Something Old, Something New: The Supervision of Financial Institutions under the Federal Act on Financial Institutions – FinIA Cleared for Takeoff

On 1 January 2020, the Federal Act on Financial Institutions of 15 June 2018 (FinIA) will enter into force together with the Federal Act on Financial Services (FinSA). The FinIA revises the regulatory architecture for financial institutions. Instead of the current sectorial approach, the FinIA proposes to introduce a regulatory pyramid with a light regulatory framework for asset managers and trustees, and an increasingly more stringent regime for managers of collective assets, securities firms – the new denomination for securities dealers – and, at the top, banks, although they will be continue to be governed by the Federal Act on Banks and Saving Banks of 8 November 1934 (Banking Act, SR 952.0) and remain out of scope of the FinIA. Furthermore, the FinIA introduces several new regulatory regimes: it subjects portfolio managers and trustees to prudential supervision and extends the current regime applicable to asset managers of collective investment schemes to asset managers of pension funds. Moreover, it recasts the existing regime applicable to securities dealers under the Federal Act on Stock Exchanges and Securities Dealing of 24 March 1995 (SESTA, SR 954.0) into a slightly modified new regime for securities firms. This article updates the previous versions now that the Federal Council passed the Ordinance on Financial Services of 6 November 2019 (FinSO) and the Ordinance on Financial Institutions of 6 November 2019 (FinSO)

By Rashid Bahar (Reference: CapLaw-2019-57)

1) Financial Institutions: Definition and Scope

The FinIA governs the regulatory framework applicable to five types of financial institutions: (a) portfolio managers; (b) trustees; (c) managers of collective assets; (d) fund management companies; and (e) securities firms.

a) Portfolio Managers and Trustees

Portfolio managers are defined as whoever can, on a commercial basis dispose of the financial assets based on a mandate in the name and on behalf of clients (article 17 (1) FinIA). Trustees are defined as whoever can on a commercial basis manage or dispose of a separate fund based for the benefit of the beneficiary or a specific purpose on the basis of an instrument establishing a trust as defined in the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on Their Recognition (article 17 (2) FinIA). Portfolio managers and trustees will be deemed to act on a commercial basis if their activity generates a gross revenue of more than CHF 50,000; if they have at any given point more than 20 long-term contractual partners or if they have in a given calendar year more than 20 such relationships; or if they have the power to dispose over assets worth more than CHF 5 million (article 19 (1) FinIO).

b) Managers of collective assets

Managers of collective assets are defined as whoever manages on a commercial basis assets in the name and on behalf of collective investment schemes and occupational pension schemes (article 24 (1) FinIA). The FinIA provides for a de minimis exemption and provides that the licensing requirements as managers of collective assets apply only if the quantitative thresholds set in article 24 (2) FinIA are exceeded. Otherwise, only a license as portfolio manager will be required. As a matter of principle, the regime for managers of collective assets is based on the current regime for managers of collective investment schemes. However, its scope is broader since it will also cover asset managers who act in the name and on behalf of pension schemes. In this context, the FinIA exempts occupational pension schemes, including so-called employer sponsored funds, as well as employers, who manage the assets of their occupational pension schemes and employer and employee unions, who manage their assets (article 3 (2)(f) FinIA).

c) Fund Management Companies

Fund management companies will continue to be responsible for the management of investment funds in their own name, but for the account of investors (article 32 FinIA) and be subject to fundamentally the same regulatory framework as under the Federal Act on Collective Investment Schemes of 23 June 2006 (CISA, SR 951.31). As is currently the case, they will be allowed to custody and administer units of collective schemes and administer SICAVs (article 34 FinIA). Strictly speaking these activities constitute ancillary businesses that do not trigger the license requirement (and the right to obtain a license), although the latter activity is reserved to fund management companies (see article 51 (5) CISA as amended by the FinIA). Nevertheless, the FinIO assumes that FINMA will need to entertain requests for a license as a fund management company for persons only seeking to administer SICAVs (see article 49 (2) FinIO).

d) Securities Firms

The same issue arises with securities firms (the new terminology for securities dealers under the SESTA): the FinIA defines securities firms as whoever, on a commercial basis, trades securities in its own name but on behalf of clients (article 51 (a) FinIA), trades in securities for its own account on a short-term basis, operates primarily on the financial market and can endanger the proper functioning of the financial market or participates in a trading venue (article 51 (b) FinIA) or trades in securities for its own account on a short term basis and quotes a price for specific securities publicly on an ongoing basis or on request (article 51 (c) FinIA). In this context, the activities of underwriters and derivative houses, which triggered a licensing requirement under SESTA, strictly speaking do not create a right to apply for a license under the FinIA although they are reserved to banks and securities firms pursuant to article 12 FinIA.

e) Exemptions

In addition to the usual catalogue of exemptions for, among others, the Swiss National Bank, the Bank for International Settlements (article 2 (e) FinIA), occupational pension schemes (article 2 (f) FinIA), social security institutions (article 2 (g) FinIA, see also article 2 (i) FinIA), the FinIA exempts banks under the Bank Act and insurance companies under the Federal Act on the Oversight of Insurance Companies of 17 December 2004 (ISA, SR 961.01) from the scope of the act (article 2 (h) and (j) FinIA). Therefore, banks and insurance companies can, as a matter of principle, carry out all the activities contemplated by the FinIA without requiring a license under the FinIA, with the exception of fund management, which is reserved to fund management companies under the CISA. By contrast, the inventory of exemptions does not mention other insurance companies that are not subject to the ISA, such as cantonal building insurers, who are thus required to obtain a license under the FinIA if they intend to engage in a business covered by the FinIA. 

Furthermore, the FinIO exempts trustees and portfolio managers who are controlled by related persons or a trust or a foundation that was established by related persons (article 4 (2) FinIO). The second exemption will allow family offices as well as private trust companies dedicated to a single family to continue to operate without needing to comply with the regulatory burden applicable to financial institutions that serve a broader client base. Notably this exemption will also apply if the trust benefits, in addition to the family, public or general interests. Moreover, the FinIO also provides for the possibility for FINMA to exempt trustees established for a specific person or for the benefit of a given family that are held and supervised by a regulated financial institution from the licensing requirement under the FinIA (article 9 (3) FinIO).

2) Regulatory Pyramid

The FinIA will revise the regulatory architecture governing financial institutions. Instead of the current sectorial approach based on the activity of financial institutions, the FinIA proposes to introduce a regulatory pyramid with a light regulatory framework for portfolio managers and trustees, and an increasingly more stringent regime for collective asset managers, fund management companies and securities firms. 

Following this approach, a more stringent license automatically permits the holder to carry out the business of a less stringent entity. Banks will – although they are not subject to the FinIA – allowed to carry out the business of entities with a less stringent license requirements. Specifically, banks will be automatically authorized to engage in the business of a securities house, a manager of collective assets, a trustee or a portfolio manager (article 6 (1) FinIA). Securities firms will be authorized to manage assets of collective investment schemes and pension funds, act as a portfolio manager and trustee (article 6 (1) and (2) FinIA). Collective assets managers will similarly be entitled to engage in “simple” portfolio management (article 6 (4) FinIA).

The pyramid is, however, not complete. First, it branches out for fund management companies; although they will have the right to engage in the business of managers of collective assets and asset managers (article 6 (3) FinIA), banks or securities firms will not be entitled to engage in fund management (article 6 (1) and (2) FinIA a contrario). Similarly, only banks and securities firms will be automatically licensed to act as trustees. Fund management companies and collective investment managers will not be authorized to act as trustees although they hold a more stringent license (article 6 (3) and 5 (4) FinIA a contrario). Furthermore, trustees will need a supplemental license to act as portfolio managers and vice versa (article 20 FinIO).

Moreover, banks will not be integrated in the regulatory framework defined by the FinIA. They will continue to be the subject of the Banking Act. Furthermore, insurance companies are completely out of scope of the FinIA and the FinSA although they regularly engage in asset management and offer investment products tied with life-insurances. This gap will, however, be closed in connection with the partial revision of Insurance Oversight Act, which was put into consultation on 14 November 2018 by introducing a dedicated regime for insurance companies (see Press release of 14 November 2018, Federal Council initiates consultation on partial revision of Insurance Oversight Act, available

Finally, the system will not be as elegant as it may seem: several functions under the CISA will continue to require a specific license, even for banks. Banks will continue to need to apply for a specific license to act as a depository bank (article 13 (2) (e) CISA). Banks, securities firms, and managers of collective assets will also continue to need a specific license to act as representatives of foreign collective investment schemes (article 13 (3) CISA and article 8 (1) and (3) of the Ordinance on Collective Investment Schemes of 22 November 2006, SR 951.311).

3) Licensing Requirements and further duties of financial institutions

a) Common Framework for all Financial Institutions

At the heart of the regulatory model lies a set of common provisions that apply to all financial institutions (see articles 5 to 16 FinIA, articles 52 to 60 FinIA on branches and representative offices of financial institutions and articles 61 to 67 FinIA on prudential supervision) which are completed by rules that apply specifically to each given type of financial institution (see articles 17 to 23 for trustees and portfolio managers, article 24 to 31 for managers of collective assets, articles 32 to 40 for fund management companies, articles 41 to 51 for securities firms).

All financial institutions will be licensed by FINMA (article 5 (1) FinIA). Once licensed, they will be required to announce any change of circumstances underlying their license to FINMA (article 8 (1) FinIA), and seek the prior authorization of FINMA for fundamental changes (article 8 (2) FinIA), which are defined in the FinIO as changes to the organization and business regulations, changes in the board of directors and executive management, changes to share capital and regulatory capital, facts that are likely to question the ongoing satisfaction of the fit and proper requirement by the institution, its directors, senior management, and shareholders, as well as changes of regulatory auditor or supervisory organization (article 10 FinIO).

As to their substance, the common requirements will be largely modelled on the current regime applicable to banks and securities dealers as applied by FINMA. Namely, all institutions will be required to have an appropriate organization (article 9 FinIA), including risk management and an effective internal control system (article 9 (2) FinIA). The FinIO elaborates further by providing that geographic and business scope of financial institutions will need to be set out in the relevant documents, meaning the articles of incorporation, partnership agreement or the organization and business regulations (article 12 (2) FinIO) and by conditioning any extension of the business activities or the geographic reach to the availability of sufficient resources and an appropriate business organization (article12 (2) FinIO). Through this provision, the FinIO creates a regulatory basis for FINMA to monitor cross-border activities and, to a lesser extent, review the business model of financial institutions.

In line with the current practice of FINMA, both the institution as such and the members of the board of directors and executive management will be subject to a fit and proper requirement, which extends also to their reputation and professional qualifications (article 11 (1) and (2) FinIA). Notably, the FinIO provides detailed professional qualification requirements for so-called qualified senior executives of portfolio managers and trustees (article 25 FinIO), but does not provide specific requirements for other financial institutions. In a positive departure from the stance taken in the consultation, the FinIO defines the requisite qualification as having at least five years of professional experience in the relevant business and a training of at least 40 hours (article 25 (1) FinIO). Furthermore, the FinIO expressly requires portfolio managers and trustees to maintain their skills through regular continuing education (article 25 (3) FinIO).

Qualified shareholders also need to comply with a fit and proper requirement and provide the assurance that their influence will not have a negative effect on a proper and prudent conduct of business (article 11 (3) FinIA). They will, as is currently the case, be subject to a duty to disclose their shareholding prior to reaching or crossing thresholds of 10, 20, 33 and 50 per cent of the shares or capital of a financial institution (article 11 (5) FinIA). 

The FinIA further generalizes the rules of the CISA on outsourcing by permitting financial institutions to outsource to third parties only if they have the requisite skills, knowledge and experience and hold the requisite licenses to carry out their business (article 14 (1) FinIA). In this context, the FinIA empowers FINMA to condition the delegation of investment management to persons in other jurisdictions on the existence of an agreement between FINMA and the foreign regulator on cooperation and exchange of information (article 14 (2) FinIA). The FinIO further defines the regulatory framework applicable to outsourcing. It expressly codifies the principle that financial institutions should in any event retain the powers that belong to the executive management and the board of directors (article 16 (1) FinIO) and must continue to have appropriate operations, meaning that they must retain under all circumstances the requisite staff and skills to select, instruct, supervise and manage the risks related to their outsourcing service supplier and have all necessary powers to instruct and control it (article 16 (2) and (3) FinIO). Furthermore, financial institutions will need to document which tasks are outsourced and define the competencies and responsibility of each party, the powers to sub-delegate, the duty to account and control rights of the financial institution (article 17 (2) FinIO). The financial institution will need to define in their organizational framework what tasks are delegated and whether they can be sub-delegated (article 17 (3) FinIO). This term is, however, somewhat ambiguous insofar as it is not entirely clear whether this framework needs to be defined in the business and organization regulations, which are subject to FINMA approval pursuant to article 8 (2) FinIA, or if it is sufficient to address the issue in an internal policy or guideline. 

Moreover, the FinIA requires financial institutions to notify FINMA before they establish or close a subsidiary, a branch or a representative office abroad or before they purchase or dispose of qualified participation in a foreign company (article 15 FinIA). This notification will need to include a business plan and further information on the foreign operations, its directors and senior management, its auditors as well as its regulators and supervisors abroad (article 18 FinIO).

Finally, all financial institutions will be required to join an ombuds-organisation upon starting their business (article 15 FinIA). This requirement ensures the effectiveness of the rules on alternative dispute resolution for investor disputes provided for by the FinSA. However, it makes little sense for trustee, who are not subject to the FinSA and do not have clients strictly speaking. Therefore, this legislative mistake is due to be corrected in connection with an upcoming amendment to the FinIA.

The general requirements will, however, be modulated to account for the particular business of each type of financial institution. Therefore, although all financial institutions are subject to an obligation to have an appropriate organization pursuant to article 9 FinIA. The requirements will vary from one type of financial institution to another and must account for the size and complexity of the business when implementing and applying the regulations (see, e.g., articles 9 (3) and 20 (2) FinIA, article 43b (3) Federal Act on the Swiss Financial Market Supervisory Authority of 22 June 2007 (FINMASA, SR 956.1)). In parallel, each type of institution will be subject to specific requirements. As the institutions raise in the regulatory pyramid, they become increasingly stringent.

b) Specific Requirements for Portfolio Managers and Trustees

Portfolio managers and trustees enjoy a relatively lenient regulatory framework: for example, qualified shareholders will be expressly allowed to exercise an executive role in a portfolio manager or a trustee (article 11 (8) FinIA). Furthermore, they are exempted from the requirement to announce to FINMA the fact that person took a substantial shareholding or reached or crossed the thresholds of 20, 33 or 50 per cent of the shares or the capital (article 11 (7) FinIA). In terms of governance, the requirements are limited: their executive management must, in principle, consist of two qualified persons with a joint signatory power (article 20 (1) FinIA and article 23 (1) FinIO). The act, however, expressly allows them to have only one qualified person, if they have ensured that business continuity is ensured (article 20 (2) FinIA). Similarly, the FinIA expressly provides that the risk management and compliance functions can be exercised by a duly qualified member of the senior management, another duly qualified member of staff or even delegated to qualified third party (article 21 (2) FinIA). Smaller financial institutions, which have less than five full-time equivalent employees or generate a gross revenue of less than CHF 2 million per annum, will even be entitled to waive the independence requirements for risk management and compliance (article 26 (2) FinIO). At the same time, larger portfolio managers with a gross revenue of more than CHF 10 million may be subject to the obligation to appoint an independent internal audit (article 26 (4) FinIO). 

Similarly, portfolio managers and trustees are also subject to fairly limited specific requirements in terms of capital. For example, they will be subject to minimal regulatory capital requirements and be expected to either post collateral or have appropriate professional liability coverage (article 22 FinIA). The ordinance is, however, more lenient and conceives professional liability coverage as a means to meet the own fund requirements (article 31 (2) FinIO). The own fund requirements will amount to 25% of the fixed costs, but no more than CHF 10 million (article 23 (2) FinIA)

c) Specific Requirements for Managers of Collective Assets

Managers of collective assets will be subject to an intermediate regime, which is fundamentally comparable to the existing regime for asset managers of collective investment schemes under the CISA. The FinIA provides only for fairly straightforward specific organizational requirements, which focus on the delegation of duties (article 27 FinIA). By contrast, the requirements regarding organization in the FinIO, which codify the existing practice of FINMA, go well beyond the ones applicable to portfolio managers: managers of collective assets will, as a matter of principle, be required to have a board of directors that is majority non-executive (article 38 (1) FinIO) and composed of at least a third of independent directors (article 38 (3) FinIO). Furthermore, the chairman of the board is not allowed to act as chief executive officer (article 38 (2) FinIO). Among others, article 39 (2) FinIO expressly requires managers of collective assets who also act as portfolio manager for individual clients (e.g., through so-called managed accounts) to invest in funds they manage only if they have a general approval from the affected clients. Similarly, the requirements regarding risk management and compliance are more detailed (see article 41 FinIO).

Managers of collective investments are not subject to full capital adequacy and liquidity requirements. Instead, they are expected to maintain a certain level of capital, post collateral or subscribe a professional insurance policy (articles 28 and 29 FinIA) as well as minimal capital requirements. Based on article 44 (1) FinIO, managers of collective assets will be required to have sufficient own funds to cover 25% of their fixed costs but no more than CHF 20 million. In addition they are also required to hold further capital amounting to 0.01% of the asset under their management unless they have sufficient professional liability coverage (article 44 (2)). However, rules for consolidated supervision requirements kick in at this stage (article 30 FinIA).

d) Specific Requirements for Fund management Companies

Fund management companies are subject to extensive rules, which mirror the existing regime under the CISA. These consist in strict governance requirements: they will need to have a board of directors composed of at least three members (article 52 (1) FinIO), of which the majority are non-executive directors (article 52 (2) FinIO), and include at least a third of independent directors (article 52 (4) FinIO). As with managers of collective assets, the chairman of the board will be barred from being the chief executive office (article 52 (3) FinIO). Moreover, the FinIO contemplates further requirements to ensure that the fund management company is independent from the depository bank. Among others, members of the management of the fund management company cannot be at the same time a member of the management of the depository bank (article 53 (2) FinIO), while directorships within both entities are permissible, as long as a majority of the members of the board are independent from the depository bank (article 53 (1) and (3) FinIO). 

In terms of capital requirements, they are required to hold at least CHF 1 million in equity (article 58 FinIO) and comply with own funds requirements calculated on the basis of the assets under management (article 59 (2) and (4) FinIO) and the general framework applicable to banks for operational risks related to the custody and administration of units of collective investment schemes (article 59 (3) FinIO), subject to a cap at CHF 20 million (article 59 (1) FinIO).

e) Specific Requirements for Securities Firms

Securities firms remain fundamentally subject to the current regime, including in terms of consolidated supervision. They are subject to full capital adequacy, liquidity and risk diversification requirements imposed by Basel III at entity and on a consolidated basis (article 46 (1) and (3) FinIA), unless they do not maintain settlement accounts for their clients (article. 70 (4) FinIO). The flip-side of this regime is the possibility offered to securities firms to rely, like banks, on additional capital instruments to prevent or overcome a situation of financial distress (article 47 FinIA and article 13 (1) Banking Act). This being said, the FinIA introduces some novelties. For example, securities houses will be authorized to accept public deposits in connection with its regulated activities (article 44 (2) FinIA) and credit such deposits to interest-bearing accounts. This regulatory framework falls, however, short from an English-style client-money protection regime, although the FinIA mandates the Federal Council to issue provisions on the use of public deposits (article 44 (3) FinIA).

f) Specific Requirements for Branches and Representation Offices of
Foreign Financial Institutions

Finally, the regime for branches and representation offices of foreign financial institutions is closely mirrored on the current regime for foreign banks and securities dealers. In this respect, the greatest novelty is the new scope of this regime which will also apply to foreign portfolio managers and trustees as well as well as managers of collective assets that were unregulated until now. As a consequence, foreign groups with a local presence in Switzerland may need to reconsider their business model if they effectively carry out activities in Switzerland, including mere marketing activities, since they would trigger licensing requirements.

4) Dual Supervision of Portfolio Managers and Trustees

The most important change introduced by the FinIA is the prudential supervision of portfolio managers and trustees under a two-tiered supervisory approach, where the supervisory responsibility will be shared between FINMA and supervisory organizations, a new hybrid supervisor, which will be responsible to supervise portfolio managers and trustees under the FinIA as well as trade assayers under the Federal Act on the Control of the Trade in Precious Metals and Precious Metal Articles of 20 June 1933 (SR 941.31) and be licensed and supervised by FINMA (article 43a (2) FINMASA). Supervisory organizations will also be allowed to act as a self-regulatory organization under the Federal Act on Combating Money Laundering and Terrorist Financing of 10 October 1997 provided it was recognized as such (article 43a (3) FINMASA).

Under this model, FINMA will license and supervise portfolio managers and trustees (article 5 (1) and 61 (1) FinIA). However, portfolio managers and trustees will be required to join a supervisory organization (article 7 (2) FinIA), which will be responsible for the day-to-day supervision (article 61 (2) FinIA and article 43b (1) FINMASA). As an exception to this rule, portfolio managers and trustees belonging to a group that is subject to consolidated supervision will not be required to join a supervisory organization, but will be supervised directly by FINMA as part of the consolidated supervision. The supervisory organizations will be entitled to rely on audit firms to inspect portfolio managers and trustees following the dual-supervisory model applied by FINMA or carry out the inspection themselves, as some self-regulatory organizations already do in the realm of anti-money laundering regulations (article 62 (1) FinIA and article 43k (1) FINMASA). 

Under normal circumstances, the supervisory organization will be responsible for the day-to-day supervision (article 43b (1) FINMASA), while FINMA will stay in the background. This supervision will be exercised mainly through periodic regulatory audits. Furthermore, portfolio managers and trustees will be required to respond to any request for information that the supervisory organization requires to carry out its statutory duties and to inform the supervisory organization of the occurrence of any event that is of material importance for the supervision (article 43l (1) and (2) FINMASA).

The supervisory organization will not have formal administrative powers, however. This role will remain with FINMA, who will be in charge of licensing (article 5 (1) FinIA) and taking formal enforcement action against portfolio managers and trustees (as with any other supervised entity). If, in the course of their supervision, a supervisory organization finds that an portfolio manager or a trustee breached its obligation, it will be required to set a deadline to the regulated entity to remedy the situation and if it fails to act within the deadline, it will be required to report the matter to FINMA (article 43b (2) FINMASA). FINMA will then take over the case and will be empowered to use the full palette of administrative measures available to it, including issuing a declaratory ruling (article 32 FINMASA), ordering remedial measures (article 31 FINMASA), prohibiting a person from exercising a controlling function within a supervised entity (article 33 FINMASA), naming and shaming (article 34 FINMASA), confiscating undue profits (article 35 FINMASA), appointing an investigating agent to clarify the facts or manage the institution (article 36 FINMASA) or even withdraw the license (article 37 FINMASA).

The split between supervisory organizations and FINMA will, however, need to be clarified in practice. Indeed, the line between supervision and enforcement is not clear. It is, therefore, likely that FINMA will create a halfway house to deal with entities that need to be monitored closely although their actions would not justify taking formal enforcement proceedings, as it already does in connection with banks and securities dealers that are subject to so-called intensive supervision.

Similarly, further clarifications will be needed to define the threshold for FINMA to take enforcement action. Although the FinIA suggests that FINMA will be required to take enforcement action only against characterized offenders who failed to remedy breaches after the deadline set forth by the supervisory authority (see article 43b (2) FINMASA), it seems unlikely that FINMA can turn a blind eye to serious breaches. In such cases, it is likely to need to take action, and issue blame or take other enforcement action (e.g., confiscate undue profits) without giving the entity the chance to clean up.

5) Other Changes

The FinIA also amends a number of other acts. The main changes relate to the CISA. These amendments are related, on the one hand, to the new regulatory framework which regulates institutions, such as managers for collective assets and fund management companies in the FinIA, rather than in the CISA. However, the FinIA amends the CISA in a more substantial manner. First, the status of distributors of collective investment schemes will be repealed and, where applicable, replaced by the obligation to register client advisors under the FinSA. Furthermore, it amends the regime for offering foreign collective investments schemes. First, it substitutes the concept of distribution of collective investment schemes with the concept of “offering” borrowed from the FinSA and – in our view without any statutory basis – an extensive construction of the financial service of buying and selling financial instruments for clients to include any activity aimed at enticing an end-client to buy or sell a security (including possibly through another financial service provider). Second, it limits the scope of the obligation to appoint a Swiss representative and paying agent to funds offered to high net worth individuals who elected to be treated as qualified investors and thus releases collective investments schemes that are exclusively offered to other qualified investors from the scope of the CISA. Finally, the FinIA removed offerings ’from Switzerland’ from the scope of the investments on collective schemes (articles 120 (1) and 123 (1) CISA as amended by the FinIA). In doing so, the FinIA arguably removed pure outbound offerings of collective investment schemes from the scope of the CISA, which is likely to significantly decrease the regulatory burden of collective investment schemes that are managed or administered in Switzerland without being offered locally.

In the realm of anti-money laundering, the FinIA entails two important changes. First, portfolio managers, trustees and trade assayers will be subject to the same regulatory regime as banks and securities dealers. Instead of having the possibility to join an SRO, compliance with the Federal Act on Combating Money Laundering and Terrorist Financing of 10 October 1997 (SR 955.0) will be supervised as part of the overall prudential supervision, albeit following the dual supervisory model, with the supervisory organization in charge of ongoing supervision and FINMA intervening on a more ad hoc basis, with the sole power to grant license and take formal enforcement action. Second, the current regime of directly supervised financial intermediaries will be repealed and financial intermediaries that are not already supervised by FINMA as part of the overall prudential supervision will have to join a self-regulatory organization. 

Among other further amendments, the FinIA also introduces a licensing obligation for trade assayers who deal in bankable precious metals, which is based on the same model as the one applicable to portfolio managers and trustees.

6) Phasing-in

As mentioned at the outset, the FinIA will enter into force on 1 January 2020. The FinIA provides for a generous phasing in process: financial institutions that were previously supervised by FINMA, such as asset managers for collective investment schemes and fund management companies under CISA as well as securities dealers under SESTA, will be automatically grandfathered into their new status under the FinIA (article 74 (1) FinIA), but will need to join an ombuds organization within six months of the recognition of the first ombuds organization by the Federal Department of Finance (article 93 (2) FinIO).

Trustees, portfolio managers and managers of collective assets that are newly subject to licensing requirements will need to report themselves to FINMA within six months of the entry in force of the FinIA and will have three years to submit their licensing application, provided they are already member of a self-regulatory organization under the AMLA (article 74 (2) FinIA). Otherwise, they will need to report themselves within six months and have joined an SRO within a year of the entry in force of the FinIA, unless they joined a supervisory organisation and filed their application with FINMA in the meanwhile (article 92 (1), although there is no certainty that the supervisory organizations will be up and running by then.

Furthermore, during the first year following the entry in force of the FinIA, new asset managers and trustees will be entitled to commence their operations provided that they immediately notify FINMA and comply with all requirements under the FinIA, with the exception of joining a supervisory organization. They will then have a year counting from the first licensing of a supervisory authority by FINMA to file their own application to be licensed and join a supervisory authority, provided they joined a self-regulatory organization under the AMLA (article 74 (3) FinIA).

The phasing-in rules under the FinIA are, thus, not entirely congruent with the rules of the FinSA which provides for a two-year phasing-in period to comply with the client segmentation, rules of conduct and organizational duties. This change is all the more paradoxical insofar as it extends the current obligation to appoint a Swiss representative and paying agent in connection with the offering of foreign collective investment schemes that are not approved by FINMA for as long as the a financial service provider that did not make the switch to the new rules of conduct and organization rules of the FinSA is involved in the process (see article 105 (3)(e) and article 106 (3)(e) FinSO).

7) Conclusion

In conclusion, the FinIA will do more than create a regulatory framework for portfolio managers and trustees. It creates a comprehensive framework for the supervision of financial institutions, with the notable exception of banks and insurance companies. As such, it is on the one hand a recast of existing rules. On the other hand, by codifying the existing practice in a systematic manner, it will necessarily lead to changes in the applicable regulatory framework. The FinIO fine-tuned a number of governance requirements to ensure that the rules remain proportionate. However, it will be necessary to see how FINMA applies the new rules to determine whether they indeed are able to create a level playing field among financial service providers without falling in the trap of one size fits all financial institutions.

Rashid Bahar (