Update legal & regulations
Following the Council of States in December 2016, the National Council has now also approved the two draft laws FIDLEG and FINIG. In order to settle remaining the differences (WAK-S proposed that the Council of State should support the resolution passed by the National Council), the two proposals were debated by the Council of States in March – and a final decision is scheduled for the summer session of 2018. This will not come into force before 1 July 2019.
The SSPA contributed actively to WAK-N with specific proposals and – together with other industry associations – supports the approach taken by FIDLEG and FINIG in the current version. Parliament markedly improved the Federal Council’s proposals, and developed a sound compromise for workable investor protection rules. The association will continue to contribute actively towards the legislative process, for example when it comes to drawing up the execution ordinance FIDLEV.
The association contributed towards two working groups headed by the State Secretariat for International Finance SIF – on the topics of execution provisions on prospectus law and the key investor information document. Rules governing its content, scope, design and language are set out in the FIDLEV (ordinance associated with the FIDLEG). For Switzerland, it is crucial that a workable solution is found, establishing a genuine alternative to the PRIIP KID, and moving away from the integral adoption of PRIIPs regulations. The association is keen to ensure that the PRIIP KID can be used without restriction in Switzerland as an equivalent non-domestic document, in place of a key information sheet – as legislators intended. In addition, it has proposed that the German product information sheet should also be approved for use in Switzerland.
Implementation of MiFID 2 & PRIIPs regulations
The amended EU Directive on Markets in Financial Instruments (MiFID 2) and the EU Regulation on Key Information Documents for Packaged Retail and Insurance-based Investment Products (PRIIPs Regulation) came into force in January 2018. This also covers financial services providers from third-party states, such as Switzerland, if financial products are offered to small investors within the EEA.
The provisions of MiFID 2 primarily address sales-related topics, such as e.g. requirements governing client categorisation or cost and inducements transparency. They also apply to product manufacture, however. For example, the manufacturer is now required to introduce and maintain a product monitoring process (product governance) – including determination of the target market. Before pursuing sales, the manufacturer must define a target market for each financial instrument. The European MiFID template EMT is probably the most widely-based target market concept that is supported by the European Structured Investment Products Association EUSIPA. At the technical level, SIX Financial Services supports issuers when implementing the target market concept by means of its RegHub.
In addition to implementing MiFID 2, structured product issuers faced and continue to face challenges in the PRIIPs regulations. Despite shifting the implementation date from the end of 2016 to the start of 2018, this still represents a race against time. Manufacturers of packaged investment products – in particular structured products – now have to prepare a standardised key information document (PRIIP KID): up to three pages long, containing essential features, enabling comparisons with other products.
Both regulations demand greater cost transparency: the cost of the instrument as well as of the service now need to be reported. The PRIIP KID has to disclose not merely a breakdown of the costs in a defined table, the costs also need to be shown over time – subdivided into one-off, ongoing and supplementary costs. One-off costs include «entry costs» – in the case of structured products, these are mostly included in the product price. As a rule, structured products do not incur ongoing costs – except for example in the case of actively managed certificates with a management or administrative fee – nor do they incur supplementary costs.
MiFID 2 also demands personalised information covering the costs incurred in conjunction with the investment. Potential investors need to know the aggregate total costs – that is to say the service and product costs. In practice, this is often done by means of a cost sheet. At the «point-of sale» it is necessary to provide this information before the investment decision is taken (ex-ante cost transparency) – while in the case of an ongoing business relationship the bank must inform clients at least once per annum about the actual incurred costs (ex-post cost transparency).
Problems with the performance scenarios and cost breakdowns became apparent only shortly after introduction. These were calculated on the basis of simulations that drew upon historic developments based on the recommended holding period of the product. In particular in the case of products with short maturities as well as leverage products, this calculation method can lead to an annual average return of over 1,000%. In the case of a recommended holding period of one day, it can even lead to average returns in the millions of percentage points. Such performance scenarios are problematic, make little sense and are ultimately misleading. The situation with costs is similar.
At the European level, this was addressed by contacting the relevant supervisory authorities, in addition member associations sought to identify a transitional solution. Three alternatives are currently up for discussion:
- A sensible interpretation of the provisions pertaining to the method of calculation, in order to ensure that ultimately no misleading scenarios or costs need to be reported.
- A declaration in the PRIIP KID concerning the misleading scenarios and costs.
- A separate document concerning the misleading information in the PRIIP KID.
With effect from January 2018, the «EU Benchmark Regulation» (in short: «BMR») needs to be comprehensively applied. The BMR relates to indices that are used as reference parameters. By establishing a transparent capital market, investors should be better protected and confidence should be improved.
Primarily affected are administrators domiciled within the EU that provide or prepare the benchmarks. The Benchmark Regulation will, however, have an impact beyond the European Union. If an index or benchmark is calculated in a third-party state, for example in Switzerland, then both the benchmark as well as the administrator will need to be entered in a special register, in order to enable the benchmark to be used in the EU. The ESMA may decide that the legal framework and supervisory practice in a third-party state is sufficient, and that it is consequently not necessary to check every index and provider.
A central criterion is the BMR’s scope of application. Potentially, for example, baskets might be considered benchmarks as underlying securities of structured products, and could fall under the regulatory provisions, insofar as the value is published on an ongoing basis. Actively managed certificates may also be covered. The current understanding is that such underlying securities are not covered by the BMR, so long as the value of the basket continues to be published on an ongoing basis. This means market-making will not, in itself, be deemed to constitute an indirect publication of the basket value.