A busy year for regulatory change

Author: | Published: 18 Mar 2015
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

André Valente of UBS Fund Services looks at how the Swiss fund management industry is gaining momentum in the face of a series of tough regulatory changes

The local fund asset managers and market participants continue to face significant challenges, similar to their international counterparts.

In addition to facing market-specific factors like economic challenges, increased competitive pressure coupled with falling margins and profitability, and geo-political events, the fund management industry is becoming more and more vulnerable to regulatory changes. The increased pace of new regulations requires significant efforts and resources not only to interpret and understand them, but to cope with the risks of non-compliance, increased scrutiny from regulators, and higher expectations from all stakeholders.

2014 was the busiest year in terms of regulatory change in the last few decades, and there is no evidence that the trend will slow.

Key regulatory developments

All market participants, without exception, are under pressure to finalise the implementation of the revised CISA (Collective Investment Schemes Act) by the end of the transition period (February 28 2015). Fund management companies must adapt all legal documents and submit revised fund contracts to Finma (the Swiss Financial Market Supervisory Authority) for approval. Foreign fund promoters and distributors are also involved; at a minimum, they need to conform to the new legislation and submit revised documents and, if they have not done so yet, they need to appoint an authorised representative and paying agent. Financial intermediaries, asset managers, distributors and legal representatives must also adapt to fulfil the new CISA requirements, and under certain conditions, must apply for a new licence. Although this sounds straightforward enough, it does in fact imply a substantial amount of resources and energy for the fund and asset management industry, involving significant investment. For numerous market players, higher transparency requirements and measures to improve investor protection have triggered major changes in their fee and distribution models. A number of asset managers have opted for a new organisation and business model.

"The fund management industry is becoming more and more vulnerable to regulatory changes"

A fully revised CISO-Finma (Collective Investment Schemes Ordinance issued by Finma) has been put in place on January 1 2015 with a one-year transition period. This new Finma-CISO has been adjusted in line with international regulatory changes and seeks to increase investor protection and maintain EU market access, as a result of the amendments of the CISA and the CISO issued by the Swiss Government that came into force on March 1 2013. The main areas covered by the revised Finma-CISO relate to the use of derivative financial instruments and their risk measurement, master feeder structures, collateral management and task delegation. CISO-Finma sets out new requirements on independent risk management and risk control for fund management companies and standards for managing derivatives risk and collateral management, now aligned with the European legislation. Fund management companies now have only a short period of time to understand the impact of the new ordinance and to implement the necessary measures. The ordinance was only released in October 2014 and the consequences of the new risk management and control requirements set by Finma still need to be understood in detail. It is already clear, however, that significant investment in terms of technology and specialised human resources will be required by the fund management companies.

A further legal change that is specific to Switzerland is the ordinance issued due to the so-called Minder Initiative, also known as the Say-on-Pay Ordinance. Although this new piece of regulation is mainly directed at major Swiss corporates and pension funds, fund management companies and asset managers would be well advised to offer support to their institutional clients in the fulfilment of their new obligation to exercise voting rights in the interest of their investors and insured persons. Coincidentally, it raises the interesting topic of increased corporate governance and the adequacy of the efforts performed by market players in this context.

Fundamental framework changes

Three far-reaching and game-changing laws are about to significantly impact the regulatory framework of the Swiss financial industry: (i) the Financial Market Infrastructure Act (FMIA or Finfrag); the Federal Financial Services Act (FFSA or Fidleg); and, the Financial Institutions Act (FINIA or Finig).

It is worth understanding the scope and potential repercussions of these three new codes, which have already captured a lot of market players' attention and, to a certain extent, have disconcerted a few.

The FMIA is the answer to Dodd-Frank and the European Market Infrastructure Regulation (Emir), so to speak. Both Dodd-Frank and Emir have an impact on Switzerland, in view of their extra-territorial reach. Nevertheless, the Swiss authorities want to regulate the use of over-the-counter (OTC) finance with its own regulatory framework. According to the legislator's intention, this new legislation will align Switzerland with global market developments and international requirements, and should result in increased stability and competitiveness of the Swiss financial market. It will govern the financial market infrastructure and derivatives trading in a more homogeneous way, combining the rules, currently dispersed in various law texts, into a consistent framework. Counterparties, central depositories and trade repositories will be subject to a new general authorisation obligation. The three key obligations set out by existing international rules for derivatives trading will in future apply in Switzerland too: settlement of derivatives transactions via central counterparties, reporting to a trade repository, and enhanced risk control. The FMIA will also include the provisions contained in the Stock Exchange Act on the disclosure of holdings, public takeover bids, insider trading and market manipulation. FMIA is expected to come into force towards the end of 2015. The impact of the new OTC clearing and reporting obligations on processes and technology should not be underestimated and will involve significant efforts for the Swiss financial industry.

The FFSA is planned to enter into force in 2017. Its primary aim is enhanced investor protection to harmonise the Swiss legal framework with the conduct of business rules in the EU, particularly with the MiFID-related set of rules. By implementing similar regulations in Switzerland, the legislator is optimistic about Switzerland continuing to enjoy unrestricted access to the EU's financial market. The FFSA's main proposed features are:

  • Improved client protection, including: new client classification approach, resulting in distinct information duties by financial service providers; enforcement of civil claims; reversal of the burden of proof; reinforcement of the mediation and conciliation system (ombudsman institution); introduction of an arbitration tribunal for disputes against financial service providers and of a litigation fund in favour of presumably damaged clients; higher transparency and information measures, in particular by providing extensive documentation to the client during the advisory process and potential legal procedures; new, uniform prospectus requirements for securities publicly offered or traded, aiming at suitability and appropriateness checks in favour of the investors; and, collective redress procedures including innovative interest group settlements actions.
  • Cross-border regulations affecting foreign financial services providers, including the duty to register for unlicensed foreign market participants.
  • New requirements for qualification and registration of client advisors.

The consultation period for this new code ended in October 2014. It is therefore not yet clear if and to what extent all the elements of the draft will finally be implemented within the law. No doubt, however, the FFSA has the potential to impact the Swiss financial regulatory landscape far more than any other financial law implemented in the last few decades.

"Significant investment in terms of technology and specialised human resources will be required by the fund management companies"

The FINIA, closely related to the FFSA, is likely to come into force in 2017 and will control the licensing of financial service providers. Supervision rules previously covered by the Banking Act (BankA), the Securities Exchange Act (Sesta) and CISA will be integrated into the new law. It will govern the supervisory regime for financial institutions in a new, uniform legislation and affect particularly independent asset managers, who are not yet required to be licensed, while managers of collective investment schemes are already supervised by Finma. This is certainly one of the most significant implications of this new set of legislation. It is unclear yet if Finma or a new supervisory organisation will be in charge. One advantage of the FINIA is the so-called cascade effect, which means that, as opposed to the existing approach, a licence granted for a specific area will include the approval for related activities at a lower level. For instance, a bank will no longer need to have an additional securities dealer licence. Interestingly, the FINIA may include the obligation to assess if assets were properly reported for tax purposes, which amounts to the introduction of a legally binding white money strategy. This is further evidence of the far-reaching impact of forthcoming regulatory changes through the entire Swiss fund and asset management industry.

Obviously, the local industry is not only affected by specific Swiss legislation changes, considering the importance of cross-border business for Swiss asset managers. The Alternative Investment Fund Managers Directive (AIFMD) is a perfect example of an EU regulation that has had a significant impact on the organisation structure and business model of many Swiss market players. With EU member states starting to abandon private placement regimes, Swiss managers have a competitive disadvantage to EU managers, with distribution of alternative (and non-alternative) funds becoming more difficult. Relying on reverse solicitation will not be a sustainable strategy. In spite of the uncertainties related to the introduction of non-EU funds passporting, planned to come into force in 2016, Swiss fund promoters must rely on AIFMD compliance.

Additional costs have certainly been triggered by further global regulatory and market initiatives, or will be, such as the change to the T+2 system and the Financial Transaction Tax, to name only two of many.

Opportunities for the Swiss fund management industry

The Swiss Fund Management Industry demonstrates sufficient competitive advantages and strength to allow for a measure of optimism. On the one hand, the new legislative framework brings its share of improvements and may reinforce the attractiveness of the Swiss financial centre. Fundamentally, the harmonisation of cross-border rules and new registration requirements and the supervision of foreign financial providers is a welcome development. It increases Swiss investors' protection and, simultaneously, partially offsets the competitive disadvantage of Swiss market players in an international context. On the other hand, many market players warn that excessive risk and administrative burden could jeopardise Switzerland's international competitiveness. Further, the Swiss finance industry has clearly expressed a negative position towards the envisaged juridical enforcement instruments in view of the radical impact on existing jurisprudence.

For specialised business areas, the regulatory changes will offer some new, specific opportunities. Increased regulations and scrutiny by the supervisor bring specialised skills into the field. Risk and data management and reporting become competitive success factors for fund asset managers. Those who are able to give their business a competitive edge, investing into technology and qualified human resources early enough, are likely to offset the potential inconveniences of increased regulatory burden by a better market position, satisfied clients and growing business volume.


André Valente
Managing Director
Head of UBS Fund Services Switzerland & Head of UBS Fund Management (Switzerland) AG

UBS Fund Services
Aeschenplatz 6
4002 Basel
T: +41 61 288 4910
W: www.ubs.com/fundservices

Moreover, market participants with specific, boutique-like offerings and competences (asset managers, asset servicers, legal experts, and risk management consultants) have an opportunity to leverage their expertise and support those who do not have the resources and critical scale. In a country like Switzerland, with a strong institutional base, it will become more and more instrumental to have an in-depth understanding of institutional clients' requirements and the right client servicing model will be game-changing. Asset managers with a strong base of various collective vehicles will continue to take advantage of their larger scale and will become more complementary to classic private banking.

The fund management industry is undeniably gaining momentum in Switzerland. The market players that successfully adapt to the new regulatory and market framework will continue to build a centre of excellence in fund and asset management and will have the opportunity to export their competence and innovative energy far beyond the Swiss borders.