Statement of the BX Swiss on the draft FinSO
As a self-regulating Swiss stock exchange, the BX Swiss is currently responsible for examining prospectuses for transactions requiring a prospectus for companies listed on the BX or for those wishing to list their financial products on the BX Swiss. Due to the practical experience and the direct connection to the existing business area of the stock exchange, the BX will probably apply via a new subsidiary as a prospectus inspection office within the meaning of Art. 52 FinSA. A licence application as a registration office for maintaining the register for client advisors within the meaning of Art. 31 FinSA is also planned, as a high synergy potential to the public law activities of the Enforcement Panel has been identified on the basis of the planned systems, personnel resources and processes at BX. The following consultation response is therefore based on detailed considerations which the BX has already made with regard to taking over the tasks of the Prospectus Inspection Office and the Register of Client Advisors.
In summary, we note that the proposed text of the Regulation contains the following problem areas or leaves them unresolved:
The possibility of unwanted regulatory arbitrage among review and registries
The legislator provides for a certain margin of discretion for both the prospectus inspection office and the registration office, in particular in the following areas:
Prospectus inspection office:
- Recognition of the equivalence of information according to Art. 37 para. 1 let. d and e FinSA;
- Recognition of foreign trading venues pursuant to Art. 47 para. 1 let. b draft FinSO;
- Recognition of generally accepted accounting standards pursuant to Art. 51 para. 3 draft FinSO; and
- Recognition of countries or their legal systems within the meaning of Art. 54 FinSA.
Client advisor register:
- Scope in the requirements for the registration requirements under Art. 29 draft FinSO, in particular with regard to the fulfilment of the requirements under Art. 6 FinSA.
In principle, this discretionary scope is to be welcomed, as it enables testing and registration office to carry out their activities in a market-oriented manner. However, since it can be assumed that there will be several review offices and several registries from the entry into force of FinSA, undesirable regulatory arbitrage among the various prospectus review bodies and registration offices may occur without prior and ongoing coordination by FINMA within the scope of the above-mentioned discretionary powers. The following considerations could favour this:
- Timetable for the legislative process: Due to the tight timetable from submission of the application to approval by FINMA and the commencement of operations shortly thereafter, the inspection and registration office will no longer have sufficient time to agree among themselves on uniform criteria.
- Competitive situation: Even if testing and registration office should not per se be profit-oriented, they must at least be able to cover their costs over a longer period of time and finance necessary further developments from their own resources. Due to potential economies of scale in the utilisation of personnel and IT resources, there is therefore an interest in handling as much business as possible via one’s own inspection or registration office.
- Lack of incentive for uniform criteria: The review and registration office have neither an inherent interest nor a legal obligation to agree on uniform criteria for the examination of prospectuses or the registration of client advisors.
- Missing organisational and subsidiary provisions for a uniform regulation: Neither the FinSA nor the draft FinSO provides for provisions in the event that there is no agreement between the registration office. Nor are there any organisational requirements for such an agreement, such as who takes the chair or whether a majority or unanimous decision is required.
- If an applicant’s application is rejected by a review or registration office, the applicant may attempt to resubmit the application to another review or registration office in order to obtain a positive opinion. Moreover, since a timely and automatic exchange of data between different testing and registration office is not possible for practical reasons, it would not be conceivable for a testing or registration office to be able to rely on the negative decision of another provider in certain cases.
In their activity reports to FINMA, the review and registration office are required to comment on coordination with any other review or registration office. However, the draft consultation on FinSO leaves open the question of how this coordination is to take place and what objectives it is intended to achieve at all. The aforementioned lack of central coordination among testing and registration office and the lack of an objective for such coordination could, in addition to favouring regulatory arbitrage, have other undesirable side-effects:
- Increased costs for market participants: In the absence of central coordination, each testing or registration office must carry out its own investigations into all the above-mentioned aspects of its own discretion and will hardly be able to rely on expert opinions or other findings for which another testing or registration office has already paid. These additional costs will ultimately be transferred to service users, leading to higher charges.
- Tendency towards deeper levelling of investor protection: It can be assumed that advisors will register or prospectuses will be submitted for review where the lowest requirements exist or where lower requirements allow the lowest costs. This could lead to a situation in which the overall quality of the services provided moves towards the lowest common denominator.
Wide definition of the term “client advisor” and equal treatment of computer-aided systems (e.g. Robo-Advisor) with natural persons.
The term client advisor is defined in Art. 3 para. 1 let. e FinSA. It’s understood to mean “Client advisors: natural persons who provide financial services on behalf of a financial service provider or themselves as financial service providers.” It follows from this that the term client advisor must be interpreted broadly. A client advisor is basically any natural person who comes into contact with a client and provides financial services to that client. Other characteristics such as the internal position within a domestic or foreign financial institution, the duration of the activity and the age are not relevant. Activities of a purely administrative nature such as, for example, the requirement of documents for the fulfilment of duties of conduct are not financial services and therefore do not require registration in the register. However, registration is required only once a financial service has been provided by a client advisor.
In the interests of technology neutrality, the obligation to register in the register should also apply to computer-aided systems that provide financial services to clients in Switzerland in the same way as a natural person (e.g. Robo Advisor). Such systems also need to be assessed to ensure that they guarantee compliance with the FinSA codes of conduct and are designed on the basis of the necessary expertise. Otherwise, natural persons would be at a disadvantage compared to computerised systems.
Lack of periodic renewal of the registration obligation of client advisors
As soon as a client advisor has been entered in a register of advisors, all changes to the facts underlying the registration must be reported to the registration office in accordance with Art. 32 draft FinSO, but this does not always ensure that the information published in accordance with Art. 30 FinSA via the register of advisors remains up-to-date over a longer period of time. This could be the case, for example, of foreign financial service providers who give up their activities in Switzerland. It could also be the case that in the course of time certain initial and further training courses may no longer be regarded as sufficient or relevant with regard to the requirements of Art. 6 FinSA and an entry in the register of advisors may thus lose importance over the years from the point of view of investor protection. Furthermore, pursuant to Art. 28 para. 3 FinSA, the Federal Council may exempt certain client advisors of foreign financial service providers from the obligation to register if counter rights are granted. In such a case it would be unclear, for example, whether registrations already made should be deleted or continued on a voluntary basis and how it would be ensured that the latter would be updated at all.
In order to ensure the long-term quality of the financial services provided in Switzerland and also to ensure competitive neutrality between Swiss and foreign financial service providers, it is necessary to repeatedly review the knowledge of the rules of conduct and the expertise. This is the only way to ensure that customer protection is optimally and continuously taken into account. In practice, Swiss financial institutions usually repeat ability and expertise tests approximately every 24 months. This practice should not be the exception, but should also apply to foreign client advisors via a legal obligation.
An entry in a register of advisors should therefore not be valid indefinitely, but should be renewed at regular intervals of at least two years.
Missing provisions for the material examination of the rules of conduct in accordance with FinSA and the specialist knowledge of foreign client advisors required for the activity
Pursuant to Art. 6 FinSA, client advisors must have sufficient knowledge of the rules of conduct under this Act and of the specialist knowledge required for their activities. Accordingly, the registry performs access control for the provision of financial services by foreign client advisors in Switzerland. Only those registered in the advisor register may provide financial services in Switzerland on a cross-border basis. It is therefore important that the registries carry out a substantiated material examination of the expertise and rules of conduct according to the FinSA. Otherwise, the registry threatens to become a mere “telephone directory” with purely formal entry effect, without any material benefit for customer protection. A well-founded material review is also necessary due to the competitive neutrality vis-à-vis client advisors of Swiss financial institutions. According to Art. 22 FinSA, they are responsible for ensuring that their employees have the necessary skills, knowledge and experience.
Lack of legal basis to claim (periodic) fees during the registration of client advisors in the register
Even after the client advisors have been entered in the register, there will still be periodic activities in the advisor register. Such fees will be incurred, for example, as part of the periodic comparison of the names of registered client advisors in common databases (such as World Check). However, they may also arise in individual cases at the instigation of the registered parties, e.g. as a result of additional expenses within the scope of clarifying certain facts of the case. It is important for a cost-covering activity of the register of advisors that a fee can be charged for these recurring expenses which are necessary for the proper management of the register. However, fees can only be charged in the context of semi- sovereign activities on the basis of a corresponding legal basis. The current wording of the FinSO only provides for the possibility of charging a one-off fee. You should therefore include a corresponding addition in the FinSO.
Unequal treatment of client advisors of Swiss and foreign financial service providers
Swiss financial service providers subject to prudential supervision in Switzerland must ensure that client advisors receive appropriate training and further education under the FinSA. Appropriate education and training is reviewed as part of the supervision of financial institutions. In the case of client advisors of financial service providers who are not subject to prudential supervision, e.g. investment advisors, the appropriate training and further education is ensured by the registration office. The registration office examines, in the sense of a material examination, whether such a client advisor has the necessary skills and knowledge for the exercise of the profession or with regard to the duties of conduct under the FinSA. The registration office also carries out such a material examination of the skills and knowledge of the duties of conduct under the FinSA for foreign client advisors who provide financial services across borders in the Swiss market for Swiss clients or in Switzerland. In our opinion, the following conclusions follow from this:
- No far-reaching exceptions to the registration obligation within the meaning of Art. 28 FinSA: The registration obligation for foreign client advisors in the register must apply comprehensively to foreign client advisors from the point of view of competition neutrality between Swiss and foreign client advisors. Exceptions within the meaning of Art. 28 FinSA should therefore in principle be waived. This is also required by the principle “same business, same risk, same rules”. One of the FinSA’s most important protective ideas is customer protection. It cannot be expected of a Swiss client or client in Switzerland to consult foreign jurisdictions to determine whether a client advisor is properly supervised and competent to provide financial services.
- Exceptions to the registration obligation within the meaning of Art. 28 FinSA only in the case of a reciprocal right: Exceptions to the registration obligation within the meaning of Art. 28 FinSA should only be granted if the corresponding foreign state grants a reciprocal right. Otherwise the client advisors of Swiss financial service providers would be disadvantaged. Client advisors of Swiss financial service providers are already subject to extensive restrictions on their activities abroad.
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