A new piece of regulation: the entry into force of the FinSA and FinIA
While the financial regulation landscape, inclusive of compliance, has kept evolving and increasing in the past 20 years, the architectural skeleton of the Swiss regulation landscape in this industry was entirely reviewed with the entry into force of two new bills of law on 1 January 2020. As of that date, both the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) constitute the two main pillars which anchor the main duties of the financial service providers performing a business activity on Swiss soil. The FinIA governs the requirements for acting as a financial institution and provides for statutory rules on the liability of financial institutions in case the latter delegate the performance of a task. The FinSA sets forth the requirements to be complied with within the context of the offering of financial services. Both bills aim at (i) strengthening the attractivity of Switzerland as a financial center as well as (ii) reinforcing the investor protection. As to the liability of financial institutions and their bodies, the FinIA refers to the provisions of the Swiss Code of Obligations (SCO). These two pieces of regulation have set a new landscape in the financial industry encompassing new significant duties, such as the duty to get an authorisation for some actors that were so far exempted (see infra) as well as new duties – entailing a new ground of liability – within the context of public offering of financial products with the duty to issue an offering memorandum complying with specific requirements (see infra). Besides, alternative dispute resolution mechanisms have been strengthened with the duty of financial service providers to inform their clients about the mediation possibility but also to submit to the same in case the client calls for such a mechanism to apply (see infra).
The general grounds of liability in financial disputes between a client and its financial service provider
The most common causes of dispute between customers and banks (and independent wealth managers) relate to breach of contract, mostly to the breach of fiduciary duties. Typical disputes relate to mismanagement of the assets or breach of the duty to inform or the duty of care by the service providers further to losses in investments. The parties will in principle rely on the mandate agreement (Article 394 et seq of the SCO), which applies to most transactions between a financial service provider and its customer.
Non-contractual duties are further set forth in the FinSA and some of those may also ground a dedicated liability towards the client which may thus base a claim on those against its financial service provider. This was notably the case of Article 11 of the Stock Exchange and Securities Dealers Act (SESDA) which anchored the information duty of the financial service provider towards its client. Such piece of regulation was replaced by the FinSA but may still, in some respect, apply until 1 January 2022.
At present, a transitional law regime is in place. Financial services have until 31 December 2021 to comply with the requirements regarding customer segmentation, technical knowledge, code of conduct and provider organisation. As of 1 January 2022, service providers will be fully liable under the obligations governing the offering of financial instruments.
Under the SESDA, Article 11 laid down the main duties of the financial service providers when offering financial products for sale. According to that provision, financial service providers owe their customers a duty of information, a duty of care and a duty of fairness (or fidelity). Based on this Article, the Swiss Federal Supreme Court acknowledged a dedicated liability ground that can be relied upon directly by investors. The Swiss Federal Supreme Court ruled that Article 11 of the SESDA established a dedicated liability ground that customers could rely on directly. As a consequence, the breach of Article 11 of the SESDA could trigger the liability of the financial service providers against their customers irrespective of a contractual management relationship.
Nowadays, Articles 7 et seq of the FinSA provide for a code of conduct imposing new – or more dedicated and specific – duties on financial service providers when providing financial services to retail or professional clients (Articles 4 cum 20 of the FinSA). Among these duties, the FinSA provides for a duty to provide information (Articles 8 et seq of the FinSA), a duty for financial service providers that provide investment advice or portfolio management to assess the appropriateness and suitability of the financial service(s) offered (Articles 10 et seq FinSA), a duty of documentation and of rendering of account (Articles 15 et seq FinSA), as well as a duty of transparency and care in client orders (Articles 17 et seq FinSA).
These provisions, while embodying to some extent prevailing principles that already existed before and had been specified and extended by case law, now clarify such duties. They will certainly give rise to new case law in the future.
An updated and extended ground of liability: the offering memorandum of financial instruments
Title 3 of the FinSA provides for the rules that apply to the offering of financial instruments. These provisions (Articles 35 et seq of the FinSA) now require the publication of a prospectus for all equity and debt securities, including derivatives and structured products, subject to the exceptions expressly provided for in the FinSA.
The FinSA introduced a statutory liability regime which scope is limited to violations of all duties relating to the offering of financial instruments in its Article 69. In this respect, Article 69 of the FinSA provides that any person who fails to exercise due care and thereby furnishes information that is inaccurate, misleading or in violation of statutory requirements in offering memoranda, key information documents or similar communications is liable to the acquirer of a financial instrument for the incurred losses (Article 69 (1) of the FinSA).
With regard to information in overviews, liability is limited to cases where such information is misleading, inaccurate or inconsistent when read together with the other parts of the prospectus (Article 69 (2) of the FinSA).
With regard to false or misleading information on main prospects, liability is limited to cases where such information was provided or distributed against better knowledge or without reference to the uncertainty regarding future developments (Article 69 (3) of the FinSA).
According to the legal doctrine that has so far been published, any violation of its obligations by an issuer shall lead to a quasi-systematic sanction.
Criminal liability under the new FinSA
The FinSA also provides for criminal liability in cases of violation of the code of conduct (Article 89 of the FinSA providing for a fine up to CHF100,000), violation of the regulations on offering memoranda and key information documents (Article 90 of the FinSA providing for a fine up to CHF500,000) and unauthorised offering of financial instruments (Article 91 of the FinSA providing for a fine up to CHF500,000).
The FinIA also provides for a liability regime. Indeed, according to Article 68(1) of the FinIA, the liability of financial institutions and their bodies is based on the provisions of the SCO. Where a financial institution delegates performance of a task to a third party, it remains liable for any losses caused by the latter unless it proves that it took the due care required in that party’s selection, instruction and monitoring (Article 68(2) of the FinIA). Moreover, the fund management company remains liable for the actions of persons to whom it has delegated tasks in accordance with the FinIA as if it had performed those tasks itself (Article 68(1) of the FinIA).
Furthermore, the FinIA also provides for a criminal liability in case of violation of professional confidentiality (Article 69 of the FinIA), of the provisions on protection against confusion, deception and notification duties (Article 70 of the FinIA) as well as violation of the record-keeping and reporting duties (Article 71 of the FinIA).
New alternative dispute resolution mechanism
Any civil claim must first be filed for conciliation (although few exceptions apply). When such conciliation fails (which is usually the case in banking disputes when the amount at stake is of significant value), the claimant is granted with the authorisation to start formal proceedings and file its statement of claim.
The first action, ie the application for conciliation, already creates the lis pendens.
Besides this, the customer may also refer the dispute to the Swiss Banking Ombudsman. The latter acts as a mediator in banking disputes and can be used before starting any litigation. This is, however, not compulsory. The services of the Ombudsman are free of charge. He or she will make a proposal to the parties who are free to accept or decline it. Their rights to then file the claim before courts remain entirely unaffected.
The FinSA also sets forth a new alternative dispute resolution mechanism as it contemplates for mediation. While this new tool is provided for in the FinSA, it however remains facultative and is not compulsory. Typically, there will be no requirement for the parties to first submit their dispute to mediation before starting proper litigation. However, the financial service providers must (i) inform their clients about their faculty to refer any dispute to mediation. Should a client decide to refer a case to mediation, the financial service provider must (ii) comply with such request and cannot refuse to go to mediation.
It remains to be seen how this new tool will be actually used and whether it will prove to be an efficient option for the clients and their service providers to avoid litigation and satisfactorily settle their disputes.