Risks Involved in Trading Financial Instruments
On 6 November 2019, the Federal Council decided to bring into force on 1 January 2020 the new Swiss Financial Services Act (“FinSA”) and the Financial Institutions Act (FinIA) with the associated implementing ordinances FINSO (Financial Services Ordinance), FinIO (Financial Institutions Ordinance) and the Supervisory Organisations Ordinance (SOO). Whereas previously it was possible to practice without a licence, the practice of asset management is now subject to FINMA au-thorisation. This requires a robust and elaborated FinSA/FinIA-compliant organisation and infrastructure for financial intermediaries offering such services.
FinSA obliges financial institutions to introduce extended rules of conduct and to provide their clients with detailed infor-mation on the services and products offered. CORUM fully complies with the requirements of the legislator and provides its clients with the obligatory information in its documents.
The aim of FinSA is to increase transparency as well as the efficiency and integrity of the Swiss financial market in order to strengthen investor protection and to create comparable conditions for financial service providers. The core of client protection comprises of duties like “client classification”, the obligation to provide “product and cost information” on finan-cial services or financial instruments offered, and the standardised “appropriateness and suitability test”. The reasons behind these tasks are that clients should be better informed and that they are aware of the risks before using financial services.
Although the new laws are comprehensive, FinSA in particular contains simple elementary core principles in favour of the client. All clients are to be classified into different client groups based on their knowledge and experience with financial instruments or their financial situation; “Private Clients”, “Professional Clients” or “Institutional Clients”. Private Clients” profit from highest possible investor protection. They must be informed comprehensively about the risks, the product features and the expected or calculable costs. Financial intermediaries are also confronted with a far reaching duty of accountability, information and documentation. In addition, investor protection is guaranteed with the greatest possible transparency and so-called “best execution”.
“Professional/Institutional Clients”, on the other hand, enjoy less investor protection. In these cases, the law assumes that persons acting in one of these categories possess sufficient experience, knowledge and expertise to independently make investment decisions and to appropriately assess the associated risks. The group “Institutional Clients” is a subcategory of “Professional Clients”, which includes supervised legal entities or larger companies as well as other institutions such as municipalities, governments or central banks, etc. These institutions benefit from the lowest level of protec-tion.
Moreover, financial intermediaries may dispense with the obligation of “client classification” where exclusively “Private Clients” are served. In addition, “Professional Clients” may waive the application of the rules of conduct obligation alto-gether.
Customers may encounter the option to be categorised under a different customer group. This process is called “opting-in” or “opting-out”. As a result, the client is subject to a higher or lower level of client protection, which increases or decreases the scope of information and clarifications to be obtained.
The duty to inform clients includes various aspects of the contractual relationship. In particular the exact scope of activities of the financial intermediary as well as his supervisory status, the risks of the recommended financial service and its singular and ongoing costs. Existing economic ties to third parties in connection with financial services offered must also be disclosed and explained. Within the framework of the duty of clarification, the financial intermediary must conscientiously inquire in advance about the financial circumstances and investment objectives as well as the knowledge and experience of the client.
Based on the information obtained, a thorough suitability and appropriateness test must be carried out before the provision of any (advisory) service. In other words, it must be thoroughly clarified whether the respective financial service or product is appropriate or suitable for the client. It is therefore important to inquire about the knowledge and experience, as well as the financial circumstances and investment objectives (in particular time horizon, purpose and risk tolerance) of the client.
In the course of appropriateness test, it must be determined whether the client understands the offered financial product or the selected investment strategy and asset allocation, as well as the associated risks (risk understanding). Conversely, the independence check aims to determine whether the selected investment strategy and asset allocation or the individual product is at all suitable for the client, in view of his needs and financial circumstances (risk bearing capacity).
This investor protection is particularly significant, as it is the first time that it has been standardised at the legislative level and thus only suitable investments may be made for the client in connection with asset management.
In addition, the law now distinguishes between transaction related and portfolio related investment advice, whereby only an appropriateness test (understanding of risk) must be carried out for the former. The obligation to conduct a suitability test does not exist in principle here, and the verification of the client’s financial circumstances is obsolete in the case of transaction-related advice.
If the financial intermediary is nevertheless of the opinion that a financial instrument is not appropriate or suitable for the client, he must in principle advise the client against it before providing the service (Art. 14 para. 2 FinSA).
In the absence of indications to the contrary, no suitability test is necessary for “Professional Clients”; only a limited suitability test with regard to the investment objectives is to be applied. (Art. 13 para. 3 FinSA).
These two tests are in principle not applicable to execution-only transactions (Art. 13 para. 1 FinSA) or generally to “Institutional Clients”.
These obligations are imposed at the request of the client and may be conducted in standardised form, provided they meet the legal requirements. The financial service provider must give an account of the services provided within the shortest possible time.
In accordance with the principles of good faith and equal treatment in the execution of client orders, the financial inter-mediary must ensure that all client orders are executed in the best interests of the client and without delay. Consequently, the financial intermediary is urged to establish criteria for the selection of the best execution venue for a client order, which for example considers costs, speed or probability of execution and settlement (“best execution”).
Financial service providers are required to take appropriate organisational precautions to avoid conflicts of interest that may occur when providing financial services, or to prevent clients from being disadvantaged by conflicts of interest, or to disclose them.
For further information, please do not hesitate to contact our customer advisors.
October 2022
CORUM
