FinSA and FinIA – details and implications for financial services providers

With its implementation provisions, FINMA is detailing important aspects of the ordinances to the Financial Services Act (FinSA) and Financial Institutions Act (FinIA) and adapting or repealing various thematically linked FINMA ordinances and circulars. FINMA’s proposal is not limited to changes of a purely ‘technical nature’, but also contains substantive provisions with implications for financial services providers, in particular in the area of professional indemnity, outsourcing (for asset managers of collective investment schemes or fund management companies), the threshold value for the identification obligation in the virtual currency business and the obligation to set up an AMLA specialist unit.

Based on the delegation regulations in FinSA, FinIA and the related ordinances issued by the Federal Council (FinSO/FinIO), FINMA’s implementation provisions will enter into force on 1 January 2021. According to FINMA, the aim of the proposal is a streamlined, principle-based and proportional implementation of the financial market laws and regulations that came into force on 1 January this year.

Which essential aspects is FINMA regulating in its implementation provisions and which related regulations is it adapting or repealing?

The noteworthy areas which are to be specified by the FINMA proposal include:

  • Regulation of details concerning the requirements for professional indemnity insurance for asset managers, trustees and managers of collective investment schemes (FinIO-FINMA)
  • Regulation of specific requirements for risk management, compliance and ICS for managers of collective investment schemes (FinIO-FINMA)
  • Thematically related changes in the area of anti-money laundering legislation, in particular reduction of the threshold for exchange transactions in cryptocurrencies to CHF 1,000 and more extensive obligations for AMLA specialist units for companies with five or more full-time employees (AMLO-FINMA)
  • Thematically related adaptation of FINMA Circular 2018/3 ‘Outsourcing – banks and insurers’, the scope of which is extended to asset managers of collective investment schemes and fund management companies

In addition, the FINMA Collective Investment Schemes Ordinance (CISO-FINMA), the FINMA Collective Investment Schemes Bankruptcy Ordinance (CISBO-FINMA), the FINMA Banking Insolvency Ordinance (BIO-FINMA) and the FINMA Financial Market Infrastructure Ordinance (FMIO-FINMA) will undergo mainly technical changes. The following FINMA circulars will also be adapted:

  • 2013/8 ‘Market conduct rules’
  • 2015/2 ‘Liquidity risks – banks’
  • 2017/7 ‘Credit risks – banks’
  • 2020/1 ‘Accounting – banks’
  • 2013/3 ‘Auditing’

Finally, Circular 2008/5 ‘Securities Dealers’, Circular 2010/2 ‘Repo/SLB transactions’ and Circular 2013/9 ‘Distribution of collective investment schemes’ will be repealed. [Link to all materials.]

In which areas might financial services providers need to act?

While the provisions on professional indemnity insurance in the final version of FinIO-FINMA (adapted after consultation) are probably not the main focus of discussions, there may be need for action with regard to the ‘Outsourcing’ aspects, as well as the money laundering themes ‘Threshold value for cryptocurrencies’ and ‘Obligations of the AMLA specialist unit’, as indicated below.

Outsourcing: As FINMA Circular 2018/3 will now also be binding on asset managers of collective investment schemes and fund management companies, the financial services providers concerned will have to comply with the relevant provisions when delegating tasks (such as portfolio or risk management) and will have to check whether the set-up currently in use meets the requirements. For asset managers of collective investment schemes, for example, this means that they must (cumulatively) handle the portfolio and risk management of at least one investment scheme themselves. Consequently, only risk control in the sense of a ‘second line of defence’ may be outsourced (but not the entire risk management), whereby the asset manager remains responsible for the appropriate monitoring of the outsourced activity.

Threshold value for cryptocurrencies: Until now, private clients could exchange their cryptocurrencies (e.g. Bitcoin or Ethereum) with a financial services provider to a value of CHF 5,000 without the latter having to identify the client in accordance with the AMLA. The revised AMLO-FINMA now lays down a threshold value of CHF 1,000 for corresponding transactions. This lower threshold is justified by the fact that virtual currencies pose an increased threat, including the associated risk of money laundering and funding of terrorism. According to FINMA, although the anonymity of exchange transactions is comparable to that of cash, electronic transmission allows large (partial) sums to be moved in a matter of seconds, which encourages smurfing (i.e. the splitting of a large amount into a large number of small sums below the threshold value). The planned tightening affects smaller providers in particular, which previously focused on transactions with lower amounts (up to CHF 5,000) and were therefore able to dispense with costly identification processes, but now have to establish these processes for volumes of just CHF 1,000 per transaction if they wish to continue operating.

Obligations of the AMLA specialist unit: The revised AMLO-FINMA provides that financial services providers subject to prudential supervision must set up an AMLA specialist unit if they have five or more full-time employees, which must comply with all the monitoring and analysis obligations laid down in the Ordinance. Until now, the threshold for this ‘comprehensive’ AMLA specialist unit was 20 full-time employees – while providers below this threshold had to install an AMLA officer, they only had limited duties. Consequently, smaller financial services providers now have to examine their AMLA compliance as well, and check whether they may need to make changes to ensure continued compliance with the regulatory requirements.

When do the changes enter into force?

All changes are due to formally enter into force on 1 January 2021, with, in principle, a transition period of one year from that point.