Since December 2020, most independent managers have been affiliated to a mediation body. But what are the consequences for them?
A practice already well established in the banking world
Mediation bodies are a new player in the independent asset manager landscape. However, this is nothing new for anyone: in fact, the Banking Ombudsman has been in existence for over 27 years.
This banking body settles an average of 2,000 cases a year throughout Switzerland. As will be the case for most of the newly-created mediation bodies, the procedure is entirely free of charge for customers, with costs borne by the financial institution.
By December 2021, asset managers will be required to inform every customer of the possibility of appealing to a mediation body.
Managing the risk of abuse
Mediation bodies are a welcome development in the world of finance. Until now, customers have had few means of recourse to assert their rights, and the slowness and cost of procedures were, in themselves, a strong deterrent.
If a portfolio is not developing as hoped, the customer can send a letter requesting a mediation procedure, which the financial institution will then have to finance.
The Manager and the obligation of means
As far as the chances of success are concerned, it should be remembered that mediation is not an arbitration procedure. The body does not have to designate a winner or a loser. That said, mediation is based on compliance with the applicable regulatory and contractual provisions. A manager who has not respected his duty to verify the suitability of investments for the client’s risk profile will have very slim chances of the proceedings turning out in his favor.
On the other hand, it is important to stress that a portfolio that loses value does not violate any regulatory or (usually) contractual provisions. The customer – not the manager – must assume the risk associated with the investment, since he also reaps the rewards of its performance. The Manager has an obligation of means and not of result.
One caveat, however: the obligation of means must be demonstrable. In other words, it must be documented. Which brings us to the second consideration: the cost to the Manager.
Intelligent documentation
One of the key consequences of LSFin and LEFin for asset managers is the need to document the investment selection process. Firstly, because documentation of the services provided is required by the LSFin, but also because this inevitably reduces the costs of the mediation procedure, and drastically increases the chances of a favorable outcome for the Manager.
Clear, straightforward documentation demonstrating compliance with the requirements for the provision of financial services gives the ombudsman a clear picture of the processes involved.
Of course, documenting the services provided can be time-consuming and counter-productive. The challenge is to find an intelligent, effective formula that protects the Managing Director while remaining easy on his business model.
