The legal bases change considerably!
As of 01/01/2020, there will be a huge paradigm shift in customer service. The two new laws of the Financial Services Act (FIDLEG) and the Financial Institutions Act (FINIG) will come into effect on this date.
As the founding president of VALIDITAS, the Professional Association of Swiss Financial Service Providers, Willy Graf has actively contributed to the legislative process of these new laws over the past three years with the support of his board and association members, as well as Beat Zemp, the Honorary President of the Umbrella Association of Teachers in Switzerland. The draft law proposed by former Federal Councillor Widmer-Schlumpf provided for alarmingly high additional costs for the financial sector at that time. These costs would have been borne, above all, by the customers.
This increase in costs due to excessive regulation could be prevented. With today’s result, the primary purpose of the laws, namely customer and investor protection, remains fully preserved and the costs of sensible customer protection have remained manageable for all parties.
The new provisions apply to all partners in the financial industry, banks, financial advisors, and asset managers. This means that all those who take customer protection seriously will need to take the necessary customer protection measures must in future.
VVK has always been regulated as an asset manager and has complied with all the provisions related thereto. It will also continue to be regulated as an asset manager in future.
What does VVK have to fulfil regarding the contact with its customers from 01/01/2020 onwards?
- Authorisation from FINMA Finanzmarktaufsichtsbehörde
- Increased minimum capital in the stock company
- Professional liability insurance
- Subordination to one of the supervisory organisations of FINMA
- Affiliation with an independent mediator
- Correctly regulated and revised
- Proof of appropriate organisation in the company
- Lawful data collection, management, and storage
- Keep all data available at all times for proof in the event of a dispute
- Complete transparency regarding costs, measures, and products vis-à-vis the customers
- Fulfilment of all prescribed conduct, due diligence, and auditing obligations, in particular the paramount appropriateness and suitability test
- Ongoing support of customers during the contractual period, as the auditing obligations will have to be repeated for each visit in future
- Diverse, broad range of financial product offers in the investment strategy
Which legal provisions stipulate this and how does VVK implement it?
Explanation: In the following text, you always see the articles of statute and its text first. Subsequently, what this means for the cooperation between the customers and VVK will be explained.
Customer protection (Art. 1 FIDLEG) and investor protection (Art. 1 FINIG)
There is an intrinsic paradigm shift: No longer just the risks of the individual financial products, but rather the personal and financial circumstances of the customers will form the basis of customer services and product sales according to FIDLEG. For this reason, VVK as a provision consultant and asset manager must provide even more intensive clarification, thereby making the information provided by the customer plausible. The collected data and their findings, as well as the measures based thereupon, are to be recorded and are rechecked with each visit. The customer’s access to all documents as well as data protection is guaranteed at all times.
Customer segmentation (Art. 4 FIDLEG)
- Private customers
- Professional customers
- Institutional customers
This means that all customers must be categorised into different classes and advised accordingly.
Conduct guidelines (Art. 15 et seqq. FIDLEG)
- Information obligations before contract conclusion
- Duty of documentation
- Obligations of transparency
- Due diligence obligations
In future, VVK consultants will have to make even more comprehensive clarifications regarding the customers’ information pertaining to their financial and familial situation. In particular, the area of possible money laundering needs to be reviewed more closely. Thus, the identification of the customer and the determination of the economic beneficiary are related to the asset values.
Most importantly, however, all communication between VVK and its customers relating to the existing situation and which has an impact thereupon, such as for example tax recommendations or investment proposals and reallocations of financial assets, must be recorded, signed, and filed. Ideally, the filing should be carried out in such a way that the customer has access to the respective dossiers and contracts.
Organisational measures (Art. 21 et seqq. FIDLEG Art. 8, 11,16 FINIG)
- Appropriate internal rules of corporate governance
- Risk management
- Effective internal controls
- Affiliation with independent auditor
These measures actually only concern the customer in the point “Affiliation with independent auditor”. The other provisions concern the obligations of VVK as a company vis-à-vis the supervisory bodies.
Minimum capital / own resources / professional liability insurance (Art. 20 FINIG)
- CHF 100,000, resp. ¼ of the fixed costs of the previous year
- Professional liability insurance
These provisions are reviewed by the auditors and supervisory bodies. It increases the customers’ security.
Appropriateness test (Art. 11 FIDLEG)
A financial service provider (e.g. VVK as a provision consultant and asset manager) who provides investment advice on individual transactions, without having to consider the entire customer portfolio to do so, must inquire about its customers’ proficiency and experiences and assess whether or not they are appropriate for the customer before recommending financial tools.
Suitability test (Art. 12, Art. 17 E-FIDLEV (consultation draft to FIDLEG))
- A financial service provider (e.g. VVK as a provision consultant and asset manager) who provides investment advice considering the customer portfolio or asset management, must inquire about the financial circumstances and investment objectives, as well as the proficiency and experiences of the customer.
- A financial service provider (e.g. VVK as a provision consultant and asset manager) must check the source and amount of regular income, the assets, as well as current and future financial obligations.
- A financial service provider must especially consider the information regarding the time horizon and the investment purpose.
VVK has never done “investment advice on individual transactions”, but rather “investment advice considering the customer portfolio or (the) asset management”, i.e. comprehensive consultation. The law requires all financial service providers, including banks, to check the customer’s overall situation as it is often very difficult to decide where the boundaries between the two types of consulting lie, as well as where boundaries for appropriateness and suitability are required.
What still stays the same for our customers after 01/01/2020?
- The quality of consulting and the high requirements for customer protection
- Consultation with the assistance of a provision plan.
- For over 20 years VVK has consistently advised its customers with a provision plan as the basis for all measures and decisions. With the plethora of new regulations, the law now does not stipulate this literally, but practically.
- With a provision plan, the requirements of the appropriateness test and the suitability test are also met in accordance with the new legal requirements, together with an expanded questionnaire – thus meeting the highest demands on customer protection.
What will change?
- More clarifications will have to be given now than have had to be given previously.
- More documents will have to be stored for evidential bases now than have had to be stored previously.
- The administrative expenditure for the individual customer will increase significantly.
- A better developed IT system is required.
- The auditing requirements are significantly higher.
- The standards for the training and further education of the employees increases.
- The costs for the digital data storage increase considerably.
- With the consultation based on an individual provision plan, VVK has hitherto already met customer protection – now also required by law – to the highest extent.
- The existing consultation process has thus far been lean and cost-effective.
- For VVK to maintain its current leading position in terms of customer protection, it has laid the foundations for the implementation of the new provisions in recent months. A lot has already been achieved; a lot still has to be done.
- As a result of the regulatory requirements, personal consultation on equal footing is noticeably more expensive. New costs arise, irrespective of the consulting fees:
- professional licence
- increased revisions and audits by the supervisory authorities,
- more qualified employees for the increased administrative expenditure and specialist requirements
- regular training of employees
- membership with the independent mediator
- increased requirements for the professional liability insurance
- digitalisation of the consulting process
- expanded data collection
- secure and long-term data storage
- complete transparency in working together
These costs must be reasonably and sustainably included in the consultation process for all parties.