Context
Following the financial crisis of 2008, financial regulators have strengthened their policies in most countries to better protect the interest of the retail client.
More specifically, most of them have made compulsory the assessment of clients’ investment profile to recommend a financial instrument in line with their financial expertise, investment objectives, financial situation and risk tolerance.
This requirement generally applies for a financial service like portfolio management and investment advice.
In the European Union, this new requirement was implemented through the directive MIFID I (Markets in Financial Instruments Directive) and then MIFID II in 2018.
The Swiss counterpart of MiFID is the Financial Services Act (FinSA), called FIDLEG in German, LSFin in French and LSerFi in Italian. It came into force in 2020.
What are the key differences between MiFIDII and FinSA regarding client suitability assessment?
At first glance, FinSA (Financial Services Act) is near-identical to EU-wide MiFID II regulations.
However, there are significant differences for advisors seeking the best outcomes for clients when making investment decision.
Client segmentation under FinSA and MiFID II
Both FinSA and MiFID II makes the difference between three types of customers: retail client, professional client and institutional client.
Retail clients are referred to as private customers in Switzerland (see article 4 (1) (a) FinSA), while the EU uses the term retail clients (article 4 (1) (11) MiFID II).
Retail customers in both jurisdictions are those customers who cannot be classified as professional customers. Financial services provided to retail clients are thus more regulated than for professional clients.
Both FinSA and MiFID II systems allow clients to switch to a higher or lower level of protection if certain conditions are met, but these conditions are slightly different.
For instance, under MiFID II, it is possible to opt-up if the client has professional financial knowledge, while this is only possible in Switzerland if private client has bankable assets of at least CHF 500,000 or if a client has assets of at least CHF 2 million.
In both FinSA and MiFID II, there is the option to benefit from the protection of the next lower customer group:
- Under FinSA, professional clients who are not institutional clients can be treated as private clients (opt-in) (article 5 (5) FinSA).
- Under FinSA, institutional clients can switch to the protection level of professional clients (opt-in) (article 5 (6) FinSA).
- Under MiFID II, professional clients must also be able to benefit from the higher level of protection of the next-lower customer group (opt-down).
Suitability and appropriateness tests under FinSA and MiFID II
Both MiFID II and FinSA have suitability and appropriateness tests for retail clients.
In both regulations:
- Suitability check consists in checking clients’ knowledge and experience, financial situation, objectives, and their risk appetite.
- Appropriateness check consists in checking clients’ knowledge and experience only.
However, theses two tests applies for different natures of financial service.
MiFID II requires a suitability test for advice and portfolio management and an appropriateness test for execution-only in complex products.
FinSA permits greater flexibility:
- Only an appropriateness test is required for investment advice that is provided on a transaction basis, without taking into consideration the entire portfolio of the client.
- No tests are required in the case of execution-only. The client has just to be informed that no such examination has been carried out.
Furthermore, under MiFID II, financial knowledge should not be assessed through self-assessment.
To check if a client understands the notion of structured products, for instance, questions about structured products (mechanisms, risk of loss…) should be asked to the clients.
Under FinSA, self-assessment is still accepted to validate financial knowledge. If the client does not have any or enough knowledge and experience, he can be educated by the client advisor.
Finally, MiFID II requires specific questions to assess financial expertise. For each financial instrument offered by the financial institution, the client should be asked if he has already invested in this kind of instrument and, if yes, what was the average number and amount of transactions for this instrument.
There is no such specific requirements under FinSA to assess financial experience.
Sustainability preferences assessment under FinSA and MiFID II
In 2022, the assessment of sustainability preferences becomes compulsory under MIFID II.
This means that financial companies will have to ask questions to their clients about their willingness to pursue social or environmental objectives in their investments. These sustainability preferences should be taken into account in the financial recommendation.
There is no such obligation yet under FinSA. Only guidelines to integrate ESG considerations in investment advice have been published for the moment.