Swiss Regulator Issued Discussion Paper on Regulation of the Production and Distribution of Financial Products

The Swiss Financial Market Supervisory Authority (FINMA), has issued discussion Paper on Regulation of the Production and Distribution of Financial Products, to laid down adequate measure to protect interest of various players including investors of Capital Market.

Swiss financial market law aims at safeguarding the functionality of the Swiss financial market and protecting clients, i.e. creditors, investors and policy holders. These two goals are supported by ensuring an adequate flow of information between market participants. An efficient financial market, and the trust of market participants in that market, can only exist if the key information on products traded and services offered is available to all market participants in a timely, comprehensive and easily comprehensible form. Creating transparency for all market participants is therefore vital to the implementation of the goals that are firmly established in law.

In its discussion paper on regulating the production and distribution of financial products to retail clients dated October 2010 (“FINMA Distribution Report”), FINMA noted that the law as it stands does not ensure that all market participants have appropriate access to key information, with the result that clients are not adequately protected. The report invited discussion on a number of regulatory measures to rectify the shortcomings identified. In their comments on the FINMA Distribution Report, many of the consultation respondents also called for regulatory adjustments to strengthen client protection.

In FINMA’s view, the following measures should be taken to improve client protection:

Rules for Financial Products

1. To improve client protection on the Swiss financial market, a prospectus requirement should be introduced for all standardised financial products offered in Switzerland. Prospectuses should be drawn up in accordance with a prescribed format and should contain all the key in-formation about the producer and the product itself.

 2. Clients should be provided with a clear and concise product description before acquiring com-pound financial products. The product description should set out the key product characteristics, risks and costs. To increase comparability between the different product types, the legislature should enact regulations governing the composition of the document. 

3. The prospectus requirement and the obligation to draw up a product description should apply primarily to products aimed at retail clients.

Stricter Rules on Business Conduct and Organizationfor Financial Services Providers

4. Financial services providers have to inform clients about their own business activities and their authorisation status before they carry out a financial transaction. 

5. Financial services providers should be obliged to inform clients of the content of their specific service. They may only describe themselves as being independent if they do not accept incentives from third parties when performing services for their clients.

 6. Financial services providers must inform clients of the characteristics, risks and costs of the type of transaction under discussion before they perform the service in question.

 7. Financial services providers must provide product documentation. In particular, they must provide retail clients with a product description for compound financial products. Prospectus documents are only to be made available on request. During contact with the client, advertising material should be clearly separated from the documents required under supervisory law.

 8. Before carrying out a transaction for a retail client, financial services providers should be obliged to determine the client’s experience and knowledge of the type of product in question or the service to be provided. If they regard a transaction as being inappropriate, they should warn the client. 

9. Before issuing personal advice, financial services providers should determine whether a transaction is suitable for the client. For this purpose, they must ascertain their clients’ experience and knowledge, investment objectives and financial situation. Before taking on portfolio management mandates, they must also ascertain whether the client has understood the significance of issuing the order and whether the chosen investment strategy is suitable for the client.

 10. Financial services providers may only carry out transactions with financial products for a retail client without an appropriateness test if the client instructs the provider to carry out the trans-action on their own initiative and the products in question qualify as simple financial products. Simple financial products are readily understandable, do not impose any obligation on the cli-ent over and above the acquisition costs, and may be regularly sold on the market or returned to the producer.

 11. Financial services providers should document the scope and subject matter of the agreed ser-vice. They should also duly account for the services provided.

Eextension of Supervision 

12. All portfolio managers that are not supervised under current law should be made subject to supervision. They must comply with the rules of business conduct and must have an appropriate organisation and adequate capital. 

13. Those who have contact with clients should prove in a test that they have sufficient knowledge of the rules of business conduct, the principles of financial planning and the products distributed. Their specialist expertise should be improved through regular further training. Clients should also be able to check via a publicly accessible register whether their client advisor or product distributor meets the corresponding quality standards. 

14. Cross-border services may only be provided to clients in Switzerland from other countries if those clients enjoy the same protection as they would if the financial services provider were based in Switzerland. The Swiss regulations on the distribution of financial products should therefore be extended to cover activities from abroad. 

Enforcement

15. Enforcement of the claims of retail clients against financial services providers should be im-proved. 

Creation of a Financial Services Act 

16. Implementation of the measures will require the creation of a new statutory basis. To ensure that the conduct and product rules at the point of sale apply across all sectors and without exception, they should be firmly established in a new law (financial services act). 

17. The rules on the authorisation and supervision of portfolio managers should be incorporated into the Swiss Stock Exchange Act. 

18. The introduction of cross-sector business conduct and product regulations necessitates changes to the applicable financial market laws and the Swiss Code of Obligations. Existing provisions on the documentation and distribution of financial products should continue to apply only when sector-specific circumstances require special arrangements.