FinSA & FinIA in Switzerland: Authorisation to engage in activity as a portfolio manager
By Philippe Bonnefous, Bonnefous & Cie SA
In June 2018, the Swiss legislature adopted two new bills governing the pursuit of certain activities in the financial sector. The FinSA (Financial Services Act) essentially covers the provision of financial services and the distribution of financial instruments. It derives some of its content from European legislation, adapted to fit the Swiss context. The FinIA (Financial Institutions Act) defines the conditions to which the various actors involved in this sector are subject in the performance of their activities.
These new laws will come into force on 1st January 2020.
Implementing ordinances, which are always subject to a consultation procedure, should also come into force on this date.
It is important to note that the most important developments concern trustees and portfolio managers of individual client assets.
This article aims to review the key requirements planned for those engaging in portfolio management activity.
The activity of portfolio management:
The activity of portfolio management is governed by certain Acts and Ordinances.
The key criteria are as follows:
- The manager acts as a representative for the client;
- He/she has power of disposal in the name of and on behalf of the client;
- He/she is acting in a professional capacity;
- His/her power of disposal regarding client assets is defined as follows:
- Acquisition or disposal of financial instruments;
- Reception and transmission of instructions concerning financial instruments;
- Management of financial instruments;
Issuing of personalised recommendations concerning transactions of financial instruments.
By definition, a portfolio manager manages individual client assets. He/she buys or sells securities for clients on their behalf.bof
Under the FinIA, he/she has a duty to deposit the assets entrusted to him/her by each client separately with a bank or securities firm.
Portfolio management must be conducted on the basis of clearly defined authorisation given in writing.
The legal structure required for engaging in activity as a portfolio manager may be that of a sole proprietorship, a limited company or a cooperative.
For a portfolio manager to be considered as acting in a professional capacity, the following conditions must be satisfied:
- Aggregate gross proceeds of over CHF 50,000 per calendar year;
- Business relationships established with over 20 contracting parties per calendar year;
- Power of disposal for an indefinite period over the assets of third parties, the value of which exceeds CHF 5,000,000 on at least one occasion during the calendar year; or
- Total transaction volume exceeding CHF 2,000,000 per calendar year.
Authorisation to engage in activity:
Portfolio managers as defined above must seek authorisation to engage in this activity from FINMA (Swiss financial market supervisory Authority).
For all new activity, authorisation must be obtained prior to registering the legal entity in the trade register.
Portfolio managers engaging in asset management activity prior to the entry into force of the laws (1st January 2020) are required to notify FINMA within 6 months, by 30th June 2020. They have three years in which to apply for authorisation to engage in this activity from the date of entry into force of the legislation. However, managers must be compliant with the new requirements from the time of entry into force.
Portfolio managers may thus continue to engage in their activity until their request for authorisation is processed by FINMA. The only condition which must be met during this period is that they maintain affiliation with a self-regulatory organisation in matters relating to the AMLA.
Conditions for engaging in the activity of portfolio management:
The portfolio manager must provide a professional organisation commensurate to his/her legal obligations. This organisation must correspond to the risk and complexity of transactions performed. The definition of a commensurate organisation as provided for by law calls for a principle of proportionality. In other words, the organisation set up by the portfolio manager must conform to the legal requirements of financial markets.
The company must have efficient internal control systems and its organisational principles must be defined in a written document. It must also employ qualified staff with the necessary skills in the relevant fields of activity. FINMA may require that portfolio management entities set up a board of directors with responsibility for supervision and control, in which the majority of members are not part of the management team. These supplementary conditions may be required if the company achieves a turnover in excess of CHF 5,000,000 and if the kind of activity renders it necessary.
2. Qualified manager
An individual who meets the following requirements for training and professional experience may be considered a qualified manager:
- 5 years of professional experience managing third-party assets; and
- Training in the management of third-party assets.
The management team of a company for portfolio management must be comprised of at least two qualified individuals, unless evidence is brought that a single person is sufficient to ensure the continuation of the company.
3. Guarantee of irreproachable conduct of business operations
The individuals in charge of the administration of the financial institution must ensure irreproachable business conduct. These same individuals must also be of good reputation and possess the requisite specialist skills for their role.
This requirement also applies to all holders of qualified equity interest (at least 10% of the capital of the financial institution); this is to say that such individuals must also be of good reputation and must ensure that their influence does not have a negative impact on the sound and prudent activity of the company.
4. Capital and own funds
Legal standards also define conditions regarding capital and own funds. The minimum capital required of a portfolio manager must amount to CHF 100,000. This sum must be readily available in full and maintained throughout the company’s lifetime.
Own funds must be constantly equivalent to at least a quarter of the expenses indicated in the most recent annual accounts, to a maximum of CHF 10,000,000.
For example, if the total costs of the financial institution (staff costs, operating costs, amortisation, charges for value adjustments) amount to CHF 1,000,000, the amount of own funds must be at least CHF 250,000.
Own funds includes share capital, reserve assets, retained earnings, profit for the fiscal year after deduction of the predictable portion of distributed earnings and latent reserves.
The portfolio manager must affiliate to an ombudsman from the day on which his/her activity begins. This new authority has been directly established by the FinSA with the objective of settling disputes between financial services providers and their clients within the context of mediation procedures.
6. Supervisory organisation
Portfolio managers are subject to prudential supervision under FINMA. This supervision is not carried out directly by FINMA, but by a supervisory organisation authorised by FINMA.
If the prudential supervision of the portfolio manager is not carried out by the supervisory organisation itself, this supervisory activity will be delegated to an audit firm approved for this type of activity.
7. Place of actual management
In order for the portfolio manager to be certified, the actual management of the financial institution must be located in Switzerland. The place of residence of the individuals responsible for the management of the company is taken into account. This place of residence must allow for the efficient running of business.
8. Delegation of Tasks
Only tasks concerning activities which are not included in the main tasks of the management of the financial institution may be delegated. The delegation of tasks must not be damaging to the proper functioning of the organisation.
In other words, the portfolio manager must possess the human resources and technical knowledge necessary for the proper discharge of various decisions, instructions, supervision and advice relating to the management of client portfolios. This also applies if the financial institution does not have or control the right to advise clients, or if such a right is limited. In all cases, the financial institution remains responsible for the performance of supervisory obligations.
All delegation arrangements must be set out in a written contract.
It should also be noted that such delegation is subject to examination upon the request for authorisation and will be subject to monitoring as part of subsequent prudential audits.
Institutions engaged in portfolio management activities at the time of the entry into force of the new legislation (1st January 2020) may well have the right to a transitional period, but it would nevertheless be advisable for companies to act as rapidly as possible to adopt any measures necessary to establish an organisation compliant with the main requirements outlined above.
Our legal and auditing services can support you in the implementation of all of these measures.
Philippe BonnefousBonnefous & Cie S.A., Geneva, Switzerland
T: +41 22 906 11 77
Created in 1934 in Geneva, Bonnefous & Cie SA is a family-run accountancy firm. The multidisciplinary team of Bonnefous & Cie SA is composed of certified auditors, legal and tax advisors, accountants and VAT specialists with companies and private individuals’ expertise. The company is a member of EXPERTsuisse and of Fiduciaire|Suisse.
Philippe Bonnefous is Managing director and Lawyer.
Published: April 2019 l sebra - stock.adobe.com