Update legal & regulations
On 15 June 2018, the day following the opening FIFA World Cup match, the Council of States and the National Council passed the Swiss Financial Services Act (Finanzdienstleistungsgesetz – “FIDLEG”) and the Swiss Financial Institution Act (Finanzinstitutsgesetz – “FINIG”). During the course of the consultations, Parliament took some teeth out of the proposals and thus greatly improved the Federal Council’s proposal and worked out a good compromise for sustainable investor protection. The new financial market legislation introduces cross-sectoral rules for the provision of financial services and the distribution of financial instruments. The content of the rules is based on EU regulations, with adjustments being made in key areas to reflect specific Swiss circumstances.
The law requires financial service providers to provide clients with appropriate information and advice, and introduces uniform rules on prospectus requirements. In addition, a Key Information Document (KID) must now be submitted for certain financial instruments offered to private clients. The KID is intended to enable well-founded investment decisions to be made, facilitating a real comparison of different financial instruments in a simple and understandable way. 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 – and in particular significantly influenced the structure of the KID. 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 see the PRIIP KID as well as the German KID accepted as a foreign document of equal value, enabling it to be used in Switzerland in place of a KID. FIDLEV consultations are due to begin at the end of October 2018. The association will be closely involved here, and will make corresponding contributions. In addition, we shall address the specific implementation of the new regulation in working group meetings. The FIDLEG is expected to come into force on 1 January 2020.
PRIIPs – misleading performance scenarios and cost descriptions in KIDs
Since 1 January 2018, manufacturers of packaged investment products – in particular structured products – have had to prepare a package information leaflet in the form of a standardised key information document (KID): up to three pages long, containing essential features, enabling comparisons to be made with other products. Problems with the performance scenarios and cost breakdowns became apparent only shortly after the introduction of the KID. In particular in the case of products with short maturities and leverage products, the required annualisation produces performance scenarios that are incomprehensible and ultimately misleading. At the EUSIPA level, a working group has been set up to analyse the problems and to develop proposed solutions, as well as to hold discussions with the ESMA. The European Securities and Markets Authority (ESMA) has conceded that there is considerable need for action when it comes to calculating performance scenarios, and ESMA has drawn up a Q&A to dispense with annualisation for maturities of less than one year. The EU Commission will shortly approve the Q&A to waive annualisation, which will at least greatly ameliorate the problem. There are other difficulties that also need to be solved, however. One possible solution would be to amend the RTS (Level II). The EU Commission currently views this as politically highly contentious, though. In the short term, it is planning to approach the issue by exercising a broad interpretation of Q&As. Within this context, it should be noted that the supervisory authorities are apparently themselves working on an explanation of performance scenarios. This explanation is designed to draw the attention of investors to the problems associated with performance scenarios and cost breakdowns. The EUSIPA working group is also discussing this matter, and will report on the result of these discussions in good time.
Product intervention within the EU
Across Europe since the beginning of January, all national as well as the three European supervisory authorities have had the opportunity to take product intervention measures. On 22 May 2018 the European Securities and Markets Authority (ESMA) established two measures to protect small investors. On the one hand, with effect from 2 July 2018 binary options may no longer be offered and sold to small investors, while on the other the offer and sale of contracts for differences (CFDs) to small investors will be greatly restricted after 1 August 2018. These product intervention measures are applicable for a period of 3 months. Once this period has passed, they will be reviewed by the ESMA and, insofar as this is necessary to protect investors, will be extended by a further 3 months. It would seem that these measures were triggered by aggressive marketing practices used by providers based in Cyprus. Small investors in the EU were being offered highly speculative products with opaque information. The intervention concerning “binary options” very problematic, to the extent that it is not precisely clear which products are affected by the ban on sales. The measure addresses products with a very short maturity and fixed pay-off, which are not suitable for hedging purposes, but that serve primarily speculative purposes instead. Unfortunately, products that are securitised or traded on a stock exchange are not explicitly excluded from the scope of application of the ESMA measure. From the perspective of issuers, it is recommended that in the case of products affected by the sales ban, small investors should be defined as a negative target market.
Product intervention is also an issue at Germany’s Federal Financial Supervisory Authority (“BaFin”). BaFin is examining the notice periods for open-end products, and is planning to conduct a market enquiry into worst-of products.