credit-suisse.com Financial Market Regulation
Financial markets are closely regulated to ensure they function efficiently and effectively. Since the financial crisis, governments and regulatory authorities around the globe have proposed and enacted numerous reforms to help create a more robust financial system. Switzerland has helped to shape and has actively implemented regulations in areas such as the prevention of money laundering and corruption, as well as the strengthening of investor protection.
Major regulatory reforms have been enacted in recent years to stabilize and strengthen the global financial system.In the US, the Dodd–Frank Wall Street Reform and Consumer Protection Act (DFA) served as the basis for market infrastructure reforms. Within the European Union, the European Markets and Infrastructure Regulation (EMIR) was adopted to regulate the over the counter (OTC) derivatives market, and the Markets in Financial Instruments Directive (MiFID) was introduced to prevent market abuse and to create a governance structure for a single, pan-European market for investment services.
European and international regulations such as these are evaluated in Switzerland and incorporated into national law as part of the ordinary legislative process. In addition, Switzerland engages in a dialogue with G20 states and participates in meetings and working groups aimed at defining a coordinated approach to financial regulation.
The European Commission DFA has been developing regulations to increase transparency and to harmonize regulatory disclosures across European financial markets since 2004. The first part of the Markets in Financial Instruments Directive (MiFID) was drafted and passed for implementation in 2006.
In view of the direct impacts of the global financial crisis in 2008, European member states decided to extend the current directive, resulting in MiFID II. Its aim is to enhance financial stability and investor protection while improving market efficiency and competition. MiFID II was approved by the European Parliament in 2014 and will enter into effect on January 3, 2018.
MiFID II is designed to:
- Increase investor protection
- Enhance market structures and market transparency
- Strengthen corporate governance and internal control frameworks
- Enforce specific rules governing algorithmic and high-frequency trading
An important part of the MiFID II investor protection framework is the Investment Suitability Assessment which has already been introduced with MiFID I (2007). The framework ensures that financial institutions act in the clients’ best interest when providing investment advice or portfolio management. When the bank performs non-advised services, the regulation asks for an Appropriateness Assessment of the client.
The assessment will clarify the following:
- the client has knowledge and experience to understand the characteristics and risks in relation to the specific type of product or service
- the client can bear the financial risks related to the transaction
- the recommendation meets the client’s investment objectives and time horizon.
The Swiss Federal Financial Market Infrastructure Act (FMIA, FinfraG) is a cornerstone of Switzerland’s financial markets regulation and entered into effect in January 2016. The regulation is supplemented by the Federal Council’s Implementing Ordinance (FMIO) and the Financial Market Infrastructure Ordinance-FINMA (FMIO-FINMA).
FMIA’s main focus is to ensure the safeguards of the Swiss financial market are working efficiently and to furthermore strengthen investor protection. With the implementation of FMIA, Switzerland adopted international standards of capital markets regulation regarding:
- the regulation of financial market infrastructures including stock exchanges, multilateral and bilateral trading facilities, central securities depositories (CSDs), central counterparties (CCPs), payment systems and trade repositories (TRs)
- the rules of conduct relating to market abuse, the disclosure of shareholdings, public takeover offers
- the regulation of OTC derivatives trading, including obligations related to reporting, risk mitigation, central clearing and platform trading
The Swiss Financial Services Act (FinSA) was passed by the Swiss Federal Council in November 2015. At present, the FinSA bill is under parliamentary review. It is expected to enter into force in January 2019, with the subsequent phasing-in of requirements.
FinSA governs the provision of financial services and the distribution of financial instruments and is intended to strengthen investor protection. Together with the Financial Market Infrastructure Act (FMIA), the Financial Institution Act (FinIA) and the Federal Act on Financial Market Supervision (FinMASA), it forms an important part of the Swiss financial market architecture. In terms of content, FinSA is closely aligned with MiFID and PRIIPs.
FinSA mainly covers the following areas:
- Compulsory rules of conduct for financial services providers in their relationship with clients
- Standardized product documentation, including consistent and easily accessible basic term sheets for financial instruments
- Standards related to training and development
- Measures in the area of legal enforcement
The Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation sets out European standards for the content and format of Key Information Documents (KIDs) for specific financial products. It also defines the frequency with which these documents should be reviewed and the point in time when they need to be made available to clients.
PRIIPs standards enable Retail Clients to better understand the key features and risks of financial products, to better compare different products, and to assess their suitability.
Like other financial institutions, Credit Suisse is obliged to supply KIDs to Retail Clients domiciled in the European Economic Area when advising them or selling products that fall within the scope of PRIIPs before the investment decision has been taken. This applies to both proprietary Credit Suisse and non-proprietary products.
The EU Market Abuse Regulation (MAR) replaced the previous Market Abuse Directive when it came into effect on July 3, 2016. In conjunction with the corresponding Directive on Criminal Sanctions for Market Abuse (CSMAD), it expanded and strengthened the framework to improve integrity and public confidence in financial markets and to prevent market abuse.
MAR applies to financial instruments. It is therefore extra-territorial and far-reaching.
MAR mainly covers the following areas:
- The market abuse offences (insider dealing, unlawful disclosure of inside information and market manipulation)
- Safe harbors (market soundings and accepted market practices)
- Prevention and detection of market abuse
- Insider Lists
- Public Disclosure of Inside Information
- Managers’ transactions
- Investment recommendations
Credit Suisse is committed in its endeavor to combat market abuse and has introduced new measures and processes to identify and reduce the risk of such behavior.
The Mortgage Credit Directive (MCD) is a European legislation designed to foster a single market for mortgages and to protect consumers. Most of the MCD provisions refer to consumer protection taking out credit agreements related to residential immovable property. MCD entered into force on March 20, 2014 and the EU Member States were required to implement the MCD requirements by March, 21 2016 into national law. The detailed specifications of the MCD apply to all consumer credits related to residential immovable property.
Key aspects of MCD include the following:
- Introduction of the European Standardized Information Sheet (ESIS)
- Minimum requirements for the content of advertising material
- Introduction of the Annual Percentage Rate of Charge (APRC) as a comparative figure
- Strengthening of consumer rights in credit agreements