An Introduction to Digital Platforms under the FinSA/FinIA

In the course of digitalization, more and more financial service providers are offering simple and easily accessible investment platforms which can be used at any time via smart phone applications. After a successful registration and verification, customers can use these platforms to set up a portfolio even with small investment sums. The aim of these offers is to enable asset management for small assets and thus to open up new market segments.

Such technological financial innovations promise a fundamental optimization in many respects including time savings, cost reduction and user-friendliness, but also confront financial service providers with new challenges, in particular with regard to ensuring customer protection.

How customer protection is to be guaranteed and which duties the offering of financial services via digital platforms basically entails has undergone significant changes since the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) came into force on January 1, 2020.

Selected Examples of Digital Platforms in Asset Management

Asset Manager Pool

One example of such digital platforms are pools of independent asset managers, which for cost reasons merged after (and already before) the new financial market architecture came into force on January 1, 2020. For detailed information on the new licensing categories please refer to our article Overview of Licenses/FinIA.

Asset Management by Robo-Advisor

Also the offering of algorithmic financial services via digital platforms needs also to be mentioned. Here, a distinction should be made as to whether or not a power of attorney exists, i.e. whether or not the algorithm can dispose in the name and on the account of the customer. Further information on this topic can be found in our article "Robo-Advisor". One of the best-known Swiss providers for robo-advisory is Swissquote.

Digital Investment Advisory Business

Finally, also a pure digital investment advisory business is possible, whereby a distinction must be made here as to whether the recommendation is provided by an algorithm or digitally by a human customer advisor. For more information on pure investment advisory using algorithms, see our article "Robo-Advisor".


Challenges and Duties

Most domestic and foreign platforms do not differ significantly at first glance. Investing money without considerable effort and benefiting from low fees is usually the selling point to convince customers to invest their money on the corresponding platform.

New World - Same Rules:

The obligations such digital platforms must comply with differ depending on the range and structure of the financial services offered. In principle, however, the same rules apply as in the non-digital sector. As always when existing regulations are applied to a new business field, a number of specific challenges arise here as well.

The following examples will therefore show aspects regarding which operators of digital platforms with Swiss customers must pay particular attention to.

Global Market - Local Laws:

The legislation regarding the cross-border provision of financial services into Switzerland that existed before the FinSA came into force was very liberal. It was thus possible for foreign digital platforms to provide financial services to Swiss clients in the field of asset management without (legal) barriers.

Since January 1, 2020, cross-border financial services into Switzerland are now subject to the FinSA and FinIA. Thus, operators of digital platforms which provide certain legally regulated financial services to Swiss clients, must comply with the requirements of the FinSA and ensure that their client advisors comply with them. The effective scope of the obligations varies depending on the segmentation of the clients and the type of service provided. It should also be mentioned that already the mere (cross-border) execution and transmission of client orders (execution-only) and transactions at the instigation of the client (reversesolicitation) are covered by the scope of the FinSA and trigger obligations, although not to the same extent as other services.

Furthermore, also the respective local regulations must be observed of course in case a Swiss financial services provider addresses foreign clients via a digital platform.

The FinSA and FinIA thus ensure that domestic providers of financial services are no longer disadvantaged in comparison to foreign providers and thus a "level playing field" is provided. The creation of uniform competitive conditions is intended to improve customer protection.

Outsourcing – Always a Simple Solution?

The speed of financial services is increasing due to automated decisions. These are usually made by programmed algorithms. Depending on the platform, in-house programmers or existing programs can be used for this purpose. However, there are also innumerable data processing and storage services (e.g. cloud providers) which can be added when operating a digital platform. If a platform operator uses third-party programs and external services, this can represent an outsourcing of business activities. According to art. 15 of the Swiss Financial Institutions Ordinance (FinIO), outsourcing is qualified as a major task of the financial services provider being performed independently and on a permanent basis by a third party. In the case of outsourcing, the limits set by FinIA must be observed and the financial service providers must take organisational measures to ensure that the obligations under FinSA and FinIA are fulfilled. In addition, it must be ensured that the agents have the necessary professional qualifications as well as the required authorisations for the tasks assigned (art. 14 para. 1 FinIA). Which professional qualifications and authorizations are required varies according to the outsourced tasks and must be checked in each individual case. Common to all outsourcing relationships, however, is that no tasks which are within the decisionmaking competence of the body responsible for management or for governance, supervision and control may be transferred (art. 16 para. 1 FinIO).

In order to ensure the faithful, diligent and transparent provision of financial services, digital financial service providers must pay particular attention to design the platforms and to implement an appropriate operational organization in accordance with the FinSA obligations.

Customers have the right to receive a copy of their dossier and all other documents concerning them at any time. This means for example that third parties may be obliged to comply with the documentation and accountability duties even in an outsourcing-relationship. It does not matter whether the outsourcing involves domestic or foreign service providers. Decisive is that the financial service is provided to a Swiss client.

Outlook

The omnipresent digitalization brings new opportunities and fields of activity for financial service providers. In order to benefit most from this potential while avoiding possible pitfalls, a timely and careful examination of the applicable regulatory requirements is advisable.

Our experts are available to answer your questions in person or by phone and help you to develop individual solutions.

October 2020 | Authors: Michèle Landtwing Leupi, Dominik Hofmann, Annina Oehen, Danilo Maric

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