Criteria for an Advance Waiver in Asset Management Mandates

Criteria for an Advance Waiver in Asset Management Mandates

The disclosures available to Liti-Link indicate that the majority of Swiss banks and asset managers continue to collect retrocessions without limitation. Although the waiver declarations in the relevant contractual documents are regularly adjusted by financial institutions, no institution known to us implements the criteria set by the Federal Supreme Court for a valid advance waiver.

The fact is: to this day, in most cases, asset management clients are unable to comprehend the scope of expected retrocessions when signing a contract or before purchasing financial products, nor are the specific incentive structures of existing conflicts of interest disclosed.

Asset management contracts are legally classified under mandate law. Article 400 of the Swiss Code of Obligations (CO) states that a contractor (i.e., bank or asset manager) must at any time account for their management and return anything they have received as a result of it, for any reason. However, Article 400 CO is not mandatory, meaning that this right can be waived. According to Federal Supreme Court rulings, such a waiver requires the following three cumulative conditions to be met:

1. The client’s intent to waive must be clearly evident from the agreement.
2. The key parameters of the existing retrocession agreements with third parties must be known to the client.
3. The expected magnitude of retrocessions must be disclosed to the client as a percentage range of the managed assets.

1. Intent to Waive:

The criterion of intent to waive requires a full and truthful explanation by the financial service provider. Misleading phrases like "The client hereby expressly agrees..." or "Retrocessions belong exclusively to the bank" give clients the false impression that they are merely confirming something that would apply by law anyway. However, the opposite is true, as the client has a statutory right to a claim for restitution under Article 400, paragraph 1, CO.

Since a waiver declaration constitutes a legal right that extinguishes a claim, it requires a clear and explicit statement, which is why a valid waiver clause should use the verb "waive" or an equivalent formulation. Only such wording meets the requirements of case law.

Liti-Link's experience shows that the pre-formulated text passages provided by banks and asset managers are often incomprehensible to their clients, making it significantly harder for clients to assess the legal validity of these passages. It should be noted that the waiver clauses of some financial service providers meet the Federal Supreme Court's criteria, although an advance waiver is only valid if the other two conditions are also fulfilled.

2. Key Parameters of Existing Retrocession Agreements with Third Parties:

The key parameters of existing retrocession agreements with third parties are the specific percentage values that banks or asset managers receive from third parties per product (e.g., Product: Swisscanto BF Sustainable: CHF retrocessions of 0.31% of the invested amount p.a.). This criterion, established by the Federal Supreme Court, is necessary to identify the specific incentive structures of existing conflicts of interest.

As early as its first retrocession ruling (4C.432/2005 of March 22, 2006), the Federal Supreme Court emphasized that asset management clients must be informed of the "specific agreements." In subsequent rulings, the Court referred to the "key parameters of existing retrocession agreements with third parties."

Although this seems straightforward, the key parameters have still not been disclosed (18 years after the first ruling). Instead, banks and asset managers have created product ranges, which the Federal Supreme Court has never required. These product ranges represent only the minimum and maximum key values (e.g., Product Category: Alternative Investments: 0-2.5% of the investment volume p.a.). Conflicts of interest cannot be identified based on such product ranges.

Liti-Link finds it incomprehensible why the key parameters are not disclosed. They could, for example, simply be published on the bank's website and thus be accessible to the client at any time. The administrative effort required from the service provider would be minimal, as the key parameters only change sporadically and are incomparable to the complexity of publishing real-time stock market data.

3. Expected Magnitude of Retrocessions:

The final criterion for a valid advance waiver in asset management mandates is the disclosure of the expected magnitude of retrocessions, which is satisfied when provided as a percentage range of the managed assets (e.g., 0.1% to 0.5% p.a. of the managed assets). This information is necessary to estimate the scope of the expected retrocessions and compare it to the agreed asset management fee.

Since the total amount of managed assets is constantly changing and the exact number or volume of transactions is unknown at the time of the advance waiver, even if the client knows the key parameters and the conflicts of interest have been disclosed, the client cannot estimate the expected magnitude of the retrocessions because a third party is responsible for managing the assets.

With the introduction of the range of managed assets, the Federal Supreme Court, in its ruling of August 29, 2011, limits the transaction volume and number of transactions. Without such a range, even with knowledge of the key parameters of existing retrocession agreements with third parties (e.g., 33.3% refund on brokerage fees), the client would be at the mercy of the asset manager (e.g., churning) and would have to rely on the manager’s faithful and careful execution of the assigned business (a protected interest).

The interaction between the key parameters and the expected magnitude allows the client, with respect to an advance waiver, to both recognize the conflicts of interest present due to the specific incentive structures at the bank or asset manager and understand the total costs of asset management.

Conclusion:

Although the above three criteria have been confirmed multiple times by the Federal Supreme Court, and only their cumulative application enables an advance waiver in asset management mandates, our experience with various banks and asset managers shows that they do not implement or do not wish to implement the criteria set by the Federal Supreme Court. Liti-Link is not aware of any bank or asset manager to date that fully informs their asset management clients according to the three criteria. Of course, there are exceptions, where financial institutions have decided, in the interest of transparency, to pass on 100% of the collected retrocessions to their clients.

Retrospective Waiver:

A retrospective waiver, according to the prevailing legal opinion, requires a higher degree of precision in the disclosure of already received retrocessions than is required for an advance waiver. While some scholars demand detailed disclosure of the received rebates, others argue for partial disclosure.

Where an advance waiver suffices with the disclosure of the key parameters of existing retrocession agreements with third parties and the expected magnitude of retrocessions as a percentage range of the managed assets, a retrospective waiver requires a higher level of disclosure. Therefore, the product ranges introduced by the banking sector do not suffice for a legally valid retrospective waiver of already received retrocessions, as detailed disclosure can be reasonably achieved at that point.