19.12.2024, Enrico Giacoletto

The aim of this post is to briefly present the main Swiss regulatory news and announcements impacting banks and financial institutions at the start of winter 2024.

FINMA publishes circular 25/02 "Rules of conduct under the LSFin and OSFin" with a planned effective date of January 1, 2025:

This is probably the most important announcement of the year. On November 22, 2024, FINMA published the final version of its circular 2025/02 "Rules of conduct under the LSFin and OSFin", which will come into force on January 1, 2025. In it, FINMA details and makes transparent its expectations for the implementation of the Financial Services Act and Ordinance. The hearing reports and explanatory comments provided by FINMA are particularly instructive. Certain provisions have a transitional period until June 30, 2025.

Incidentally, during the hearing, several participants asked the regulator to withdraw this text. FINMA maintains this circular, invoking its own duty to inform under art. 22 para. 1 FINMASA.

On the substance, this circular provides several key clarifications for financial service providers in terms of advice and client portfolio management, but also in terms of transaction advice and execution. In particular, we note the following points:

• The duty to provide information on the nature of the services provided has been increased: the definition and delimitation of the nature of the financial service must be clearly and explicitly communicated to private clients. FINMA stresses the need to make a clear distinction between investment advice relating to a portfolio taken as a whole, and advice relating exclusively to transactions (without regard to the portfolio).
• Information and warnings on risky financial instruments need to be reinforced: in its report, the Autorité cites several risky financial instruments, notably CFDs (contract for difference) and FX rolling spots. These instruments can, through leverage, lead to almost total losses for private clients. In the explanatory report, FINMA clarifies expectations and refers to ESMA's opinion on CFD risk warnings: "between 74% and 89% of retail client accounts lose money when trading CFDs". The Authority introduces an obligation for financial services providers offering risky instruments to communicate to customers the proportion of customers who have lost money when trading them.
• A transparency requirement has been introduced for " large risks " in private client portfolios. FINMA considers that an unusual concentration of risk constitutes a "large risk" to which the customer must be alerted by the financial service provider. In the circular, FINMA defines unusual risk concentrations as any concentration of 10% or more in a single security, or 20% or more in a single issuer. In the explanatory report, FINMA goes a step further and also considers concentration in correlated industries, countries and currencies to be a major risk.
• FINMA introduces more stringent requirements for the prevention, detection and disclosure of conflicts of interest, as well as in relation to remuneration received by the service provider from third parties for transactions relating to the client's portfolio. With regard to the prevention of conflicts of interest, FINMA states that it is forbidden to encourage the investment of proprietary products (whether by means of an incentive compensation program for employees, or a campaign aimed at achieving quotas or targets for the investment of proprietary products). With regard to remuneration received from third parties ("retrocessions" and "kickbacks" in the words of the report), FINMA introduces the obligation to visually highlight (e.g. "bold type", "larger font" and "borders") all indications relating to any such remuneration received.

FINMA overhauls and modernizes the regulatory framework for insolvency with a new ordinance:

On October 9, 2024, FINMA put out for consultation a new Insolvency Ordinance ("OIns-FINMA"). This new ordinance will eventually replace the following three existing ordinances:

• OIB-FINMA (FINMA Ordinance on the Insolvency of Banks and Securities Dealers) ;
• OFA-FINMA (FINMA Ordinance on Insurance Bankruptcy); and
• OFPC-FINMA (FINMA Ordinance on the bankruptcy of collective investment schemes).

In addition to consolidating these three texts into a single ordinance, FINMA considers it necessary to adapt their insolvency provisions. These adaptations follow on from the revisions of the Banking Act (insolvency and deposit guarantee) and the Insurance Supervision Act.

FINMA's new Insolvency Ordinance (OIns-FINMA) will govern the procedure for all financial market institutions subject to FINMA's reorganization and bankruptcy powers from a single source; the proposed text thus simultaneously incorporates the specific features of these different types of institution.

Other regulatory announcements at the end of 2024 include:

With regard to auditing, FINMA has published a new ordinance on prudential auditing and a revised version of its circular on auditing activities, which will now be numbered 2025/01 (FINMA circular 25/1 "Auditing activities"). The former FINMA circular 2013/3 is repealed, and its content is partly transferred to a new ordinance. The new circular 2025/01 contains those points of the former circular that have not been moved to the ordinance. The aim of this revision is to maintain the appropriate normative level of regulation and to enable audit models to be adapted more rapidly.

Enrico Giacoletto, CFA, FRM

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