An impending overhaul of European Union financial trading rules could further sour already-shaky relations with Switzerland whilst also triggering a collision course between Swiss banks and champions of consumer rights.This content was published on December 23, 2013 - 18:46
Despite its cryptic name, the EU Markets in Financial Instruments Directive (MiFID II) – designed to enhance transparency and consumer protection – is anything but dull for the Swiss financial sector. Banks and asset managers fear it could freeze them out of the lucrative EU market.
The exact wording has yet to be approved, but MiFID II is likely to include the irksome demand that financial traders have a physical presence on EU soil to sell products to EU citizens. Furthermore, non-EU countries would have to adapt their consumer rights laws to largely mirror the proposed new EU regulation.
For smaller Swiss banks and asset managers, the expense of setting up a physical operation in the EU could be far too onerous, and yet the cost of being frozen out of the EU market would be deadly.
“Until now, it has been relatively easy to serve clients in neighbouring countries, such as Germany, from offices in Switzerland,” Markus Fuchs, managing director of the Swiss Funds and Asset Managers Association, told swissinfo.ch. “This might not be possible in future and we could see employees being relocated across Swiss borders.”
“Small firms could get around MiFID by distributing their products through larger banks that already have a presence in the EU,” Fuchs added. “But this would inevitably lead to fees being charged for these services.”
The first version of the EU’s Markets in Financial Instruments Directive (MiFID I) regulations entered into force in 2007.
It aimed to harmonise financial trading across the EU, giving companies that were certified as compliant by their home regulator a “passport” to operate throughout the EU under a unified set of regulations.
As well as dealing with a number of technical areas and breaking the monopoly that stock exchanges had on conducting share transactions, MiFID also sought to provide better protection for investors.
It demands that traders comply with "best execution" by telling clients where they can find the best price, fastest transaction time and most efficient means of conducting their trades.
It also requires traders to segregate institutional and retail clients into separate categories and apply appropriate risk models to each set, maintaining records of how they achieve this.
MiFID II updated the regulations to keep pace with new developments in the financial markets, such as high speed trading and ‘dark pools’ where trade can be conducting without revealing details of prices and volumes.
The impending reforms also intend to compel companies in non-EU countries doing business in the EU to have a physical presence in EU territory.
MiFID II would also require non-EU countries to have consumer protection laws that are “equivalent” to MiFID regulations.End of insertion
Efforts to finalise the text of MiFID by the end of the year have failed after talks broke down between the European Commission, the European Parliament and the Council of the European Union on December 18. Talks will resume on January 14 .
The Swiss Bankers Association (SBA) told the Financial Times in September that some 7,000 jobs were at stake. Smaller players could also be cut off from the estimated CHF1 trillion ($1.1 trillion) of EU assets currently being handled by Swiss banks, the SBA added.
The Swiss government is taking the threat seriously enough to risk yet another damaging row with the EU. On December 18 it said Switzerland would not resolve a long-standing tax evasion row with the EU unless Swiss financial firms could be guaranteed reasonable access to EU markets under MiFID.
This could lead to a stand-off with EU Commissioner for Taxation Algirdas Semeta who has persistently ruled out such joint negotiation. There are no signs of Semeta changing his mind, particularly after noting that Switzerland resolved a tax evasion dispute with the United States without attaching any conditions.
But Switzerland is adamant that EU financial market access for Swiss firms must be addressed.
“We can live with the idea of Swiss companies having branches in EU territory, but we cannot countenance protectionist regulations that stop all cross-border business,” Mario Tuor, spokesman of the State Secretariat for International Financial Matters told swissinfo.ch.
“For example it is not clear if financial products developed in Switzerland could be sold in Germany, if client relationship managers would have to be based EU territory or if an EU client can be booked in Zurich. We need clarification.”
The Swiss Consumer Protection Association, however, sees MiFID in a far more positive light, particularly the demand that non-EU countries adopt new standards of behaviour when selling complex products to small retail investors.
The association feels it is high time that ordinary people should be given a fairer hearing if their investments turn sour. Some people who lost out during the financial crisis - despite buying products suggesting the capital could never be lost - found they did not have a legal leg to stand on when they complained.
“Consumer protection of small investors in Switzerland is clearly insufficient at the moment,” Swiss parliamentarian and Consumer Protection Association head Priska Birrer-Heimo told swissinfo.ch.
Some tinkering by the financial regulator has improved the marketing and labelling of financial products, such as funds, but not all asset managers are bound by the Swiss Financial Markets Financial Authority.
That would all change under MiFID, which obliges firms to make a distinction between professional and retail investors. MiFID also lays down clear rules about executing the best deals for clients, including the requirement to write down investment strategies that can be reviewed by regulators.
Moves are already afoot to beef up the Swiss Financial Services Act and to force independent asset managers under the supervision of the Swiss regulator. But work still needs to be done to iron out some contentious points before the law can be changed.
The complaints system is weighted too heavily in favour of financial institutions and their armies of lawyers, according to Birrer-Heimo. “Banks should keep documentary evidence of communication with clients,” she told swissinfo.ch. “And if there is a conflict, the burden of proof should be on the bank to produce evidence that they did not do anything wrong.”
But the SBA is against burdening already struggling small banks with excessive restrictions that over-empower small investors.
“It cannot be the case that banks should take the responsibility for investment decisions made by the client,” Claude-Alain Margelisch, SBA chief executive said at its annual media conference in September. “We assume investors are responsible adults who make their own decisions and bear the consequences.”
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