The key information document - the prospectus for retail clients

Initial situation

The information obligations, which were implemented with the introduction of the Financial Services Act (FinSA) in accordance with the Directive on markets in financial instruments MiFID II, now include not only the prospectus but also the so-called Key Information Document (KID). While the prospectus requires a comprehensive description of issuers and securities, the KID serves directly to inform retail clients about the financial instruments on offer. The following article is intended to explain the purpose of the KID for financial instruments in more detail, as well as whether and to what extent tokens fall within the scope of the KID and whether there are any "crypto-specific" exceptions for the KID.

Scope and exceptions

Together with the Financial Services Ordinance (FinSO), the FinSA defines the framework conditions for the KID. Art. 58 FinSA, for example, defines the scope of application as a basic rule, according to which KIDs must be prepared by the producer whenever financial instruments pursuant to Art. 3(a) FinSA are offered to retail clients.

According to the wording of the law, the person responsible for producing this "manual" is the producer, i.e. the person at the point of production. The financial service provider who personally recommends a particular financial instrument to retail clients is responsible for submitting the KID, provided that the producer had to produce it.

No such brochure is required for financial instruments which may be acquired for retail clients exclusively within the scope of their asset management contract. Furthermore, no KID is required who offers shares and share-like securities allowing for participation rights (such as participation or dividend rights certificates). In this case, the legislature assumes that the basic characteristics of this form of investment are already known to retail clients. In addition, individual shares as securities are subject to the obligation to publish a prospectus, which already guarantees the corresponding information obligations. The same exception applies to non-derivative debt instruments - again, no KID is required. In addition, in the case of the exclusive execution or transmission of client orders (so-called execution-only transactions), there may be no obligation to provide a KID, or the relevant product documentation may only be provided following the transaction, provided the client has given his or her consent. In practice, this brings some simplifications.

In accordance with the EU regulation, the law and the FinSO regulation recognize product information documentation produced in accordance with foreign law. If such documentation exists, it is no longer necessary to create a KID in accordance with FinSA (e.g. the EU-KID for PRIIP). Instead, these are considered equivalent.

Guiding maxim

In line with the scope of application of the KID for retail clients, the guiding maxim is that the KID must be linguistically easy to understand and, as an independent, structured document, must also be clearly distinguishable from advertising material on financial instruments. To this end, the law or ordinance also provides for a model template (Annex 9 FinSO), which must be used by the producers. The standardized form of KIDs to be achieved in this way allows retail clients to directly compare different, complex financial instruments. In addition, financial service providers must make the Key Information Document available to retail clients free of charge prior to subscription or conclusion of the contract (point of sale).

If regulations on the preparation of and/or information in KID are violated (e.g. by providing false facts), a fine is threatened, whereby only the intentional commission of an offence is punishable.

Content

In terms of content, KID should contain all the information that will enable retail clients to make well-founded investment decisions and to compare different financial instruments. This information brochure therefore includes information on the type of financial instrument, its risk and return profile, including the highest impending loss, the costs to be borne by the investor, the minimum holding period and the tradability of the financial instrument, and more.

The non-exhaustive list in the FinSA is largely based on the European regulations (MiFID II, Prospectus Regulation, PRIIP). Nevertheless, it is noticeable that the Swiss legislator regulates to a lesser extent in this respect and thus gives financial service providers greater scope for action. Nevertheless, if only indicative details can be provided for the legally required information (such as on costs), retail clients must be explicitly made aware of this (Art. 85 FinSO). In contrast to the prospectus, it is also noticeable that the KID is not subject to any approval requirement.

BIB for Virtual Assets

Insofar as Virtual Assets qualify as financial instruments within the meaning of Art. 3(a) FinSA, a KID must be prepared for such financial assets under the above-mentioned conditions. In its report of 14 December 2018 on the legal basis for distributed ledger technology and blockchain in Switzerland, the Federal Council has already stated that payment tokens do not constitute securities and, in principle, do not constitute financial instruments within the meaning of the FinSA. It is further explained, however, that under the conditions of Art. 3 (a)(6) FinSA, payment tokens may constitute financial instruments if the payment tokens are accepted as deposits whose redemption value or interest is dependent on risk or price, except for those whose interest is linked to an interest rate index. This would in principle also result in corresponding duties of conduct and information. According to the Federal Council's report, utility tokens, if they are only intended to provide access digitally to an application or service, will generally not be treated as securities and are in principle not financial instruments in the sense of the FinSA. However, the FINMA Guidelines for enquiries regarding the regulatory framework for initial coin offerings state that utility tokens that fulfil, in whole or in part, the economic function of an investment are treated by FINMA in principle as securities and thus as asset tokens. As far as asset tokens are concerned, FINMA generally assumes that they are securities, with the associated consequences under financial market laws - namely the obligation to publish a prospectus or to prepare a KID. Again, a distinction must be made between the issuer of the token and the provider of the financial service associated with the token. This distinction is relevant for the connection to prospectus- and KID-obligations.

In principle, it must be assessed on a case-by-case basis to what extent DLT-based investments qualify as financial instruments and as a result a KID must be prepared. For example, in the case of tokens which are non-derivative debt instruments (e.g. plain vanilla bond), no corresponding KID is to be prepared.

Summary

The Key Information Document, easy to read and understand, must be provided to retail clients when offering complex financial instruments. The overriding principle when drawing up the KID is that the relevant financial instrument should be effectively presented to retail clients in a language as simple as possible. The comprehensibility of the information must be measured against the average understanding of the respective client group, in this case retail clients. With the introduction of the KID, Switzerland is catching up with the EU and is implementing additional product documentation. The scope of application is defined by law, although there are also exceptions, namely for shares. Under certain circumstances, there may also be an obligation to produce and submit a Key Information Document when offering DLT-based financial products.

August 2020 | Authors: Dr. Lucy Gordon, Tanja Müller, Romina Lauper

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