Update Legal & Regulations
Ratification of the Swiss Financial Services Act (Finanzdienstleistungsgesetz – «FIDLEG») and Swiss Financial Institution Act (Finanzinstitutsgesetze – «FINIG») by the Council of States and the National Council on 15 June 2018 introduced the final core elements of modern Swiss financial market legislation – FIDLEG & FINIG introduce important changes to the distribution of financial products: Advice at the point-of-sale, prospectus specifications, introduction of a basic information sheet as well as prudential supervision of asset managers. FIDLEG is scheduled to come into force on 01 January 2020, whereby there will probably be a few transitional provisions with regard to the code of conduct and the obligation to publish a prospectus and basic information sheet, to ensure smooth implementation.
The wording of the associated FIDLEG and FINIG Ordinances was prepared by working groups headed by Switzerland’s State Secretariat for International Finance (Staatssekretariat für internationale Finanzfragen – «SIF»). Following the departmental consultation phase, the draft Ordinances were submitted to the Federal Council. It has now begun to discuss the wording of the Ordinances. The consultation will last until 06 February 2019 and the Association will play an active part in this process. In addition, we will address the specific implementation of the new regulation in working group meetings and, inter alia, prepare a working paper with questions and answers on the topic of the FIDELG.
PRIIPs – BaFin notes discrepancies between KIDs and the PRIIPs Regulation
Since 01 January 2018, manufacturers of packaged investment products – such as for example structured products – have had to prepare a package information leaflet in the form of a standardised key information document (in short: «KID»): up to three pages long, containing essential features, enabling comparisons to be made with other products. Ahead of its supervision of compliance with the provisions of the PRIIPs Ordinance, BaFin took stock of PRIIP manufacturers based in Germany and assessed tested several KIDs on a random basis. Within this context, BaFin became aware of a number of cross-institutional issues in which the KID does not comply with regulatory requirements. BaFin has reported these issues to the relevant German associations, including the German Derivatives Association (Deutsche Derivat Verband – «DDV»). BaFin complained that the name of the issuer or the product was included in the title of the KID in addition to the words «basic information sheet». The title of the KID is only permitted to be «basic information sheet». BaFin also complained that under the heading «what type of product is involved», a tabular overview of the product is first provided, and only then a description in running text. However, the tabular overview should be included only after the prescribed running text. These two issues, as well as the other issues highlighted by BaFin, demonstrate that the KID needs to adhere strictly to the specifications and that there is little scope for flexibility.
Section 871(m) – two-year delay in the recording of “non-delta-one products”
In its Notice 2018-72, the US Internal Revenue Service («IRS») reported that the applicability of the rules set out under the Sec. 871(m) regime on «non-delta-one products» is to be delayed by two years to 01 January 2021. Without this delay, the withholding tax deduction under Sec. 871(m) would also have to be performed for all «non-delta-one products» on US equities with effect from 01 January 2019. In addition to postponing the recording of «non-delta-one products», the IRS also extended the so-called »good faith effort» approach to implementing and applying the Sec. 871(m) regime. This consequently means the «good faith effort» approach applies to «delta one products» until 2020 and to «non-delta one products» until 2021.
Product intervention within the EU
The European Securities and Markets Authority («ESMA») has extended temporarily ban on binary options and contracts for differences («CFDs») for small investors by a further three months from 2 October 2018 and 1 November 2018 respectively. In this conjunction, it is very gratifying that ESMA has responded to the discussions with the relevant associations and explicitly excludes financial instruments from the ban on marketing binary options
– that have a minimum maturity upon issue of 90 days
– that are backed by a prospectus, and
– where the provider does not itself assume the market risks and only takes on transparent costs in advance.
Also excluded from the ban are binary options where the lower of the two pre-determined payout amounts is at least equal to the total payment (including commission, transaction fees and other related costs) made by a small investor for the binary option. The payout for this type of binary option must be such that small investors do not lose any money relative to their total investment (including commission, transaction fees and other related costs) in the product.