A lot has already been said, but perhaps it’s helpful to delve a bit more into the legal details, for those that are interested.
What impact does the new FIDLEG/FINIG have on the offering of US-based funds in Switzerland?
The new Financial market regulation in Switzerland FIDLEG/FINIG will not directly regulate foreign brokers (exception: the foreign broker wants to establish a permanent type of business presence in Switzerland, but that’s not really what’s interesting us), but it will have an impact on what they’re able to offer in terms of financial products (in our case: ETFs) to clients based in Switzerland.
Among the new requirements is a so-called “Basisinformationsblatt für Finanzinstrumente” which is, basically, the Swiss version of the European KIID. According to Article 35 FIDLEG, whenever a retail client (such as most of us) is being provided a financial instrument (e.g. an etf share) by a financial services provider (e.g. a broker/bank), a KIID has to be available. If that is not the case, said financial instrument should not be offered to Swiss retail clients. This will be true not only for Swiss based brokers/bank, but also for brokers/banks domiciled in other parts of the world whenever they want to service the Swiss market with that financial product on a large scale.
Now, as has been pointed out in this thread, for US-domiciled funds, the fund administrators have not been willing to produce these kind of documents for the European markets because these funds were originally not intended to be distributed in Europe. That’s why the European brokers have stopped offering US-based funds to their EU clients after the PRIIPs Regulation has been enacted at the beginning of last year. It’s not impossible that some fund administrators will eventually produce some of the required documentation, but I wouldn’t hold my breath regarding that. At least the big fund providers have their own EU-based ETF offering incl. higher TERs compared to their US offerings. From a numbers point of view, they lack the incentive to produce and keep those documents up to date.
What does that mean for foreign brokers (e.g. IB/Schwab/Degiro etc.)?
Well, if they want to be compliant with the new regulation, they will most likely have to cease offering US based fund products to Swiss retail clients (if no KIIDs are being produced). Degiro chose to do that for Swiss clients prematurely based on the new PRIIPS regulation before the new Swiss regulation was enacted. I fear most other brokers will likely follow once FIDLEG/FINIG is enacted (probably at the beginning of 2020), as compliance even with foreign regulations is important, even if the firm doesn’t have a business presence here in Switzerland. The Swiss authorities have the possibility to sanction non-compliant firms at a supervisory level or on the basis of criminal provisions included in the new regulations. There are ways to enforce such sanctions even to firms based abroad, so there’s naturally a tendence to be compliant for financial services providers. Furthermore, it doesn’t really help a firm’s overall reputation if criminal charges are pending in another country. Now, it’s possible that e.g. smaller brokers will not implement the new rules here in Switzerland (perhaps due to negligence), but as a client, this type of behaviour doesn’t instill a lot of trust either, considering you’re willing to let them safeguard possibly a sizeable amount of your private wealth.
Is there no way to avoid all this?
Possibly. The accompanying ordinance to FIDLEG, which is still under consideration and therefore cannot be considered finalized, contains a so-called reverse-solicitation exemption (a construct that’s also present in the EU’s legislation). In a nutshell: A client has the possibility to contact a foreign broker and request from him e.g. to buy a specific financial product, even though this financial product isn’t being actively offered in Switzerland. For that exemption to be available, it is necessary that the foreign broker/bank doesn’t actively solicit the client beforehand about this product (e.g. send brochures, targeted online marketing etc.). If the conditions of the exemption are being met, FIDLEG/FINIG would not apply to that specific transaction and basically only the regulations in the country of the financial services provider would apply to this relationship. Reasoning behind this exemption: Clients should be allowed to decide for themselves whether they want to engage with a foreign broker/foreign financial product. If they do so willingly and consciously of the risks, the need for protection offered by the new Swiss regulation is waivered.
The big question here is: Are foreign brokers willing to accept these type of reverse solicitation-requests? As the reverse solicitation exemption isn’t really a clear cut and simple exemption, there is potentially some legal risk involved when they enter into these type of client relationships. It’s possible that most brokers will not really answer these kind of requests because integrating them into their business model could be costly and the demand could be weak. It certainly seems that Degiro and other European brokers have chosen to go down this route.
In the end, we will have to wait and see what happens next year, but from my point of view, the outlook doesn’t seem to rosy.