Compliance for external asset managers (EAM) in Switzerland

External asset managers (EAMs), also known as independent portfolio managers, look after their clients' wealth independently of a bank and are financial institutions that require a FINMA licence under the Financial Institutions Act (Art. 5 para. 1 FinIA). This page sets out the compliance requirements after licensing, what custodian banks look for and how Peak Compliance takes over the compliance function for external asset managers in Switzerland.

What is an external asset manager (EAM)?

A portfolio manager is a person mandated to manage assets on a commercial basis in the name of and on behalf of clients (Art. 17 para. 1 FinIA). It is called "external" or "independent" because it works alongside the bank as a separate firm: the assets sit with a custodian bank in the client's name, and the external asset manager takes the investment decisions under the portfolio management mandate and a power of attorney. This creates a triangle with clear roles:

• Client: grants the portfolio management mandate and holds the account and custody account.
• External asset manager: manages the assets under the agreed strategy as a licensed financial institution.
• Custodian bank: holds the assets, executes orders and governs the cooperation by contract.

Portfolio managers and trustees are financial institutions under FinIA (Art. 2 para. 1 FinIA) and at the same time financial intermediaries under the Anti-Money Laundering Act (Art. 2 para. 2 let. abis AMLA). Persons who exclusively manage assets of persons with whom they have business or family ties are outside the scope of FinIA (Art. 2 para. 2 let. a FinIA). The route to the licence is described under portfolio manager licensing, and the article on the portfolio manager licence in Switzerland explains the steps for new firms.

Compliance duties of external asset managers in Switzerland

Licensing marks the start of ongoing business under supervision. The main duties at a glance:

• Risk management and internal control: external asset managers have an appropriately defined risk management system and an effective internal control structure that ensures, among other requirements, compliance with legal and internal provisions (Art. 21 para. 1 FinIA). Persons carrying out these tasks stay separate from the activities they supervise (Art. 21 para. 3 FinIA; exemption for small firms: Art. 26 para. 2 FinIO).
• Supervisory organisation and notifications: ongoing supervision is performed by a FINMA-approved supervisory organisation (Art. 61 FinIA). Changes in the facts on which the licence is based must be notified; material changes require prior authorisation (Art. 8 FinIA).
• Fit and proper: the institution and the persons entrusted with its administration and management guarantee irreproachable business conduct (Art. 11 FinIA).
• FinSA rules of conduct: client segmentation (Art. 4 FinSA), information on supervisory status, risks and business affiliations with third parties (Art. 8), suitability assessment in portfolio management (Art. 12), documentation and accountability (Arts. 15 and 16) and organisational measures on conflicts of interest (Art. 25).
• Compensation from third parties: commissions, discounts and similar payments, for example from custodian banks or product providers, may be kept only if clients were expressly informed in advance of type and scope and relinquished them; otherwise they are passed on in full (Art. 26 FinSA).
• Ombudsman: firms that also serve retail clients affiliate with an ombudsman at the latest on commencing their activity (Art. 77 FinSA).
• Anti-money laundering: as a financial intermediary, the external asset manager meets the AMLA due diligence duties, takes organisational measures including staff training and controls (Art. 8 AMLA) and reports well-founded suspicions to the Money Laundering Reporting Office (Art. 9 AMLA).
• Audit: an audit firm generally performs an annual audit unless the supervisory organisation conducts it itself; the supervisory organisation may extend the cycle to a maximum of four years, with a compliance report in the years in between (Art. 62 FinIA).

More on the rules of conduct in the FinSA hub and on day-to-day due diligence in the practical guide to AMLA due diligence. Licensing, organisation and supervision under the Financial Institutions Act are summarised in the FinIA hub.

Working with the custodian bank

For an external asset manager, the custodian bank is both a partner and an attentive counterparty. In practice, custodian banks govern the cooperation in a cooperation or framework agreement and typically expect the following from the external asset manager:

• Evidence of licence and supervision: FINMA licence, supervisory organisation and, on request, details of organisation, key persons and audit.
• Clear power of attorney: the client grants the asset manager a power of attorney within the scope of the portfolio management mandate, with defined scope and limits.
• Transparency on compensation: arrangements on compensation paid by the bank to the asset manager are clearly documented and aligned with client information under Art. 26 FinSA.
• Own due diligence: the custodian bank and the external asset manager are each financial intermediaries and both meet their AMLA duties; the asset manager answers the bank's queries on the origin of assets and transactions promptly and with documentation.
• Periodic review: many custodian banks review their external asset managers regularly, for example with questionnaires on compliance, directives and controls.

Peak Compliance prepares the documents for the custodian banks and keeps the documentation up to date.

Typical focus areas for small external asset managers

Small teams meet the requirements with lean structures. In practice, these points deserve particular attention:

• Segregation of duties: persons carrying out risk management and internal control stay separate from the activities they supervise (Art. 21 para. 3 FinIA); firms with five or fewer full-time positions or annual gross earnings below CHF 2 million and a business model without increased risks are exempt from this independence requirement (Art. 26 para. 2 FinIO).
• Suitability and documentation: client profile, investment strategy and reporting are fully documented for each client relationship.
• Compensation: client information and waivers are in place before the contract is signed, where the firm retains compensation, and easy to retrieve.
• AML risk analysis and directives: risk analysis, directives and criteria for higher risks are up to date.
• Control plan: controls are planned, performed and traceably evidenced.
• Training: staff training takes place regularly and is evidenced for the audit.

How Peak Compliance covers compliance for external asset managers

External asset managers may delegate the tasks of risk management and internal control to a qualified external entity (Art. 21 para. 2 FinIA). Peak Compliance takes on this role for external asset managers:

The institution selects, instructs and supervises the external entity carefully (Art. 14 FinIA) and remains responsible for its regulatory duties. The role and choice of the supervisory organisation are explained in the article on FINMA supervisory organisations for portfolio managers. A supervisory organisation differs from a self-regulatory organisation: financial intermediaries without a FinIA licence meet their AMLA duties through SRO affiliation, which Peak Compliance also supports. Asset management companies supervised by the FMA in Liechtenstein can turn to compliance outsourcing Liechtenstein.

Checklist for external asset managers

• Directives on compliance, AML, conflicts of interest and compensation approved by management
• Client segmentation, suitability and documentation complete for each client
• Third-party compensation disclosed and waivers obtained before signing, where the firm retains compensation
• AML risk analysis up to date, criteria for higher risks defined
• A control plan with documented controls and follow-up of measures
• Affiliation with the supervisory organisation and the ombudsman confirmed, notifications to the supervisor made
• Custodian bank agreements and questionnaires current
• Staff training records are ready for the audit

Discuss compliance for your firm with Peak Compliance: book a free initial consultation via the contact page.

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Isabelle Ledergerber

Managing Partner, Co-Founder · LinkedIn profile