FINMA restrictions: a challenge for Swiss unregulated asset managers
Originally, Within European borders, the regulator has implemented broad directives useful to clarify just the minimum requirements needed to act as a portfolio manager, leaving the possibility to each country to define in their law if the managers have to be licensed, approved or just have to demonstrate their skills using their background without official permissions.
Over the years, some countries have adopted strict and severe minimum requirements in terms of initial approvals and ongoing checks on asset managers activities, while some other gave them the possibility to have an easier access to the profession and softer obligations to respect and be aligned with.
Nowadays jurisdictions also outside of EU, that in the past adopted a lighter approach on the thematic such as Switzerland, are changing their mind on that topic. In fact, due to the restrictive trends of the last decade about compliance, transparency or substance and after the publication of the Swiss Financial Institutions Act (FINIA), it has been more and more challenging to carry on portfolio manager activities in Switzerland without having proper and expensive licenses required by FINMA to become a Regulated Asset Management.
The new requirements
Within the new regulation “Federal Act on Financial Institutions” which came into force on 1 January 2020 and basically apply to each category of “Asset Managers”: portfolio managers, Trustees, managers of collective assets, fund management companies and securities firms, the managers have been provided with a 3 years period to align themselves to the law by asking for the mandatory authorization required by the regulator FINMA. The objective of the regulator is quite clear: develop a clear framework useful to regulate, inspect and verify activities carried on by the players of the sector, asking them to standardize and make transparent their scopes.
Technically the authorization process requires to portfolio managers to comply with various requirements to receive a FINMA license: they have to be classified as either a sole proprietorship, a commercial enterprise or a cooperative and enter as such in the Swiss commercial register, they are required to activate and demonstrate their organisationin terms of risk management and internal controls, they have to proof and share their business activity including precise details of their operations and geographic layout in the relevant documents, moreover they must be affiliated to an SO, which can confirm that the entity is supervised by an authorized organization.
Actually at the moment just about 320 managers out of more than 2.000 requests have been approved and the deadline settled for the 1st January 2023 is now approaching.
Which are the reasons of this very low number of authorization confirmed? Are these professionals totally equipped to reach standards requested? If not, how they solve this complicated challenge?
The reality is that many players are actually too small to bear the costs linked with the license and they surely have to find a way to keep their clients’ satisfaction and loyalty, without underestimating revenues matters. Some of those players decided to join forces with other Swiss actors with the same issue, merging companies in order to have the necessary resources to ask for the license. Some others have been sold to bigger competitor running the risk to lose the advantage to be fully independent while doing their core activities as Portfolio Manager. The rest of the unregulated asset managers are still looking for opportunities that could help them to go ahead with their activities keeping an independent structure and strong relationships with final clients. This situation could open virtuous collaborations and relationships between these professionals and regulated B2B platforms with strong experience in managing portfolio with external advisors as the one that FARAD Investment Management have built in more than 15 years in that field.
The Luxembourg solution
Is it possible for that entities to find someone abroad able and professionally qualified that can help them in solving this complicated challenge?
The answer to this question is definitely positive and it is the reason why regulated asset managers based in Luxembourg are proposing themselves as a third party solution for Swiss portfolio managers that are not yet aligned with the new regulations and need to find as soon as possible the best way to respect FINMA’s restrictions. Companies as FARAD Investment Management, not only they have the necessary licenses to carry on investment activities but thanks to their strong expertise, they are able to set up a full service based on a consolidated framework made of dedicated teams able to follow the entire process from the onboarding to the day by day tasks. They can approach several reliable counterparties to work with and they have already in place a solid infrastructure in terms of procedures, know-how and communications.
In the end the advantages of this structured solution are many on both sides: Swiss entities are able to be fully compliant with FINMA regulation as they carry out an advisory activity towards a regulated investment firm. This advisory activity allows them to keep under control portfolio allocations, to maintain substantial relationship with the clients for all the other aspects not directly linked to investment decisions and to avoid to increase their operational costs. Regulated asset managers could increase assets under management, visibility and revenues proposing a win-win situation for a complicated regulatory challenge.
FARAD I.M. can actively help in putting in place the above described structure thanks to its many years of experience and its independent platform exclusively built to provide services to B2B partners.
Conducting Officer, FARAD I.M.
Client Relationship Manager, FARAD I.M.
FARAD Investment Management S.A