Swiss Regulator Opens Consultation on Fully Revised Circular "Market Conduct Rules"

The Swiss Financial Market Supervisory Authority FINMA can now take action against all persons who use insider information or engage in market manipulation. Following the revision of the Stock Exchange Act and the Stock Exchange Ordinance, FINMA is fully revising Circular 08/38 on "Market conduct rules". Together with the section on general market supervision, the full revision also includes the part on specific organisational provisions for FINMA-supervised institutions. The consultation runs until 13 May 2013.

The revision of the Stock Exchange Act and the Stock Exchange Ordinance with respect to market offences and market abuse provides, for the first time at supervisory law level, specific statutory provisions that prohibits all natural persons and legal entities from engaging in insider trading and market manipulation. This means that Switzerland is moving closer to international standards. Prior to this, FINMA and its predecessor, the Swiss Federal Banking Commission (SFBC), could only enforce market conduct rules against supervised market participants. FINMA is implementing these new provisions as part of its full revision of Circular 08/38.

Clear definition of prohibition standards

The first part (Sections III-V) of the Circular details the general rules on preventing insider information and market manipulation. These rules apply to all natural persons and legal entities active on the financial market. The list provided includes abusive practices such as scalping, spoofing, wash trades, banging the close, etc. and is not conclusive. Moreover, a conceptual change has been made to the Circular: the rules on market conduct have been unbundled from those on the duty of loyalty as prescribed in Article 11 SESTA. The Circular on ‘Market conduct rules’ will thus focus on market supervision in the traditional sense.

Market abuse on the primary market, with foreign securities and in other markets

In order to assess the proper business conduct of an institution under prudential supervision, the Circular prescribes that not only securities dealing on Swiss stock exchanges is relevant; it now states more precisely what has been in practice for many years, i.e. that securities dealing in the primary market, on a foreign stock exchange and business activities such as the commodities and foreign exchange markets are also of importance when assessing proper business conduct (Section VI).

Revised organisational requirements

Section VII of the Circular that focuses on organisational requirements has also been revised. Here in particular recent experience and, where possible, international standards are taken into consideration; the target group has also been extended. In the revised Circular, organisational requirements are no longer directed exclusively at securities dealers, but also at all institutions under prudential supervision. The requirements specified however, are not the same for every supervised institution: depending on its business activities, size and structure, they are applied on an individual basis. The organisational measures necessary must be defined according to a risk assessment that is conducted regularly.

Legislative framework of the Circular

The revised Stock Exchange Act and Stock Exchange Ordinance are scheduled to come into force on 1 May 2013. The new rules in the Stock Exchange Act provide standards in criminal and supervisory law that capture market abuse on a broader basis and take account of international regulations. In particular, the insider criminal law provision has been newly regulated, the offence for price manipulation defined and universally valid elements for the prudential definition of improper market conduct provided. The Stock Exchange Ordinance sets out behaviour that is allowed in terms of "safe harbours".

Consultation Paper by Swiss Regulator on Circular "Distribution of collective investment schemes"

The Swiss Financial Market Supervisory Authority "FINMA" is fully revising FINMA Circular 2008/8 on "Public advertising – collective investment schemes" and is opening a consultation to this purpose. The new Circular will now be entitled "Distribution of collective investment schemes" and will take account of the revised Collective Investment Schemes Act (CISA) and the Collective Investment Schemes Ordinance (CISO) that came into force on 1 March 2013. The consultation will run until 3 June 2013.

In its current circular (FINMA-Circ. 2008/8), FINMA defines the term "public advertising" and sets out what cases qualify as public advertising when offering or distributing collective investment schemes in or from Switzerland.

In the revised Collective Investment Schemes Act (CISA) and the Collective Investment Schemes Ordinance (CISO) that came into force on 1 March 2013, the term "public advertising" has been removed and replaced by the term "distribution". Therefore, since one of the key criteria, i.e. the term "public" is no longer relevant following the revision of the CISA and CISO, it is necessary to fully revise the current circular. The new Circular will replace FINMA Circular 2008/8.

The new Circular will implement the changes made to the revised CISA and CISO with respect to the distribution of collective investment schemes. In particular, it will define the term "distribution" and explain what activities qualify as distribution, as well as setting out the legal consequences entailed.

Key Points

1. In the partly revised Collective Investment Schemes Act (CISA) and the Collective Investment Schemes Ordinance (CISO) that came into force on 1 March 2013, the term ‘public advertising’ has been replaced by the broader term ‘distribution’ (Art. 3 CISA; Art. 3 CISO).
2. Following the revision of the CISA and the CISO, there is no longer a distinction made between ‘public’ and ‘non-public’ advertising. It is therefore necessary to fully revise FINMA Circular 2008/8 ‘Public advertising – collective investment schemes’.
3. Within the meaning of Article 3 CISA, any form of offering and advertising collective investment schemes is, in principle, considered as distribution of collective investment schemes where (i) it is not directed exclusively at investors under Article 10 para 3 lets a and b CISA and (ii) it is not in- cluded in the exemption clause under Article 3 para. 2 CISA.
4. The term ‘distribution’ within the meaning of Article 3 para. 1 CISA in particular excludes offering and advertising collective investment schemes that are aimed solely at qualified investors as prescribed in Article 10 para. 3 let. a (supervised financial intermediaries) and let. b (supervised insurance companies). Other exceptions include execution-only transactions and asset management advisory services.
5. The purpose of the revised circular is to define the term ‘distribution of collective investment schemes’ and explain what activities qualify as distribution. Moreover, the legal consequences entailed where a certain activity qualifies as distribution are set out.

Collective Investment Schemes Bankruptcy Ordinance comes into force in Switzerland

The Swiss Financial Market Supervisory Authority FINMA will put the FINMA Collective Investment Schemes Bankruptcy Ordinance into effect on 1 March 2013 (In German Language). The new ordinance details the provisions of the Collective Investment Schemes Act under bankruptcy law and sets out the procedure for bankruptcy proceedings. It renders the courses of action adopted by FINMA and the procedural steps it takes during the bankruptcy process transparent.

The consultation on the FINMA Collective Investment Schemes Bankruptcy Ordinance (CISBO-FINMA) stirred relatively little interest, and the consultation draft was favourably received. By adjusting the draft document appropriately, account has been taken of the few suggestions made for improvement. Hardly any material changes were made, however, to the draft document. The proposed adjustments concerned the revision of the Collective Investment Schemes Act, which, in the meantime, had been completed and treated in the definitive version of the CISBO-FINMA.

Background

Since 1 September 2011, FINMA has been responsible for opening and conducting bankruptcy proceedings over licence holders of collective investment schemes. By putting the current ordinance into effect, FINMA has invoked its powers to issue specific implementing provisions in this area. The new ordinance is a fully coherent and comprehensive regulatory framework: it includes general provisions under bankruptcy law as well as specific regulations for the various categories of licence holders. This in turn renders the regulatory process transparent and enhances creditor and investor protection.

FINMA Opens Consultation on Insurance Bankruptcy Ordinance

The Swiss Financial Market Supervisory Authority FINMA has opened the consultation on the new Insurance Bankruptcy Ordinance. This Ordinance is needed because the Insurance Supervision Act only provides a rudimentary framework for bankruptcy proceedings and because FINMA is responsible for overseeing the bankruptcy of insurance companies since 1 September 2011. The consultation period ends on 30 June 2012.

 

Since 1 September 2011, FINMA is responsible for initiating and conducting bankruptcy proceedings concerning companies subject to the Insurance Supervision Act (ISA). The ISA only provides a rudimentary framework for bankruptcy proceedings, so the new Ordinance adds the necessary detail and thus ensures legal certainty and predictability.

 

The draft Ordinance of the Swiss Financial Market Supervisory Authority on the Bankruptcy of Insurance Companies (FINMA Insurance Bankruptcy Ordinance, IBO-FINMA) is intended to protect insurance policy holders in the event of an insurance company’s bankruptcy. Policy holders' claims that are to be secured by the insurance company using tied assets are especially important here. On the one hand, such claims are to be classified as preferential to other privileged claims (see Art. 219 para. 4 of the Debt Enforcement and Bankruptcy Act for ranking) and settled before the latter (see Art. 54a para. 2 in conjunction with Art. 17 ISA). On the other hand, provision is made for bankruptcy dividends to be paid to policy holders from tied assets in full or in part prior to the schedule of claims takes legal effect. This is significant because several years may pass before the schedule of claims takes effect after an insurance company goes bankrupt, and policy holders' money would remain blocked until then.

 

While the Banking Act gives FINMA the authority to issue implementing regulations for the law on both bankruptcy and restructuring as far as banks are concerned, the ISA and thus the draft IBO-FINMA cover only the bankruptcy of insurance companies.

Mortgage Financing: Swiss Regulator Recognises New Minimum Standards

The Swiss Financial Market Supervisory Authority FINMA has approved the new minimum re-quirements for mortgage financing drawn up by the Swiss Bankers Association (SBA) as a minimum regulatory standard. The new self-regulatory regime, which enters into force from 1 July 2012, for the first time lays down minimum requirements concerning down-payments by borrowers and introduces compulsory amortisation. The recognition comes in the context of the measures presented by the Federal Council concerning the implementation of Basel III, “too big to fail” and reduction of the risks in the mortgage market, which FINMA expressly welcomes. 

 

FINMA has for a long time been pointing out the risks that could build up as a result of rapid growth in mortgages for residential property. There is no sign of a weakening in the strong demand for mortgage financing, not least due to the exceptionally low level of interest rates. In the course of its supervisory activities and direct inspections, FINMA has also noted that many banks are stretching their own lending criteria to the limit, as regards both financial sustainability for the borrower and the loan-to-value ratio applied to the property, and are also making increased use of exceptions to policy. This is creating a new segment of borrowers who would not be able to acquire residential property under different market conditions. In particular, there is a risk that rising interest rates would leave such borrowers unable to service their loans, ultimately raising the possibility of defaults and falling property prices. When a real-estate bubble bursts, the implications for a country’s financial stability can be extremely serious. 

 

Guidelines on minimum down-payments and amortisation

The SBA guidelines set out basic requirements concerning minimum down-payments by borrowers and contain clear rules on amortisation that must be taken into account during financial sustainability analyses. Given that this is a self-regulatory regime imposed by the banks themselves, FINMA expects it to be widely accepted by them and implemented swiftly and conscientiously.

 

Minimum down-payments from own funds: In future, borrowers will be required to supply at least 10 per cent of the lending value of the property from their own funds, which may not be obtained by pledging or early withdrawal of Pillar 2 assets. This means that the purchase of a property by a mortgagor using a down-payment derived exclusively from pension fund assets will not meet the minimum standards. The new guidelines require borrowers to be on a sounder financial footing. Equally, they reduce the danger that they will put at risk their retirement capital and, with it, their pensions. 

 

Amortisation: Under the new rules, mortgages must in all cases be paid down to two thirds of the lending value within a maximum of 20 years. Waiving amortisation in the expectation of rising property prices would not, therefore, meet the minimum standards. The amortisation rules require the debt burden to be steadily reduced, which will have a positive effect on long-term financial sustainability. 

 

Revised Capital Adequacy Ordinance contains reference to the new minimum standards

 

In the event that a mortgage granted after 1 July breaches these new minimum standards, banks will be required to significantly increase the capital involved to cover it. This is stipulated in the Federal Council’s revised Capital Adequacy Ordinance, which also contains a further instrument for reducing mortgage risks. If a bank grants a mortgage amounting to more than 80 per cent of the lending value, it will be required to back it with a higher level of capital. This measure comes into force on 1 January 2013. As a further measure, from 1 July 2012 the Federal Council will have at its disposal a new capital buffer for all banks that can be selectively and temporarily activated for specific sectors, such as the mortgage business. 

 

Although the amortisation requirement has a direct impact on financial sustainability calculations, there are still no binding minimum standards in this central area of residential property financing. However, a realistic assessment of the medium-term financial situation is invariably in the interest of borrowers too, as it ensures that their property remains affordable for them even if interest rates rise or their own income falls.

Swiss Consultation Paper on Adapting FINMA Circular "Capital Buffer and Capital Planning – Banks"

The Swiss Financial Market Supervisory Authority (FINMA) is opening a consultation on adapting FINMA Circular 11/2 "Capital buffer and capital planning – banks". The Circular, which has been in force since 1 July 2011, is based on provisions prescribed in the current Capital Adequacy Ordinance (CAO) pertaining to the requirements for the quality of capital needed for the capital buffer. To date, the quality of capital defined in the CAO has been in accordance with Basel II. Since the CAO is currently being fully revised and adjusted to incorporate the modified definition of the term 'equity capital' as specified in the Basel III reform package, it is also deemed necessary to change the Circular appropriately. Comments on the proposed adjustments to the Circular may be submitted up to 30 April 2012.

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.

Swiss Regulator Proposes Package of Measures to Strengthen Client Protection

The Swiss Financial Market Supervisory Authority (FINMA), capital market regulator of Switzerland, takes the view that Swiss financial market legislation needs to be improved as regards client protection. To reduce the asymmetrical power relationship between financial services providers and clients and strengthening the market, FINMA has written a position paper proposing as key measures clear rules of business conduct for financial services providers and better product documentation. It also sees the strategic extension of supervisory powers as necessary. These measures are to be implemented through legislation.

In order to improve protection for clients, FINMA proposes introducing a package of mutually complementary regulatory measures. FINMA published a discussion paper on regulating the production and distribution of financial products to retail clients in October 2010 stating that, under the current legislation, clients are neither sufficiently informed nor adequately warned about products that are not appropriate for them. In FINMA’s public consultation on this subject and the measures that could be taken, many participants also called for regulatory changes to strengthen client protection.

New rules of business conduct for financial services providers

At the core of the proposed package of measures are standardised, cross-sector rules of business for banks, insurers and portfolio managers with which they must comply in their contact with clients. The focus here is on the obligation to inform all clients about the content of a service and the characteristics of financial products, and to warn them about the risks involved. Clients should in future be clearly informed about all the costs associated with a service or the purchase of a product.

Better documentation for clients

FINMA is in favour of financial services providers furnishing clients with complete and readily understandable product documentation. In particular, providers of standardised financial products such as shares, bonds and structured products should be obliged to draw up a prospectus. This document must contain all the key details of the product and the provider and ensure transparency concerning the risks associated with buying the product. To ensure that retail clients are better able to understand compound financial products such as structured products and unit-linked life insurance plans, and are informed about the direct and indirect costs these products entail, FINMA is also calling for brief, roughly two to three-page product descriptions along the lines of the simplified prospectuses produced for securities funds.

Strategic extension of supervision and obligation to provide proof of relevant knowledge

FINMA considers a strategic extension of its supervisory powers as essential to ensuring that the proposed conduct and information requirements are put into practice. Portfolio managers, for example, should in future be allowed to exercise their wide-ranging powers of decision with regard to the investment of client assets only if they have been authorised by FINMA. In addition, all client advisors should prove that they know the applicable rules of business conduct and have the necessary specialist knowledge by taking a compulsory test and regular further training.

Implementation based on a new financial services act

The coherent implementation of the proposed measures requires a financial services act covering all the relevant sectors. Only those rules of business conduct that reflect the specific features of individual sectors should continue to be governed by the existing financial market laws.

In addition to these changes to supervisory law, FINMA also regards measures at the level of civil law as expedient. These should facilitate the enforcement of retail clients’ claims against financial services providers.