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FinSA and the code of conduct: is everything clear?

The Financial Services Act (FinSA), which entered into force on 1 January 2020, became completely effective on 1 January 2022. It sets out a code of conduct for the financial service providers.

The first regulatory audits have generally shown that the basic principles are being applied well, but that there are still some grey areas, with institutions not always applying the requirements uniformly and correctly.

This article summarises common issues and explores some frequently asked questions.

 

By Ilaria Santini
Partner, Head Asset Management Geneva, BDO                                            

 

1. Client segmentation

The applicable provisions of the code of conduct depend on how the clients are classified. Portfolio managers are required by law to classify their clients as retail, professional or institutional. All rules of conduct apply to retail clients and none to institutional clients, while professional clients may release in writing financial services providers from applying certain rules.

Before providing any financial services, financial service providers shall inform those of their clients who are not classified as retail clients of the possibility of opting in.

What are the most common mistakes?  

  • There are sometimes inconsistencies between the documentation in the KYC file and the actual classification of the customer, particularly with regard to the amounts of financial assets taken into account when applying the opting out regimes.
     
  • In general, we find that institutional and professional clients are not informed of their right to opt-in, and in some cases there is no opting-out documentation, which is applied by default by the fund manager.
     
  • It might be difficult to classify legal entities because of the concept of ‘professional treasury operations’. A company or a private investment structure has professional treasury operations when it entrusts an experienced person with qualifications in the financial field with the constant management of its financial resources.

Can the knowledge and experience of the representatives be taken into consideration when determining if the client can opt out?

Yes, clients acting through an authorised person may agree with their financial service provider, in writing, that they be assigned to a segment (Art. 4 para. 2 FinSO) and that appropriateness and suitability (Art. 16 FinSO) are assessed in accordance with the knowledge and experience of this person. The contract must specify the person appointed as representative and the client must agree to the representative’s experience being taken into account. In addition, the representative must be given signing authority on the account.

What FinSA documents does a life insurance company that has opted in have to complete in order to become a professional client?

A life insurance company simply has to sign the opting-in form. The rules of conduct applicable to professional clients must then be complied with when providing financial services.

How should a foreign life insurance company be classified?

It is an institutional client if the company has not signed an opting-in agreement and if it is subject ,in its own country, to an equivalent FINMA supervision.

 

2. Assessment of suitability and appropriateness

In the context of portfolio management and investment advice taking account of the client portfolio, a suitability assessment is required: This means that the investment strategy must be tailored to the risk profile (which considers the client’s knowledge and experience, financial situation and investment objectives). The content of the portfolio must be in line with the agreed strategy.

In the context of investment advice for specific transactions, an assessment of the appropriateness of the recommendation provided is required: this means that the advice given must be tailored to the client’s knowledge and experience.

What are the most common mistakes?

  • We sometimes observe discrepancies between the risk profile and the investment strategy (more risky) chosen by the client. This constitutes a reservation unless the client has explicitly confirmed that the portfolio manager has informed that client of the risks and advised against a strategy that is not in line with the client's risk profile.
  • In the case of ad hoc advice, we often observe inadequate assessment of the appropriateness of the recommendation for specific transactions.

How often should the risk profile be reviewed?

Regularly. The best practice is to review it every three years. Any known changes should trigger an immediate review.

In the context of portfolio management or global investment advice, how do you assess the client’s knowledge and experience?

The client’s knowledge and experience relate to portfolio management or investment advice as a financial service and not to each individual transaction carried out or recommended under the mandate.

 

3. Duty to provide information, documentation and rendering of account

Financial intermediaries must inform their clients about their activities, the services offered and the financial instruments employed. The duty to provide information can be met by means of a printed customer information notice or an electronic copy delivered before the contract is concluded.

The financial service provider must document the financial services agreed and the information collected.

In addition, if the personalised recommendation relates to financial instruments, the financial services provider will also make the basic information sheet (FIB) available to their private clients.

What are the most common mistakes?

  • The information memorandum is not always provided before the contract is signed.
  • We sometimes observe a lack of evidence that the KID and/or prospectus have been made available.
  • When advising private or professional clients who have not waived the application of certain rules of conduct, the reasons for the recommendation are often not documented (the reason for each recommendation must be documented).
  • Exceptions are not often documented either.

What is a waiver?

A waiver is a signed written declaration in which professional clients waive the duty to inform, document and rendering of account: if the waiver is not signed, all the rules of conduct of the FinSA still apply, even for professional clients.

This waiver can be included in the opting out form.

 

Concluding remarks

The first audits show a significant effort made by the portfolio managers to comply. However, there are still a number of open questions and best practices to be implemented.

 

 

Biography

Ilaria Santini, Partner, is Head of Asset Management at BDO in Geneva. Previously, she worked for 10 years at PwC in Milan, Luxembourg and Geneva. She has also worked for Lombard & Odier and Deloitte. She is a certified auditor and holds a CAS in Compliance and is recognised by FINMA as a lead CISA auditor.

Contact: ilaria.santini@bdo.ch