Update: The Enforcement of Clients’ Rights in the Financial Services Act

The Financial Services Act (FinSA) as it will enter into force on 1 January 2020 contains two elements of an initially broad set of proposals meant to strengthen the enforcement of clients’ rights. First, it specifies the scope of records to be kept regarding a service provider’s relationship with a client and gives the client an unambiguous legal basis to obtain a copy of such records on request. Second, it will require all providers of financial services to be affiliated with an ombuds institution. Parliament ultimately opposed the introduction of new procedural mechanisms such as collective action instruments and changes to the ‘loser pays’ rule, referring to ongoing efforts towards a broader reform of the Civil Procedure Code.

By Thomas Werlen / Jonas Hertner (Reference: CapLaw-2019-54)

1) Introduction

One of the primary drivers of a new law governing the provision of financial services was the realization, in the wake of the financial crisis of 2007/2008, that the current laws often did not allow retail investors to enforce monetary claims against financial institutions, in particular with respect to relatively small claims. The insolvencies of the Lehman Brothers and Kaupthing groups, for instance, left scores of investors without an effective remedy, mainly for two reasons. First, both procedural and substantive law make it difficult for individual investors to establish proof of misconduct of their financial service provider. Second, litigation against financial service providers is costly to the point that damaged investors were discouraged from trying to enforce their rights if the damages incurred were relatively small.

The original preliminary draft of the FinSA, issued by the Federal Council in June 2014 included relatively far-reaching proposals to strengthen the enforcement of clients’ rights. These proposals were heavily criticized by the financial industry in the public consultation proceeding. In response, in November 2015, the Federal Council put forward a draft bill, which significantly curtailed the proposed changes (for a summary of the legislative history, see WERLEN/HERTNER, The Enforcement of Clients’ Rights in the Financial Services Act, CapLaw 19 December 2018). This article is an update to the December 2018 publication following the publication of the final text of the Financial Services Ordinance (FinSO).

The enforcement of clients’ rights in the final text of the FinSA rests on the two remaining pillars of (1) a client’s right to be provided a comprehensive copy of all documents and records the service providers keep concerning the specific client and the client relationship, and (2) the ombuds system, requiring all service providers – not only the banks – to be affiliated with an ombuds institution recognized by the Federal Department of Finance. These two pillars, however, do not tower above the existing framework and are not expected to significantly change the litigation landscape in the financial services industry.

2) The provider’s obligation to keep records and the client’s right to
obtain the records

a) The duty of the service provider to keep records and to give account upon client‘s request 

Art. 15 and 16 FinSA and Art. 18 and 19 FinSO contain the substantial requirements in terms of records to be kept by the service provider:

– Art. 15(1), 15(2) and 16(2) FinSA in connection with Art. 19(1) FinSO set out the scope of the records to be kept.

– Specifically, Art. 15(1) FinSA requires service providers to keep records on (a) the services to be provided as agreed upon with the client and the information gathered from the client, (b) any waiver from the requirement to assess the suitability and appropriateness pursuant to articles 13 and 14 FinSA, and (c) all financial services provided (whereas Art. 18 FinSO specifies that the service provider must keep records in a manner that allows it to give account to the client on the services provided within ten working days).

– For advisory contracts, Art. 15(2) FinSA additionally requires the service provider to keep records on the client’s investment needs and requirements and the reasons for each recommendation that results in the purchase of the recommended product.

– In addition, Art. 16(2) FinSA requires the service provider to provide information regarding (a) the services which were agreed upon and executed, (b) the composition, valuation and development of the portfolio, and (c) the costs associated with the provision of the services.

– Art. 19(1) FinSO essentially repeats the requirements contained in Art. 15(1) and 16(2) FinSA.

– Moreover, Art. 16(1) FinSA requires the service provider to transmit the information in writing pursuant to Art. 15 FinSA to the client upon request or to provide it by any other suitable means.

b) The client‘s right to be provided all documents concerning their relation with the service provider

Art. 72 and 73 FinSA and Art. 97 FinSO govern both the substantial and procedural aspects of the client’s right to request the records kept by the service provider:

– Art. 72(1) FinSA entitles the client to request at any time a comprehensive copy of the „Dossier“, including all records, which the service provider is required to keep pursuant to Art. 15 FinSA, as well as any additional records, which the service provider created or maintains in respect of the relation with the client.

– Art. 73(1) FinSA requires the request to be made in writing. The service provider is required to provide the copy within 30 days free of charge (para. 2).

– Article 73(3) FinSA entitles the client to pursue the right to a copy of the records in summary proceedings if the service provider does not comply with client’s request.

– Article 73(4) FinSA stipulates that a refusal by the service provider to comply with the request may be taken into consideration by the court in a later litigation when allocating the costs of the proceedings.

– Art. 97 FinSO, finally, stipulates that, while the first copy of information must be provided free of charge, any subsequent request, if not sufficiently justified, may incur an appropriate fee.

– The annotations to the FinSO, issued by the Federal Council in November 2019, note that the client‘s right to be provided records is not meant to include any preliminary internal documents such as drafts, notes or internal assessments.

3) The ombuds system

Art. 74 et seq. FinSA introduce the new ombuds system, which will require all service providers to fund and be affiliated with a particular ombuds institution as follows:

– Art. 75(1) FinSA governs the ombuds procedure and requires these proceedings to be “non-bureaucratic”, fair, swift, impartial, and free or cost-effective for the client.

– The ombuds proceeding is confidential, meaning that the statements made in the proceedings must not be used in another proceeding (para. 2).

– The confidentiality also covers party submissions: neither party has a right to see the correspondence between the other party and the ombuds institution (para. 3).

– The client may initiate a proceeding before the ombuds institution (1) in accordance with the respective regulations of the institution, (2) if the client can demonstrate that he or she notified the service provider of an issue and undertook a reasonable effort to resolve it, (3) if the client’s claim is not manifestly ill-founded and was not subject to a previous conciliation proceeding, and (4) if the issue is not currently, and was not previously, pending before a judicial body (e.g., another ombuds institution, a state court or a conciliatory authority) (para. 4).

Notably, the requirement that the issue is not yet and was not pending before a judicial body should not mean that clients were prohibited from bringing a dispute to the ombuds institution after filing an action in court to obtain records pursuant to Art. 73(3) FinSA.

– While the ombuds institution will not have discretion to issue a decision on the matter brought before it, it may give its own factual and legal assessment and include it in the final communication to the parties (Art. 75(8) FinSA).

– Pursuant to Art. 76 FinSA, an ombuds proceeding does not preclude a civil proceeding covering the same matter (para. 1). If, however, a judicial body seizes the matter, the ombuds institution concludes its proceeding (para. 3). If an ombuds proceeding was undertaken, but did not result in a resolution of the dispute, the claimant in a civil proceeding may unilaterally decide to waive the conciliation stage pursuant to the Civil Procedure Code (para. 2).

– Art. 77 et seq. FinSA stipulate the obligations of service providers in connection with the ombuds system. Notably, service providers must affiliate themselves with a recognized ombuds institution; participate in an ombuds proceeding if so requested by a client; and duly honor all requests to appear and submit statements in the proceeding.

– Service providers must inform their clients about the possibility to request an ombuds proceeding in connection with the opening of a client relationship, when rejecting a claim made by a client, and anytime upon request.

– The funding of a particular ombuds institution shall be governed by an institution’s own regulations, borne by its service provider participants in proportion to their use of the institution (Art. 80 FinSA).

– With respect to the organizational aspects of the ombuds system, Art. 81–83 FinSA broadly govern the membership of service providers, providing that ombuds institutions need to accept service providers if they meet the institution’s own membership criteria, and that service providers may be excluded if they violate their obligations pursuant to Art. 77–80 FinSA. Ombuds institutions are required to notify the supervisory authority and the central register of ombuds institutions (both likely to be within the Federal Department of Finance) of all service providers accepted as members and of those not accepted or subsequently excluded (Art. 83 FinSA).

– The ombuds institutions themselves shall be recognized by the Federal Department of Finance if they meet the requirements of Art. 84 FinSA. Notably, they (and the ombudspersons engaged by the institution) are required to be impartial and independent, and that the ombudspersons are sufficiently competent. Institutions further need to have regulations governing its organization and membership of service providers, the ombuds procedure, and the financial contributions of service providers. Any amendment of internal regulations will have to be approved by the supervisory authority (Art. 85 FinSA). Ombuds institutions shall publish annual reports on their activities (Art. 86 FinSA).

4) Conclusion

What had started with an attempt to significantly strengthen the means by whichretail clients of financial service providers could pursue legitimate claims – relatively small claims in particular –against service providers, essentially resulted in a mere restatement of the status quo.

First, the provisions governing the right of clients to be provided with a full documentation of records relevant to the client relationship do not add to the existing tool set provided by the provisions governing the agency contract in the Code of Obligations and the Data Protection Act.

Second, as regards the provisions governing the ombuds system, the Federal Council noted in its annotations to the FinSO that the ombuds institution will essentially be a continuation of the existing ombuds system for the banking industry (Erläuterungen zum FIDLEG, 6 November 2019, p. 66). The same annotations refer to the ombuds framework as introduced by the FinSA as a process following the adversarial system (“kontradiktorisches Verfahren”) (Ibid, p. 66). It is difficult to envisage an effective adversarial process given the extensive confidentiality rules, which prevent both parties from taking into account submissions made by the other. In light of this, it will also be interesting to observe to what extent courts will take into consideration assessments prepared by an ombuds institution.

With respect to the ombuds system, other question marks remain too – such as how and to what extent the supervisory authorities will make use of Art. 88 FinSA, which allows for the sharing of information between the authorities and bodies created by the FinSA, including the ombuds institutions. Is FINMA going to request information from ombuds institutions that service providers submitted on a confidential basis?

In sum, the omission to introduce new procedural tools specifically devised to facilitate the enforcement of relatively small claims of retail clients will mean that the subject remains on the parliamentary agenda for consideration in the context of a broader revision of the Civil Procedure Code. In the meantime, retail investors will look to FinSA‘s more substantial provisions such as new rules of conduct for service providers and extensive disclosure obligations.

Thomas Werlen (thomaswerlen@quinnemanuel.swiss)
Jonas Hertner (jonashertner@quinnemanuel.swiss)