The Swiss Financial Market Supervisory Authority (FINMA) has recently authorized FinSA (draft FinSO) and the FinIA (draft FinIO). In October, the Federal Council started the consultation procedure on the draft FinSO by FinSA and draft FinIO by FinIA. It should be noted that the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) have been adopted in June 2018.
One of the many aspects of this law includes the regulation of independent asset managers (IAMs) and trustees. Now the IAMs and trustees need to be authorized by FINMA and they will be regulated and supervised by a supervisory organization (SO). The SO will be supervised by the FINMA ultimately.
FINMA Authorization for IAMs and Trustees
Players affected by the new FINMA authorization for IAMs and trustees as foreseen by the FinIA
This new FINMA authorization will affect the IAMs. However, FinIA has never used the term “external asset managers” or “independent asset managers.” FinIA describes them as portfolio managers and as per FinIA’s description, “A portfolio manager is a person mandated to manage assets on a commercial basis in the name of and on behalf of clients.”
As per FinIA, if a company has every financial right of the client, it can be classified as an IAM. However, if the company only chooses to do just advisory activity without having any power over their bank accounts, it will not be subject to FinIA regulations, hence averting FINMA authorization. However, such advisory companies need to follow the code of conduct of the FinSA that includes the obligation to obtain the registration of its client advisors (individuals) in the register of advisors.
In addition to this, the FinaIA says that the trustees will have to get authorization from FINMA. Trustees have been described as someone who manages or disposes a separate fund on a commercial basis; this is done for the benefit of the beneficiaries or a specified purpose based on the instrument creating a trust.
Register of advisors
The advisory companies with no power over clients’ bank accounts have to be under the ambit of FinSA rules. The company types include investment advisors or distributors of financial products, as in particular distributors of collective investment schemes.
As per FinSA regulations, the client advisors of those advisory companies need to register themselves with the register of advisors. It should be noted that this register of advisors is yet to be set up.
FINMA authorization conditions for IAMs and trustees
FINMA has laid down certain conditions for IAMs and trustees’ authorization. Those conditions include an adequate organization, financial guarantees, and guarantee of an irreproachable activity and affiliation to an ombudsman’s office.
- Adequate Organization:
As far as the management of the IAMs and trustees is concerned, it needs to have at least two qualified managers with at least five years of professional experience in asset management. Along with this structure, IAMs and trustees need to have risk management and internal control that includes compliance as well.
The draft FinIO also suggests additional requirements for larger companies. The classification of the companies is likely to be done by the annual gross income that is yet to be notified. The large companies will have to create an internal audit or a board of directors whose majority of the members should not be the part of the body responsible for the management.
- Financial guarantees:
As per the draft FinIO, the minimum capital of IAMs and trustees need to be CHF 100,000. This minimum capital needs to be fully paid and has to be always maintained.
Equity of the IAMs and trustees need to be at least 25% of the fixed costs of the last annual accounts or up to a maximum of CHF 10 million. The draft suggests that apart from the capital and equity, IAMs and trustees need to have required guarantees.
Authorization procedure and supervision of the IAMs and the trustees
As far as the authorization procedure is concerned, the draft requires the IAMs and trustees to get confirmation that they are affiliated with a SO. This affiliation will be provided if their internal regulations and organization confirm compliance with the supervisory law with a special focus towards combating money laundering.
The IAMs, trustees, and any person or company providing financial services that may be classified as banking institutes, securities firms, managers of collective assets, and occupational pension schemes and investment advisors need to follow the rules of FinSA. The rules are as following:
Organizational rules- The financial service providers need to have an organization with specific regulations in place curated according to their size, types of services offered, and kind of risk they pose. The organizations need to select the workforce carefully with proper training. However, FinSA is yet to fix the minimum qualification, training or experience for client advisors. The draft FinIO states that the IAM needs to have “raining in asset management equivalent to the experience necessary to carry out an audit of an asset manager.”
Client classification – As per the draft, the financial service providers have to classify their clients based on the level of legal protection. This classification may include private, professional or institutional clients. The clients need to be made aware of the client protection they have.
Documentation obligation- FinSA and FinSO require the service providers to be transparent as far as the information sharing is concerned. The organizations need to share their address, the type of supervision to which they are subject, and many other details concerning the financial services they offer that includes characteristics, rights of the clients, and risks attached to it. The service providers also need to be transparent with the clients regarding their relationships with any third parties or any case of conflict of interest.
It should be noted that the older draft FinIA gave the trustees and IAMs a minimum of six months to report to FINMA and a cut-off year of three years to comply with all the rules and conditions. However, the new FinSA now gives the IAMs and service providers the time till December 31, 2021 to adopt the new rules and conditions.