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20 October 2006
The Swiss Federal Tribunal has rendered an important decision according to which any finders' fees and commissions received by an asset manager in connection with a wealth management agreement belong to the client, unless expressly agreed otherwise by the client in full knowledge of the relevant facts.
A significant percentage of assets deposited with banks in Switzerland are managed by so-called 'independent asset managers'. On the basis of a wealth management agreement entered into with a client, an independent asset manager manages the client's assets which are deposited with a bank in the client's name.
It is customary practice in Switzerland for independent asset managers to receive from the depository bank: (i) finders' fees, where the independent asset manager caused the client to deposit its assets with the depository bank; and (ii) a portion of any fees and commissions which the depository bank charges the client for its depository and brokerage services. That portion of the fees and commissions which the depository bank pays to the independent asset manager is designated in Switzerland as a 'retrocession'.
The client is often unaware that the independent asset manager which manages its assets receives commissions in the form of these finders' fees and retrocessions; and even if the client is aware that commissions are paid, it often has no knowledge of their extent, nor has it has expressly agreed that the independent asset manager can keep them.
The Swiss Federal Tribunal, Switzerland's highest court, recently rendered a decision which involved the payment of commissions to an independent asset manager.
A foundation, the client, requested from the independent asset manager who managed its assets payment of an amount equal to the commissions which the manager had received from three banks in Switzerland which held the client's assets. There was no express agreement between the client and the manager to the effect that the latter could keep commissions received from the depositary bank.
The lower court which had to decide on the request rejected the client's claims, holding that since the payment of commissions is standard in Switzerland, the commissions could be considered as being owed to the manager as part of its fees as a result of Swiss custom in accordance with Article 394(3) of the Swiss Code of Obligations. The lower court also argued that, given that the client was aware that commissions were paid, it could be considered as having implicitly agreed to the manager keeping them.
The Swiss Federal Tribunal upheld the client's appeal against the lower court's decision.
The Swiss Federal Tribunal confirmed the core principle under the provisions of Swiss law which govern any wealth management agreement that: (i) an independent asset manager must inform the client about commissions received in connection with the wealth management agreement; and (ii) unless otherwise agreed with the client, commissions belong to the client (irrespective of whether the depository bank intends to make the independent asset manager, rather than the client, benefit from the commissions).
However, the Swiss Federal Tribunal also ruled that the client and the independent asset manager can agree that commissions (even future commissions) can be retained by the latter. That said, the client's waiver of its right to be paid commissions received by the independent asset manager must be an informed one - in other words, the client must be fully and correctly informed about the commissions. The client's waiver of its right to receive commissions must be clear from the agreement with the independent asset manager.
In the case at hand the Swiss Federal Tribunal rejected the lower court's first argument that commissions were part of the manager's fees as a result of Swiss custom. It considered that an agreement in respect of commissions could not be considered as an agreement on fees, even if the end result was to increase the independent asset manager's total remuneration. It also rejected the lower court's position on the grounds that one cannot consider a client's waiver of its right to receive commissions customary where the client is neither aware of nor in control of the extent of such commissions. Moreover, the Swiss Federal Tribunal noted that the Code of Conduct of the Swiss Association of Asset Managers - which can be considered as reflecting custom in the profession - expressly provides that an independent asset manager must inform its client of any commissions and agree with it on who is entitled to keep such commissions.
The Swiss Federal Tribunal rejected the lower court's second argument that the client had implicitly waived its right to receive the commissions. Even if a client is aware that the independent asset manager receives commissions, it cannot know their extent, which depends on several factors such as the number of transactions and the agreement between the independent asset manager and the depository bank. In the case at hand the client had no knowledge of the extent of commission paid, so the manager should have informed it of the potential amount of the commissions. In the absence of such information, the client could not be considered as having validly waived its right to receive the commissions paid to the manager.
The Swiss Federal Tribunal ruled that the case should be reconsidered by the lower court based on the principles outlined above.
The decision has far-reaching consequences for independent asset managers in Switzerland, given that clients are often unaware of the existence or extent of commissions paid to the independent asset managers who manage their assets in Switzerland, nor do they expressly waive their right to receive such commissions.
In contrast to current practice, a number of independent asset managers will have to seek their clients' express consent to keep commissions paid or to be paid by depository banks, with such consent based on a complete and correct understanding of the extent of the commissions received or to be received.
The decision is to be welcomed because it will increase transparency in the relationship between client and independent asset manager, reducing the risk to the client of the conflicts of interest which are inherent to the payment of commissions.
It remains to be seen whether and to what extent the decision will affect the way that Banks in Switzerland operate.
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