investment Fund Managers Directive Re-shaping for the Future, May 2013 In the publication “Alternative Investment Fund Mangers Directive – Re-shaping for the Future” we provide an overview of the AIFMD (Level 1 and Level 2) legal and regulatory framework that will govern the alternative investment fund industry in the EU from July 2013 and re-shape the operations of managers and the alternative funds they manage. Evolving Distribution Models in Asset Management May 2013 In this report, the second in our Agile Asset Manager series, we focus on Evolving Distribution Models. In particular, we look at the forces that are leading to a reshaping of distribution functions and how different elements of the model are changing.
Frontiers in Finance Growth in difficult times: Breaking new ground in Asia, April 2013 It is difficult to form a clear judgment at the moment about the state of economic performance and its impact on the financial services industry. Every month, statistics are scanned for signs of consistent trends; but the picture remains confused. The April 2013 issue of Frontiers reflects a number of aspects of this search for growth in difficult times. Frontiers in Tax People thinking beyond borders in financial services, April 2013 This edition of frontiers in tax is devoted to developments in the Asia Pacific region - relatively unscathed by the crisis and continuing to offer evidence of dynamism and growth, but not without challenges.
E-NEWSLETTER Fund News Monthly newsletter with brief overviews of developments in regulatory and fiscal matters, as well as current information on investment funds. Compliance Matters Periodical newsletter with contributions on regulatory issues that affect the local and global financial sector. KPMGnews Biweekly newsletter with current articles on developments and trends in various industries and markets as well as interviews with technical experts and our media releases. Subscribe now to this free newsletter under: kpmgnews.ch
Swiss Finance App
This new iPad app provides an overview of the regulations and topics affecting the Swiss financial services industry. It is intended for organizations which conduct business with Swiss financial institutions as well as institutions which seek to establish or expand operations within or from Switzerland. Download: kpmg.ch/swissfinanceapp KPMG Knowledge iPad App Access KPMG Switzerland›s latest studies, newsletters, and blog entries. Wherever and whenever you want. Free download: kpmg.ch/knowledge
30 – SWISS FINANCIAL SERVICES NEWSLETTER – August 2013
IFRS Update for Financial Services 24 October 2013, 17 – 20h, Auditorium, KPMG Zurich CISA Event, Autumn-Update 31 October 2013, 16.30 – 20h, Hotel Baur au Lac, Zurich
Follow us on
Contacts Philipp Rickert Partner, Member of the Executive Board Audit Financial Services +41 58 249 42 13 firstname.lastname@example.org
Pascal Sprenger Director Head of Legal Financial Services +41 58 249 42 23 email@example.com
Markus Schunk Partner Audit Financial Services +41 58 249 36 82 firstname.lastname@example.org
Silvan Meyer Senior Manager Legal Financial Services +41 58 249 53 79 email@example.com
Astrid Keller Partner Audit Financial Services +41 58 249 28 82 firstname.lastname@example.org
Heinz Weidmann Senior Manager Audit Financial Services +41 58 249 35 21 email@example.com
Michael Schneebeli Partner Audit Financial Services +41 58 249 41 06 firstname.lastname@example.org
Alfonso Tedeschi Senior Consultant Real Estate +41 58 249 28 83 email@example.com
Ulrich Prien Partner Real Estate +41 58 249 62 72 firstname.lastname@example.org
Published by – KPMG AG Editor – KPMG AG, Badenerstrasse 172, Postfach, CH-8026 Zurich Telefon +41 58 249 20 01, Fax +41 58 249 44 06, Email: email@example.com Editorial team – Markus Schunk, Partner, Financial Services, Bettina Neresheimer, Marketing Manager Financial Services Design – Elena Strano, Florence Print – Heer Druck, Sulgen Articles may only be republished by written permission of the editorial team and quoting the source: KPMGs Swiss Financial Services Newsletter. Swiss Financial Services Newsletter is published two times a year in German and English. If you have any feedback on this issue or would like to order further copies, please e-mail us at firstname.lastname@example.org.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2013 KPMG Holding AG/SA, a Swiss corporation, is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Published on Aug 13, 2013
Published on Aug 13, 2013
The latest edition of the Swiss Financial Services Newsletter focuses on the future of asset management in Switzerland, various new and revi...