Geissbühlers Lectures Flashcards
(102 cards)
1
Q
The Trust Index
A
Consumers’ Disposition to Trust
* This is an individual-level trait reflecting a consumer’s general willingness to trust others or institutions. It can influence how easily trust in the organization is formed.
Trust in the Organization
* Trust itself is divided into two dimensions:
o Cognitive Trust: Based on rational evaluations of the organization’s competence and reliability.
o Affective Trust: Based on emotional connections and belief in the organization’s goodwill.
2
Q
Why is regulation needed?
A
- Unequal balance of power between client and FI
- Risk for investors as a result of insufficient product understanding / complexity of the products
- Operational risks as a result of the complex structures
- Systemic risks as a result of size and interconnectedness
- Growing risk appetite (wrong incentive systems)
- Reputation of the financial centre (sanctions/credibility)
- Legal certainty for clients and FI
- Protection of market participants / competition
3
Q
Actors & cooperation
(Swiss government) Chain for banking laws
A
- Memorandum of Understanding (MoU) between FDF, SNB and FINMA as well between SNB and FINMA:
o Exchange of information on financial stability and regulation
o Cooperation in the event of a crisis
4
Q
What is FINMAs Legal Mandate
A
- Spotlight of FINMA’s mandate
5
Q
Authorisation and supervision cascade
A
6
Q
FINMA’s Areas of responsibility
A
7
Q
Types of Regulation
(By FINMA)
A
- Own ordinances: If legislater expressively provided for it, to regulate technical details or particularly dynamic circumstances (example: Anti-Money Laundering Ordinance-FINMA
- Circular: aim to ensure an uniform and appropriate practice of the supervisory authority in the application of financial market legislation
o Concretise open, undefined legal norms and contain specifications for the exercise of discretion
o Do not require explicit legal basis
o Bind FINMA in the application of the law
8
Q
FINMA Audit Relations
Interaction with external audit
A
FINMA (Swiss Financial Market Supervisory Authority)
* Role: Central regulatory authority responsible for overseeing the Swiss financial market.
* Functions:
o Conducts direct supervision of supervised institutions to ensure compliance with financial regulations.
o Collaborates with audit companies for basic and additional examinations.
o Receives audit reports from audit companies for assessment and regulatory action.
Audit Companies
* Role: Independent entities authorized by FINMA to audit supervised institutions.
* Functions:
o Perform audits as per the mandate provided by supervised institutions.
o Conduct both basic and additional examinations to ensure compliance with regulatory requirements.
o Submit detailed audit reports to FINMA for regulatory evaluation.
o Operate under quality control and supervision from RAB.
RAB (Regulatory Auditing Body)
* Role: Oversees the quality and supervision of audit companies.
* Functions:
o Authorizes audit companies to operate.
o Ensures audit quality through continuous monitoring and evaluation.
o Collaborates with FINMA to maintain effective supervisory standards.
Supervised Institutions
* Role: Financial entities (e.g., banks, insurance companies) under direct supervision of FINMA.
* Functions:
o Provide necessary information and access for audits.
o Comply with regulatory mandates and undergo audits by authorized audit companies.
9
Q
Appointment of an investigator
Art 36 regulatory framework of FINMA
A
- FINMA appoint an independent person to investigate circumstances relevant for supervisory purposes at a supervised person or entity or to implement supervisory measures that it has ordered (investigating agent)
- Enforcement: encompasses all investigations, procedures and measures taken by FINMA to clarify and punish breaches of supervisory law
o Due to indications of violations
o Opening of enforcement proceedings in accordance with the requirements of the administrative procedure act (VvVg)
o Appointment of an investigator: clarification of a matter relevant under supervisory law or implementation of supervisory measures ordered by FINMA - Documents/Data remain with the institute
10
Q
Information Gathering
A
- Secure evidence: customer correspondence, AMLA / CBD Documents (AMLA: mandatory by law, Code of due diligence: self-regulation: KYC), directives, regulations, BoD/GL minutes, manuals for process flows, backup electronic data
- Interviews: no application of the Federal Act on Administrative Procedure, taking minutes? Countersignature? Presence of lawyers/employee?
11
Q
Securing Data
A
- Paper, E-Mail, Hard Disks, Mail server, chats, clouds etc.
12
Q
Data Analysis
A
Planning is everything
Always keep an eye on the scope
13
Q
Surprise Audit: Reporting
A
- Interim reports: jour fix, written interim report (no assumptions if the facts have not yet been completely clarified)
- Final report:
o Facts vs. legal assessment
o Covering the FINMA order
o Also report positive aspects
14
Q
FINMA Sanctions
A
- Restoration of compliance with the law
- Guarantee of proper business conduct is a condition of authorization (Gewährsbrief)
- Prohibition from practicing a profession or performing an activity: serious violation of supervisory provisions, activity in management position at an institution supervised by FINMA (duration up to 5 years), client advisor or trader activity
- Publication of the supervisory ruling: serious violation of supervisory provisions, final ruling once it takes full legal effect, disclosure of relevant personal data in electronic or printed form
- Confiscation: serious violation of supervisory provisions, prevention of a loss, profit made by an institution or a person in a management position, the right to confiscate prescribes after seven years
- Revocation of licence/withdrawal of recognition: serious violation of supervisory provisions, supervised entities no longer meet the licensing requirements, loss of the right to carry out the activities
Chatgpt:
1. Measures Against Institutions - Revocation of Licenses: FINMA can revoke an institution’s license to operate if it no longer meets the legal or regulatory requirements.
- Enforcement Proceedings: FINMA can initiate proceedings against financial institutions for violations of financial market laws, potentially leading to corrective measures or sanctions.
- Restrictions on Business Activities: FINMA may impose limitations on the scope of an institution’s activities, such as suspending specific services or limiting operations.
- Forced Liquidation: If an institution is insolvent or violates regulations severely, FINMA may order its liquidation.
- Fines and Penalties: While FINMA itself cannot impose fines (these are handled by Swiss courts), it can report severe violations to criminal authorities for further action.
2. Measures Against Individuals - Industry Bans: FINMA can ban individuals from holding certain positions in financial institutions for a period of up to five years if they are deemed unfit.
- Confiscation of Gains: If individuals gained improperly from regulatory violations, FINMA may order the confiscation of illicit profits.
- Warnings and Public Announcements: FINMA can issue formal warnings to individuals or publicly name them to ensure transparency and deter non-compliance.
- Suitability Assessments: Individuals may be declared unsuitable for leadership roles or be barred from performing certain functions within supervised institutions.
3. Corrective Actions - Appointment of Investigators: FINMA may appoint independent investigators to examine and report on an institution’s operations, compliance, or specific incidents.
- Orders for Compliance: Institutions or individuals may be ordered to take specific actions to remedy violations or ensure compliance with the law.
- Temporary Administrators: In cases of severe mismanagement, FINMA may appoint a temporary administrator to manage the institution.
4. Reporting and Criminal Proceedings - Notification to Criminal Authorities: If FINMA identifies criminal conduct (e.g., fraud or insider trading), it reports the matter to Swiss prosecutors for criminal investigation and potential prosecution.
- Collaboration with Foreign Authorities: FINMA cooperates with international regulators and may share information or impose measures based on mutual agreements.
5. Publication of Decisions - Public Enforcement: FINMA may publish enforcement actions or decisions to increase transparency and deter violations.
These sanctions are applied in a proportionate and case-specific manner, ensuring they align with the severity of the misconduct and the potential risks to the financial market.
15
Q
Gewährsbrief
A
- FINMA informs an individual about potential concerns regarding their suitability for a leadership position in a FI. This is typically issued when the individual has been involved in incidents or irregularities that raise doubts about their ability to ensure sound and proper business conduct.
- The Gewährsbrief is intended to notify the individual an provide them with an opportunity to respond. It is not a formal ruling and does not establish immediate rights or obligations.
- FINMA reserves the right to assess the individuals suitability for future leadership roles.
- The purpose of the Gewährsbrief is to maintain public trust in the integrity and porfessionalism of FI by ensuring that individuals in key positions meet the necessary standards of reliability and competence.
16
Q
Art. 47 Banking Act
Banking secrecy
A
- Prison up to three years or fined accordingly:
- Disclose confidential information as a member of an executive or supervisory body, employee, representative or liquidator of a bank or as a body or employee of an audit firm
- Attempt to induce such a breach of professional secrecy
- Discloses confidential information to third parties or use this information for their own benefit or the benefit of others
- Anyone who acts negligently is punished with a fine of up to 250’000 Swiss francs
17
Q
Banking Secrecy
A
- Existing, former or potential customers
- Negative information is also prohibited
18
Q
Obligation to provide information under private law
A
- Customer or its legal representative
- Heirs and executors
- Authorized representative
- Spouses but only in context of matrimonial or divorce proceedings
- But not: beneficial owner of the assets
19
Q
Obligation to provide information to authorities
A
- Criminal proceedings (investigating judge, puplic prosecutor, criminal judge)
- Civil procedure
- Debt enforcement and bankruptcy proceedings
- Administrative procedure
- But not: proceedings for tax evasion
20
Q
Disclosure of clients in the tax area
A
21
Q
Automatic Exchange of information
A
22
Q
Sanctions and embargo in the world
A
23
Q
Sanctions & embargo types
A
- Complete Sanctions: restriction of trade relations with the sanctioned state: US Embargo on Cuba
- Sectoral sanctions: Restriction within a specific sector: Sanctions on Iranian Oil
- Targeted sanctions (“smart sanctions”) specific individuals or groups: Sanctions on Individual Russian Oligarchs,
24
Q
Sancions: Special Case USA
A
Principle (Left Box)
U.S. sanctions laws apply to the following:
1. All U.S. citizens: No matter where they are located in the world.
2. Foreign nationals with permanent residence in the USA: These individuals must comply with U.S. sanctions laws.
3. All companies incorporated under U.S. law: Regardless of where the company operates globally.
4. All companies and persons resident in the USA: Including both citizens and non-citizens operating within the U.S.
In Some Sanctions Programs (Right Box)
Additional categories may be included in specific sanctions programs:
1. Companies owned or controlled by U.S. citizens: Even if these companies are located abroad, they may still be bound by U.S. sanctions.
2. Foreign nationals in possession of goods from the USA: This refers to foreign entities or individuals handling U.S.-origin goods, which could make them subject to sanctions.
Special Considerations (Bottom Section)
Certain transactions or situations might trigger U.S. sanctions regulations:
1. The clearing or receiving bank is located in the U.S. or with a U.S. bank:
o Any financial transactions involving U.S.-based banks or those clearing through the U.S. financial system can fall under U.S. jurisdiction.
2. Supply of U.S. goods or services:
o Even if the exporter is foreign, supplying U.S.-origin products can subject them to U.S. sanctions laws.
3. Employees who are U.S. residents and/or citizens:
o Such employees, even while working for foreign companies, must adhere to U.S. sanctions regulations.
4. Transactions carried out in USD:
o Any transaction denominated in U.S. dollars, even if between foreign parties, might involve U.S. banks and therefore be subject to sanctions.
25
Sanctions and Embargo: Measures within the bank Know your Customer
* All person involved and their business activities must be reviewed:
o When opening an account
o Regularly for ongoing business relationships
o Recipients of transfers
26
Sanctions and Embargo: Measures within the bank:
Duties of the customer
* Prohibition of transactions through the bank with sanctioned persons and countries
* Notification of change of domicile, nationality, changes in business activity
27
Sanctions and Embargo: Measures within the bank (compliance)
* Knowledge of the regulations: up-to-date know-how (content of relevant sanctions, latest lists), international practice
* Monitoring: queries with a focus on sanctions, systems and configuration, escalation
28
Sanctions and Embargo: Measures within the bank (staff awareness)
* Training
o National sanctions & embargos
o Relevant international sanctions & embargos
o Need for a detailed KYC
o Importance of transaction monitoring
* Instruction system
o Instruction Sanctions & Embargos
o KYC & KYT
29
The transparent customer
* KYC according to AMLA/CBD
* US citizen; green card; substantial presence in USA
* White money:
o clarification of tax conformity
o country-specific information at AIA
* Knowledge and experience
* Financial circumstances
o Income
o Assets, including real estate holdings
o Financial obligations
o Liquidity needs
30
Swiss Criminal Code
Anti money laundering
(Consequences)
* Three years custody or monetary penalty for persons who know or must assume that the money comes from crime.
* Predicate (Straftat) muss gegeben sein
* Misdemeanour (Ordnungswidrigkeit) is excluded (for example tax evasion)
31
Swiss Criminal Code
Consequences for not knowing the beneficial owner
* Persons who as part of his profession accepts deposit and fails to ascertain the identity of the beneficial owner of the assets with care that is required in the circumstances is liable to a custodial sentence not exceeding one year or to a monetary penalty
32
Anti money Laundering Act
Consequences
* Violation of the duty to report: fine not exceeding CHF 500’000
* If the offender acts through negligence: fine not exceeding CHF 150’000
33
How money laundering works
Placement
Layering
Integration
34
Due Diligence Obligations
* Identification of contracting party & establishing the identity of the beneficial owner of assets, KYT: origin of assets, client’s activity
* In case of unusual business relationships or transactions: clarification of the economic background
* Documenting business relationships & transactions with increased risk: for example risky countries or PEP
* Organizational measures to prevent money laundering and terrorist financing (issuing internal directives, training staff, carrying out controls, IT triggers
* Reporting suspicions of money laundering to MROS
35
Due diligence
Self regulation of Swiss Banks
* Swiss Banks code of conduct with regard to the exercise of due diligence
* Preserving the good name of the swiss financial centre
* Due diligence rules concerning the identification of the controlling person and beneficial owner
* Effective contribution against money laundering and terrorist financing
36
Information to be documented
Nat persons and legal entities
* Natural persons:
o Name, first name
o Date of birth
o Nationality
o Effective residential address
o Document of identification (Passport, ID, driving license)
* Legal entities
o Company name
o Effective seat address
o Document of identification
37
Types of Identification
* Face-to-face meeting
* By correspondence
* Per video
* Online
For accounts/deposits of any kind & cash transactions of CHF 15’000 and more
38
Identification (face-to-face)
* Physical presence at the time of conclusion of the contract
* Inspection of the original of the official identification document and filing of a copy for the files
* Photo on the ID card must be recognizable
* Copy does not have to be made by the FI
* Expired documents: exceptionally admissible if there is no doubt of the identity
* If copy is only delivered after personal appearance: establishing a business relationship by correspondence
39
Identification (correspondence)
* Delivery of a copy of the identification document
* Confirmation of authenticity of the copy by: Bank, another financial intermediary or lawyer admitted in CH, notary or public body
* No contract necessary
* Verification of residence address with bill (electricity, water, telephone) or postal delivery
* Official confirmation of residence is equivalent
40
Identification
(Video)
* Equivalent to face-to-face meeting
* Transmission of identification information before identification
* Communication in real time
* Verification of the customer’s identity through video chat and verification of the identification documents by decoding the information in the MRZ ( machine readable zone)
* Verification of the identity of the contracting party via TAN
41
Identification (Online)
* Equivalent to identification when a business relationship is established by correspondence
* Photo of the identification document is equivalent to a copy
* Verification of the identity of the contracting party via TAN
* Verification of residence address with bill (electricity..) or postal delivery or public register
* Transfer of money (or confirmation of authenticity of identification document)
42
Identification of legal entities
* Written extract from a database maintained by: registry authority, supervisory authority or a trustworthy private party
* Extract must not be older than 12 month or certificate of an auditing company is available
* Swiss Official Gazette of Commerce (SOGC), CRIF AG(Teledata, Deltavista), Creditreform or others, Public website for commercial register entries (zefix), published lists of financial intermediaries by the supervisory authorities (FINMA)
* Identification of the person who opens the business relationship
* Beneficial owner of assets: Form A if doubts: contractual partner not identical with BO, criminal offence to provide false information
43
Beneficial owner of Entreprise
* Natural persons hold at least 25% of the capital or voting rights in the legal entity or otherwise control it
* If the beneficial owners cannot be identified the most senior member of the legal entity’s executive body must be identified
* Applies to operationally active legal entities and partnerships
* Expections: Listed companies, authorities (new: also foreign), banks and FI (if adequately supervised), societies and associations whose sole purpose is to safeguard the interest of their members or beneficiaries in joint self-help or which pursue political, religious, scientific, artistic, charitable or similar purposes (no economic purpose, no threshold value required)
44
Know your customer
* Type and purpose of business relationship
* Beneficial ownership
* Origin of the assets contributed
* Use of withdrawn assets
* Origin of the assets of the contracting party and the beneficial owner assets
* Professional or business activity of the contracting party and the beneficial owner of the assets
* PEP
* Competent third party can make a reliable judgement about the clarified business relationship and transaction
45
KYT: Risk-based approach
* Relationship with increased risk
* Every FI developes its own criteria that indicate a Rwir: Internal Guideline, Responsiblities, Controls (procedure and frequency)
* Executive Board decides on the arrangement of regular controls of al Rwir and their monitoring
46
Rwir foreign PEP’s
* Leading public function abroad
* Heads of state and government
* Senior politicians at national level
* High officials in the administration, judiciary, military and parties
* Supreme body of state-owned companies of state significance
* Persons entrusted with leading functions in intergovernmental organisations and international sports federations
* Companies and persons who are recognizably close to the aforementioned persons for family, personal or business reasons
* Determination via lists and databases, but material overall assessment in the individual case
47
Swiss PEP
* Next to political trigger you need another trigger to be PEP
* For example high assets
48
Transactional Analysis
* Clarifications:
o beneficial owner
o origin of assets
o intended use of withdrawn assets
o background and plausibility of larger incoming payments
o Payment flows are in recognizable relation to the customer profile
49
BNP Paribas Case
* World record fine 8.9 billion USD because of sanction violations
* Violated sanctions against Sudan, Cuba and Iran
* BNP Suisse believed US sanction law did not apply to foreign banks
* BNP Paribas processed billions of dollars of financial transactions for entities in countries subject to U.S. sanctions
* Omitting identifying information form wire transfers, using non-us intermediaries to mask the origin funds, creating systems to bypass detection by us authorities
50
Corporate Governance
Who is part of corp. gov.
51
Definition of Corporate Governance
Swiss code of best practice for corporate governance:
Corporate governance is the set of principles geared to the sustainable interests of the company which, while preserving decision-making ability and efficiency at the highest level of the company, strive for transparency and a balanced relationship between management and control
FINMA Circular:
Corporate governance is understood to mean the principles and structures on the basis of which an institution is directed and controlled by its governing bodies
Leadership and control
52
Good corporate governance
* Ensures good corporate culture
* Ensures adequate monitoring and control
* Determines the distribution of revenue
* Sets the right incentives
* Defines decision-making rights
* Is legally compliant (compliance)
53
Main task of governing bodies
* Identify
* Capture
* Limit
* Control
Risks
54
3 Lines of Defense (internal)
Internal Rules are stronger than the law (audit controls it
55
Concept & objective of compliance
* Economiesuisse (Swiss code of Best practice for CG: The Board of Directors shall take measures to comply with the applicable standards (compliance)
* Sarbanes Oxley Act: SOX details criminal and civil penalties for noncompliance, certification of internal auditing, and increased financial disclosure. It affects public and private U.S. companies and non-U.S. companies with a U.S. presence. SOX is all about corporate governance and financial disclosure.
* FINMA Circular: Compliance is understood to mean abiding by the relevant statutory, regulatory and internal rules and observing generally accepted market standards and codes of conducts.
* Basel Committee: The expression compliance risk is defined in this paper as the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organization standards, and codes of conduct applicable to its banking activities.
* Clear rules, no expeptions, Handelsszeitung, Compliance with laws, ordinances, regulations, circulars and rules of professional conduct as well as generally accepted business principles
* Financial Times: Adherence to ethical standards such as honesty, fairness, transparency, decency and trust in the relationship with customers, other stakeholders and employees
56
Example: Cum-ex tax scandal
The scheme centered around rapid trading of shares with ("cum") and without ("ex") dividend rights among various participants around dividend payout dates. This created confusion over share ownership, allowing multiple parties to claim tax rebates on capital gains taxes that had been paid only once, or in some cases, not at all. Essentially, it enabled investors to receive refunds for taxes they hadn't actually paid.
57
Limits to the scope of action
How far does a company exploit the legal framework?
58
Code of Conduct
* Provides orientation
* Concretises values and norms
* Provides a basis for concrete operational action
* Shall be specified in directives
* Sensitises employees
* Anchors the role model function of managers
Example Credit Suisse:
* Whoever has to act well and rightly must know what is good and right
* You have to do yourself what you say and what you expect from others
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Code of Conduct 2 pic
60
Compliance Officer
* Poor recognition and praise
* Business obstructors
* Limited career opportunities
* Salary can’t keep up with either the mental pain tolerance level or the high responsibility
* Seating in the hot seat when the worst comes to the worst
61
Compliance Officer Personality
* Deep understanding of the business
* Leadership and persuasive qualities
* Personality, maturity and persuasiveness
* Drives change in he organization and in behaviour
* Is courageous and reaches out to the employees in the company
* Approaches employees on his own initiative – good communication skills
* Shows backbone to leadership to stand his ground
* Demands the necessary resources
* Insists of an unrestricted right to information, access and inspection
* Asks questions
* Make sure to be sufficiently involved in product development at an early stage
* Documents activities, comments, recommendations
* Advocates his point of view and makes it transparent
* Remains steadfast towards the front
* Does not give tips on how to get around it, or does not look the other way
* Demands and uses direct access to management
* Demands and uses escalation options
* Does not make decisions in individual cases itself (only supportive)
* Is free from conflicts of interest
62
1MDB Case
* The 1Malaysia Development Berhad (1MDB) scandal is a significant financial fraud involving the misappropriation of billions of dollars from Malaysia's state investment fund, 1MDB. Established in 2009 by then-Prime Minister Najib Razak to promote economic development, the fund became a conduit for extensive corruption and money laundering. Fund managers used the money for themselves.
* Wolf of Wall Street was financed from one of the managers at 1MDB
* The compliance officer of Falcon Private Bank got a two-year ban from holding a management role in the financial services industry. Falcon was involved in the graft scandal.
* Pro Head of Compliance: CEO & Bod exerted pressures (findings from interviews / phone records by FINMA investigator)
* Contra Head of Compliance: had organizational and factual possibilities to influence the decision of the management & report to MROS, failure to propose a report to MROS to Senior Management, failure to fila a report oneself, there was a lack of firm adherence to its compliance standpoint, was responsible for serious supervisory infringement
* Main problem: profitability vs. compliance
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Compliance is a must
* Culture of compliance as the best protection for the bank, as it is not possible to establish internal rules for all potential compliance risk situations
* Commitment of management to compliance and integrity as a basic prerequisite for an effective compliance culture
64
Local scope
Where does FINSA apply?
3) The provider needs to act passive, then it’s allowed to have clients from EU. Active Institution in EU: needs a license
65
Material scope
(For FINSA to apply)
Financial services provider / client advisor
* Acquisition or disposal of financial instruments
* Acceptance and transmission of orders involving financial instruments
* Portfolio Management
* Investment advice
* Granting of Lombard loans
66
Provisions of the Code of Obligations Art. 394ff CO
What is a PM what is a IA
* Portfolio Management: Mandate of the client to the portfolio manager to invest in the best possible way
o Duties of care and loyalty with comprehensive protection of interests
o Comprehensive information and advide taking into account knowledge and experience, the personal financial situation and risk suitability
* Investment Advice: Mandate of the client to the investment advisor to advise the client on investment decision
o Duties of care and loyalty in connection with advice and warnings
o Duty of disclosure as in portfolio management
67
Customer Segmentation
* Categories
o Retail clients
o Professional clients
o Institutional clients
* Possibility of opting out for retail customers if:
o Experience/profession & assets >CHF 500’000 or
o Assets > CHF 2'000’000
o Financial Assets such as bank balances, securities, derivatives, precious metals, life insurances
o Not included: direct investments in real estate, pension schmees and social insurances
* In case of several persons: always consider the weakest link (expetion in the case of power of attorney relationships)
* Professional clients can declare that they wish to be considered retail clients
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Information requirements before onboarding
Content
Information requirements before onboarding
Content
* Financial Service providers (type of authorization with name, address of the supervisor, field of activity, ombudsman’s office)
* Economic ties to third parties (interest conflicts)
* Services offered and financial instruments
o Type, characteristics, modes of operation
o Essential rights and obligations for clients
o Risks for clients
PM & portfolio related Investment Advisor: Risks from investment strategy
IA on individual transactions: disclosures on individual financial instruments
* The market supply taken into account when selecting the financial instruments (own or third-party financial instruments)
* Ongoing and one-off costs and fees (Bandwidths possible, if not determinable in advance without major effort)
69
Information requirements before onboarding
Modalitites
* Before service is provided: updates on risks and costs in the event of significant changes
o Client must have sufficient time to understand the information before concluding the contract
* Permanent data carrier or website: Client has to know and able to retrive/download and record on a durable medium at any time
* Clear separation of advertising material
* Can be done with the key information document
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Key information Document
Scope
* Principle: in case of investment advice, a key information document must be made available to the retail client in advance
* Exception: Shares and non-derivative debt instruments, financial instruments within the scope of portfolio management mandates
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Key information Document
Time of provision to the retail customers
* Before subscription or conclusion of contract
* Exception: in case of consultation in absentia (technically not possible), provided that the client’s consent is available, consent must be documented
* KID must be easy to understand and clearly distinguishable from promotional material
* Documents under foreign law that are equivalent to the kid may be used instead
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Appropriateness & Suitability
Legal Basis FINSA
* provider of investment advice or portfolio management shall perform an appropriateness or suitability review
* Knowledge and experience and financial circumstances and investment objectives of the clients
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Appropriateness & Suitability
Modalities
* Customer decides what he discloses
* Rely on information provided by the client unless there are doubts
* Duty to review: appropriateness or suitability of the financial instrument
* Knowledge & Experience of authorized representative
* PM & portfolio based IA: K & E refers to the service and not the individual financial instruments
74
Assessment of appropriateness
Advisory on individual transactions
* Assessment of knowledge & experience:
o Specific product type
o Appropriate education can compensate for lack of K&E
o Before transaction (not applicable for Execution only
o Professional clients: can be assumed they have necessary K&E
o If K&E is missing, the customer must be warned, this has to be documented
75
Assessment of suitability
Portfolio-related advice & portfolio management
* Assessment:
o Knowledge & experience
o Financial circumstances
Income (type and amount)
Assets including real estate holdings
Financial obligations
Liquidity needs
o Professional clients: assumption that they have K&E and can bear the risks of the financial service
o Investment objectives:
Time horizon of the investment
Risk awareness as well as ability and willingness to take risks
o Creating a risk profile
o Determine the investment strategy
76
Documentation requirements (written)
(investment advice)
* Agreed services, risk profile & investment objectives
* Appropriateness & suitability review (information collected about client)
* Consequences for lack of appropriateness or suitability (warning)
* The needs of the client and the reasons for recommending products or services (in case of investment advice)
77
Documents for the clients
* Documentation in accordance with obligations under FINSA
* Orders received & executed
* Composition, valuation & development of the portfolio
* One-off and ongoing costs incurred when acquiring or disposing of financial instruments
* On a durable medium: at the agreed time intervals or on request of the customer (delivery within 10 days)
78
Transparency & care in client orders
Handling of client orders
* Good faith & equal treatment
* Procedures & systems that are appropriate to their size, complexity & business activities and ensure the interests & equal treatment of customers
* Client orders are registered & allocated promptly and correctly
* Comparable client orders shall be executed in order in which they are received
* Combining orders: interests of clients shall be equally protected
* Clients must be informed immediately of any difficulties that may affect the correct execution of the order
79
Transparency & care in client orders
Best Execution
* Best possible result in financial, time and quality terms
* Execution costs and third-party compensation (retrocessions) must be taken into account
* Determination of criteria for the choice of execution venue (Stock Exchange Location), price, costs, speed, probability of execution & settlement
* Express instruction: order shall be executed accordingly
80
Transparency & care in client orders
Use of financial instruments by customers
(lending)
* Borrowing financial instruments from client portfolios requires express consent of the client: written agreement, separate from the GTC or any other text form
* The customer’s consent is only valid if the customer has been informed about the risks in an understandable way, is entitled to receive proceeds and is compensated for the lent
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Adequate organization
Compliance with FINSA
* Appropriate policies
* Processes for the delivery of services
* Careful selection & training of staff (Art. 12 FINIO: staff must be appropriately and suitably qualified for their business activities)
* Internal controls
* No false incentives to employees (appropriate remuneration policy)
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Avoidance of conflicts of interest
Organizational arrangements
* Measures to identify conflicts of interest
* Measures necessary to prevent the exchange of information to the extent that the exchange could be contrary to the client’s interest
* Separation of organization and management of empoyees functionally , if necessary, also spatially
* Prohibition of false incentives (bonus should not influence quality and objectivity)
* Issuing internal policies
* Disclosure of conflicts of interest that cannot be eliminated without disproportionate effort:
o From which circumstance does the conflict of interest arise?
o What are the risks of the client?
o What precautions are taken to mitigate the risks?
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Avoidance of conflicts of interest
Staff transactions
* Implement measures that are suitable to prevent the misuse of information by employees
* Also apply to Members of Board Directors and Executive Board
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Retrocessions (CH EU)
Avoidance of conflicts of interest
Prohibited conduct
* Retrocessions in EU are not allowed (mifid)
* In CH for financial service providers is compensation from third parties allowed if:
o customer is expressively informed in advance
o and the client can relinquish such compensation
o or the bank pass on the compensation in full to the customers
* prior disclosure of the nature and extent of the compensation
* information about bandwidth possible
* for all types of services (in particular PM and investment advice)
* Art. 29 FINSO: incentives that cannot be passed on per se must be disclosed as a conflict of interest.
* Offences in connections with retrocessions have serious consequences (imprisonment)
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What are Ombudsman’s offices
* A mediation request is not obviously abusive
* No conciliation attempt or other official procedure at the same matter
* Confidential (statements & correspondence may not be used in other proceedings
* Civil action is not rules out
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Ombudsman’s offices (offices)
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Register of advisors
Registration requirements:
* Swiss financial service providers: Investment advisers
* Foreign financial service providers
o All client advisory who look after retail clients
o Not: client advisors who are subject to prudential supervision abroad and that the services are provided exclusively to professional and institutional clients
Registration requirements
* Sufficient knowledge of the rules of conduct of the FINSA and necessary professional knowledge
* Professional liability insurance for each consultant (CHF 500’000) or equivalent financial securities
* Connection to ombudsman
* The data of the register of advisers are public
Contents of the register of advisers
* Name and first name
* Name and address of the financial service provider
* Function / Position of the client advisor
* Fields of activity
* Completed education and training
* Ombudsman’s office
* Date of the register entry
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Applicability MIFID II for CH financial institutions
* Lugano Übereinkommen: accepts international jurisdiction of the courts in the EU and Countries of the European Free Trade Association (EFTA) for example Switzerland, Norway, Iceland & Liechtenstein. The main aim of the Lugano Convention is to enhance legal certainty and predictability in cross-border disputes in Europe. It simplifies access to justice for individuals and businesses and fosters economic cooperation.
* As a foreigner customer (domicil) you can go to your own court in your doestic country.
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Limited option for CH financial service providers
* Passive Freedom to Provide Services:
o This refers to a situation where a client from the EU actively seeks services from a Swiss financial service provider.
o In this case, the Swiss provider can deliver services without requiring a local presence or license in the EU.
* Freedom of Establishment:
o Swiss banks can establish a branch in the EU, but they must obtain a local license to operate legally.
o However, active financial advisory or service provision to EU clients without a license is not allowed.
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FINIA/FINIO
Subject matter & purpose
* Regulates the requirements for the activities of financial institutions
* Aims to protect investors and customers of financial institutions & ensure the functioning of the financial market
Scope
* Portfolio managers & trustees
* Managers of collective assets
* Fund management companies
* Securities firms
Not subject to this law:
* Persons who exclusively manage assets of persons economically or familially related to them
* Banks and insurance companies
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Portfolio managers pursuant to FINIA
(Definition of PM)
* A portfolio manager is a person who manages assets on the basis of a power of attorney (FINIO), further clarification of the Federal Department of Finance FDF:
o Manages portfolio autonomously based on investment objectives & investment strategy (discretionary portfolio management)
o Advises clients on individual investments & agree on which investments are to be made (execution based on a power of attorney)
o Accepts client orders for financial instruments & instruct banks to execute them by means of a power of attorney
* Whenever a financial service is performed on a professional basis & the assets can be disposed of by means of a power of attorney, it is an portfolio management
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The new supervisory regime: authorization cascade
(other picture than in slide because of the language)
* Before: Proprietary trading in securities requires a license as a securities dealer if annual turnover exceeds CHF 5bn. Additional licences might be required, such as a banking licence, if additional financial market activities are conducted.
* New:
o All investment firms need a licence under FinIA
o A securities licences is not needed if a securities firm has already a banking licence (according to the swiss banking act)
o Exception: Fund management needs a separate license
PM + precious metal trader
investment advisor -> advisor register
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Supervisory organisations
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New supervisory regime: mixed model
For trustees and Portfolio managers
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Ongoing supervision
Principles
(new supervisory organisations)
* FINIA requirements (authorization requirements
* Comply with obligations of AMLA
* Comply with obligations of FINSA
* Audit periodicity 1-4 years depends on the risks of the activity & the organization
* FINMA gives SOs guidelines for auditing & supervision in regard to
o Risk assessment system
o Minimum requirements for supervision concept
o Minimum test points
o Test periodicity
* FINMA reserves the right to issue legally enforceable decisions and findings (rulings)
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Conditions for approval of financial institutions in Switzerland
* Organisation, in particular corporate governance & risk management:
o Organizational principles including geographical & business area
o Appropriately qualified staff
o Risk management must cover entire business activity: all material risks must be identified, assessed, controlled & monitored
* Place of management
* Guarantee of proper business conduct
o Borad of Directors and executive board
o Qualified participants (10%)
* Minimum capital & collateral
* Own funds
* Ombudsman’s Office, Supervisory Organisation & Auditor
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Complex environment for EAM (external Asset manager)
Custodians (Depotbanken)
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EAM & custodian bank triangular relationship
## Footnote
EVV = EAM
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Fields of action
How to decide it?
Asking the right questions:
Legal terms:
* What are the organizational requirements of the new regulation?
* Do my processes meet the new regulations?
* Do my contracts/policies comply with the new regulations?
General/organizational:
* Is my business model still up to date?
* Do I want to launch new services/products?
* Do I want to expand the customer base?
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Will Switzerland achieve EU equivalence?
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Steps easy
Let me break down the key due diligence obligations that Golden Globe (Schweiz) AG must fulfill under FinSA as an external asset manager:
1. Appropriateness and Suitability Check
2. Information Obligations
3. Documentation and Accountability
4. Best Execution
5. Regular Reporting
6. Ongoing Monitoring
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Steps long
Let me break down the key due diligence obligations that Golden Globe (Schweiz) AG must fulfill under FinSA as an external asset manager:
Appropriateness and Suitability Check
Must conduct a comprehensive suitability assessment before providing portfolio management services
Need to gather information about the client's:
Financial situation (income, assets, current and future financial obligations)
Investment objectives (return expectations, risk tolerance, investment horizon)
Knowledge and experience with financial instruments and services
Information Obligations
Must inform clients about:
The company and its regulatory status
The nature and risks of the financial services offered
The costs and fees associated with the services
Economic ties to third parties that might create conflicts of interest
Documentation and Accountability
Must document:
The scope and nature of the agreed services
The client profile and rationale for recommendations
All portfolio management activities and decisions
The information provided to clients
Must provide clients access to their documentation upon request
Best Execution
Obligation to ensure best possible outcome for clients in terms of:
Price
Costs
Speed of execution
Likelihood of execution and settlement
Other relevant aspects
Regular Reporting
Must provide regular portfolio statements
Must inform clients about significant changes in:
The investment strategy
Portfolio composition
Performance
Risks
Must report any significant deviations from agreed objectives
Ongoing Monitoring
Must continuously monitor:
Portfolio alignment with agreed strategy
Client's investment objectives and restrictions
Changes in client circumstances that might affect suitability
Must adjust the portfolio management strategy when necessary
These obligations are designed to ensure client protection and professional service delivery in line with Swiss financial regulations.
