In the first year after FinSA came into force, financial service providers are faced with the question of how the obligations included in the law are supposed to be implemented. The first step in implementation is to modify client agreements.
In addition to client segmentation, FinSA imposes a raft of obligations upon financial services providers. The requirements are as follows:
- Duty to provide information
- Suitability and appropriateness check
- Documentation obligations
- Accountability obligations
Client segmentation
Financial services providers have several options when it comes to client segmentation. They can choose to grant all clients the highest level of protection – that of the private client – thereby avoiding any segmentation. Otherwise, clients must be divided into one of the following three segments:
- Private clients
- Professional clients
- Institutional clients
There is a certain amount of flexibility between these segments, with the law allowing for both opt-in and opt-out declarations. These options need to be clearly explained to professional and institutional clients, if not all clients. Any client declarations must be documented in writing or some other verifiable text form. It is worthwhile including this in the contractual documentation, as the client segmentation determines the financial services provider’s obligations.
Duty to provide information
The client must be provided with information about the financial services provider, the services on offer and the financial instruments. As the provision of this information and the associated compliance with the obligation must be documented, appropriate client information should be included in the contractual documentation.
Suitability and appropriateness check
To carry out the suitability check, the financial services provider needs information about the client’s knowledge and experience, financial circumstances and investment objectives. The appropriateness check is based exclusively on the client’s knowledge and experience. This information should be documented in a client risk profile. For asset management and portfolio-based investment advice, an investment strategy based on this information should also be agreed with the client. This documentation forms a central part of the client relationship and thus the contractual documentation as a whole.
Documentation and accountability obligations
FinSA documentation regulations require financial services providers to document both the financial services agreed with the client and any data gathered about the client. This requires a written agreement to be concluded for all financial services rendered for the client.
For accountability obligations, individual agreements can be concluded with the client. Ideally, these should also form part of the overall client agreement.
Conclusion
Existing client agreements and new financial services agreements should be checked and modified against the new FinSA regulations. To accommodate any changes during the client life cycle, it is a good idea to allow for a high degree of modular flexibility in the design of client agreements. This ensures that any changes – to the client segmentation or risk profile, for example – do not require all client documentation to be re-signed.