A new piece of regulation: the entry into force of the FinSA and FinIA
While the financial regulation landscape, inclusive of compliance, has kept evolving and increasing in the past 20 years, the architectural skeleton of the Swiss regulation landscape in this industry was entirely reviewed with the entry into force of two new bills of law on 1 January 2020. As of that date, both the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) constitute the two main pillars which anchor the main duties of the financial service providers performing a business activity on Swiss soil. The FinIA governs the requirements for acting as a financial institution and provides for statutory rules on the liability of financial institutions in case the latter delegate the performance of a task. The FinSA sets forth the requirements to be complied with within the context of the offering of financial services. Both bills aim at (i) strengthening the attractivity of Switzerland as a financial center as well as (ii) reinforcing the investor protection. As to the liability of financial institutions and their bodies, the FinIA refers to the provisions of the Swiss Code of Obligations (SCO). These two pieces of regulation have set a new landscape in the financial industry encompassing new significant duties, such as the duty to get an authorisation for some actors that were so far exempted (see infra) as well as new duties – entailing a new ground of liability – within the context of public offering of financial products with the duty to issue an offering memorandum complying with specific requirements (see infra). Besides, alternative dispute resolution mechanisms have been strengthened with the duty of financial service providers to inform their clients about the mediation possibility but also to submit to the same in case the client calls for such a mechanism to apply (see infra).
The general grounds of liability in financial disputes between a client and its financial service provider
The most common causes of dispute between customers and banks (and independent wealth managers) relate to breach of contract, mostly to the breach of fiduciary duties. Typical disputes relate to mismanagement of the assets or breach of the duty to inform or the duty of care by the service providers further to losses in investments. The parties will in principle rely on the mandate agreement (Article 394 et seq of the SCO), which applies to most transactions between a financial service provider and its customer.
Non-contractual duties are further set forth in the FinSA and some of those may also ground a dedicated liability towards the client which may thus base a claim on those against its financial service provider. This was notably the case of Article 11 of the Stock Exchange and Securities Dealers Act (SESDA) which anchored the information duty of the financial service provider towards its client. Such piece of regulation was replaced by the FinSA but may still, in some respect, apply until 1 January 2022.
At present, a transitional law regime is in place. Financial services have until 31 December 2021 to comply with the requirements regarding customer segmentation, technical knowledge, code of conduct and provider organisation. As of 1 January 2022, service providers will be fully liable under the obligations governing the offering of financial instruments.
Under the SESDA, Article 11 laid down the main duties of the financial service providers when offering financial products for sale. According to that provision, financial service providers owe their customers a duty of information, a duty of care and a duty of fairness (or fidelity). Based on this Article, the Swiss Federal Supreme Court acknowledged a dedicated liability ground that can be relied upon directly by investors. The Swiss Federal Supreme Court ruled that Article 11 of the SESDA established a dedicated liability ground that customers could rely on directly. As a consequence, the breach of Article 11 of the SESDA could trigger the liability of the financial service providers against their customers irrespective of a contractual management relationship.
Nowadays, Articles 7 et seq of the FinSA provide for a code of conduct imposing new – or more dedicated and specific – duties on financial service providers when providing financial services to retail or professional clients (Articles 4 cum 20 of the FinSA). Among these duties, the FinSA provides for a duty to provide information (Articles 8 et seq of the FinSA), a duty for financial service providers that provide investment advice or portfolio management to assess the appropriateness and suitability of the financial service(s) offered (Articles 10 et seq FinSA), a duty of documentation and of rendering of account (Articles 15 et seq FinSA), as well as a duty of transparency and care in client orders (Articles 17 et seq FinSA).
These provisions, while embodying to some extent prevailing principles that already existed before and had been specified and extended by case law, now clarify such duties. They will certainly give rise to new case law in the future.
An updated and extended ground of liability: the offering memorandum of financial instruments
Title 3 of the FinSA provides for the rules that apply to the offering of financial instruments. These provisions (Articles 35 et seq of the FinSA) now require the publication of a prospectus for all equity and debt securities, including derivatives and structured products, subject to the exceptions expressly provided for in the FinSA.
The FinSA introduced a statutory liability regime which scope is limited to violations of all duties relating to the offering of financial instruments in its Article 69. In this respect, Article 69 of the FinSA provides that any person who fails to exercise due care and thereby furnishes information that is inaccurate, misleading or in violation of statutory requirements in offering memoranda, key information documents or similar communications is liable to the acquirer of a financial instrument for the incurred losses (Article 69 (1) of the FinSA).
With regard to information in overviews, liability is limited to cases where such information is misleading, inaccurate or inconsistent when read together with the other parts of the prospectus (Article 69 (2) of the FinSA).
With regard to false or misleading information on main prospects, liability is limited to cases where such information was provided or distributed against better knowledge or without reference to the uncertainty regarding future developments (Article 69 (3) of the FinSA).
According to the legal doctrine that has so far been published, any violation of its obligations by an issuer shall lead to a quasi-systematic sanction.
Criminal liability under the new FinSA
The FinSA also provides for criminal liability in cases of violation of the code of conduct (Article 89 of the FinSA providing for a fine up to CHF100,000), violation of the regulations on offering memoranda and key information documents (Article 90 of the FinSA providing for a fine up to CHF500,000) and unauthorised offering of financial instruments (Article 91 of the FinSA providing for a fine up to CHF500,000).
The FinIA also provides for a liability regime. Indeed, according to Article 68(1) of the FinIA, the liability of financial institutions and their bodies is based on the provisions of the SCO. Where a financial institution delegates performance of a task to a third party, it remains liable for any losses caused by the latter unless it proves that it took the due care required in that party’s selection, instruction and monitoring (Article 68(2) of the FinIA). Moreover, the fund management company remains liable for the actions of persons to whom it has delegated tasks in accordance with the FinIA as if it had performed those tasks itself (Article 68(1) of the FinIA).
Furthermore, the FinIA also provides for a criminal liability in case of violation of professional confidentiality (Article 69 of the FinIA), of the provisions on protection against confusion, deception and notification duties (Article 70 of the FinIA) as well as violation of the record-keeping and reporting duties (Article 71 of the FinIA).
New alternative dispute resolution mechanism
Any civil claim must first be filed for conciliation (although few exceptions apply). When such conciliation fails (which is usually the case in banking disputes when the amount at stake is of significant value), the claimant is granted with the authorisation to start formal proceedings and file its statement of claim.
The first action, ie the application for conciliation, already creates the lis pendens.
Besides this, the customer may also refer the dispute to the Swiss Banking Ombudsman. The latter acts as a mediator in banking disputes and can be used before starting any litigation. This is, however, not compulsory. The services of the Ombudsman are free of charge. He or she will make a proposal to the parties who are free to accept or decline it. Their rights to then file the claim before courts remain entirely unaffected.
The FinSA also sets forth a new alternative dispute resolution mechanism as it contemplates for mediation. While this new tool is provided for in the FinSA, it however remains facultative and is not compulsory. Typically, there will be no requirement for the parties to first submit their dispute to mediation before starting proper litigation. However, the financial service providers must (i) inform their clients about their faculty to refer any dispute to mediation. Should a client decide to refer a case to mediation, the financial service provider must (ii) comply with such request and cannot refuse to go to mediation.
It remains to be seen how this new tool will be actually used and whether it will prove to be an efficient option for the clients and their service providers to avoid litigation and satisfactorily settle their disputes.
Irwin Mitchell is determined to become a leading responsible business. We’re already on a journey to ensure that our environmental, social and governance values are embedded into our business and influence our relationships, strategies and aspirations. But to be truly successful, we need to proactively engage in conversation and collaboration; with our colleagues, with our clients, within our business and geographic communities, and, setting commercial competition aside, with our peers across the legal sector. In doing that, we believe our aspirations will be realised and we will lead as a responsible business. We’re delighted that so many in-house counsel contributed to this research, and I’d like to thank them for their time and for sharing their insights into the role of in-house in setting and supporting the ESG agenda within their businesses. We hope that you’ll find this research useful in plotting where you, your team and your business are on your own ESG journey, and where it will take you next.’
‘Although there is currently no global standard for ESG reporting, there is a huge range of legal reporting requirements for businesses. In the UK alone there is a wide variety of existing and incoming legislation that involves important elements of ESG reporting such as gender pay gap reporting and modern slavery statements. In addition, we believe that some of the confusion around current ESG reporting obligations has arisen from the fragmented reporting framework that places obligations on companies depending on their size (rules for large undertakings under section 172 and 414 Companies Act), whether they are listed (arising from the Disclosure Transparency Rules and UK Governance Code) and whether they are in the regulated financial services sector (Prospectus regulations, Disclosure Guidance and Transparency Rules and Market Abuse Regulations).
‘The in-house legal team’s role is to ‘help their business do “it” right’ – the “it” being sustainable, successful and compliant business.
‘The G in ESG is becoming increasingly more important for businesses in the funds and investments space; aligning how you operate your own business with your external ESG messaging is crucial. The impetus for businesses to build ESG into their investment decision making is driven partly by the introduction of new regulation and partly by the growing appetite and demand from stakeholders, whether they be shareholders, investors or customers. Post Brexit the UK has not ‘onshored’ the EU Sustainable Finance Disclosure Regulation (SFDR) into UK domestic law, opting instead to make disclosures that are aligned with the Task Force on Climate related Financial Disclosures (TCFD) fully mandatory by 2025 but there is a general view that it still has a number of indirect/practical implications for funds and investment related businesses in the UK given the UK’s Green Finance Strategy and the fact that ESG considerations will become integral to future EU trade deals and the ability to attract international capital.’
‘For two weeks in autumn 2021, the eyes of the world will be on Glasgow as it plays host to the UN Climate Change Conference (COP26). These talks will bring together heads of state, climate experts, leading businesses and campaigners to discuss a coordinated action plan to tackle climate change. Top of the agenda will be the urgency around net-zero commitments and the need for business transparency and accountability.
‘Diversity and inclusion, as part of a wider ESG agenda, provides clear opportunities for those businesses ready to truly embrace it. D&I cannot be seen as a job for HR; as something that should be monitored and reported on but then forgotten. A strategic approach that is embraced by all leaders including GCs must be taken to embracing D&I on a day-to-day organisational basis. We have seen huge leaps forward by businesses who are paving the way including for example the creation of shadow boards or “reverse” mentoring programmes. These businesses are already reaping the rewards of these programmes and those businesses who have not started to properly engage with D&I as an agenda item risk falling behind.’
