Retrocession (financial sector)

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In the Swiss financial sector , retrocessions (outside Switzerland, according to Directive 2014/65 / EU on markets for financial instruments (Financial Market Directive, MiFID), also referred to as incentives ) are fees ( commissions ) in favor of the sales outlets. Retrocessions are paid by product providers, and in asset management also by the asset manager's custodian . For retrocessions in other countries (Germany, Austria) and other industries (including health, insurance, advertising) see the article Kick-back .

Categories

Retrocessions, also known colloquially as "retro (s)", can be roughly divided into the following categories in the financial sector:

  • Refunds of part of the management fee for financial products: The so-called portfolio retrocessions , also known as portfolio maintenance commissions , are paid by product providers to asset managers. In return for using the products, an average of around half of the administration fee goes to sales. These payments are made regularly, usually quarterly. These retrocessions were declared inadmissible by a ruling by the Swiss Federal Supreme Court on October 30, 2012 (see below).
  • Refunds of the front-end load for investment funds : If you buy investment funds, you often have to pay a so-called front - end load . If the fund is brokered to the customer by a third party, this third party normally receives the entire issue surcharge.
  • Refunds for foreign exchange transactions : If an asset manager conducts a foreign exchange transaction for several of his clients, the conditions are significantly better than for a (single) private client. Often the asset manager receives the difference.
  • Brokerage reimbursements : For every securities transaction that an asset manager carries out, he receives part of the fees charged to the client as a share of the turnover .
  • Refunds for custody fees: an asset manager agrees with the custodian bank on a uniform custody fee for his entire customer base. However, the customer only receives a small discount or pays the usual banking conditions. The difference goes to the asset manager.
  • Retrocessions also exist in the credit card business : If card payments are accepted, the provider must grant the credit card company a discount. Some credit card companies reimburse part of this to their customers, for example with so-called "kickback credit cards".

Cause and problem of retrocessions

Compensation for sales services as the primary reason

Providers of financial products are dependent on the sales network or the customer base of financial advisors and asset managers. Therefore, commissions are paid to consultants when they decide on a product from the provider. In making transactions , a bank can generate fees and revenues. With rebates, the bank shares the external asset manager with this turnover. These commissions represent an incentive system that is also common in other areas of the economy. Retrocessions are more problematic, which the bank itself receives from the issuer of a security for its own asset managers to order securities on behalf of their customers and for their account, as a conflict of interest threatens here.

Conflict of interest as a central problem

Banks, product brokers and asset managers have the same interests in many areas that do not have to coincide with those of the investor. Retrocessions help ensure that the asset manager also acts in the interests of the bank and not just in the interests of his clients. Because he is reimbursed some of the fees, he is not always interested in keeping the fees down for his customers. Because asset managers usually have a lot of leeway in their investment decisions, they can significantly increase their income through higher bank and product fees. Greater transparency can reduce this conflict of interest.

Conflicts of interest exist in particular in customer relationships that are processed on a mandate basis (asset management contract). In this case, order law can prohibit such payments even without an express agreement, as has already been established in at least one case before the Swiss Federal Supreme Court . There are now the first asset management companies that voluntarily reimburse their clients for all retrocessions in order to avoid conflicts of interest. For most banks, however, retrocessions represent a relevant share of net income, which is also shown by bank balance sheets. Since financial advisors at banks are usually remunerated based on the income they have achieved (in addition to other success criteria such as new acquisitions), they have an incentive to offer their customers investments that may maximize such income more than the customer's benefit. Consumer advocates therefore recommend investors to carefully check the conditions of asset management mandates with non-independent administrators (bank's own and others).

There are also known cases where the management of a bank instructed its asset managers to give preference to the products of a certain fund provider and to grant special additional remuneration for them.

Reclaiming retrocessions in Switzerland

Decision of the Federal Court of March 22, 2006

In March 2006, the Swiss Federal Supreme Court ruled that in many cases asset managers had to return to their clients retrocessions that they had received from third parties (BGE 132 III 460 of March 22, 2006, confirmed by 137 III 393 of August 29, 2011) . The basis was Art. 400 I OR ( Code of Obligations ), according to which an agent is obliged to give an account of his management at any time upon request and to surrender to the client all assets that are intrinsically related to the order.

On this basis, the Swiss consumer protection magazine Kassensturz offers a sample letter for reclaiming retained retrocessions for download on its website (for more see web links ). However, retrocessions can only be claimed back if the investor has not waived these payments. A backlash from banks and many asset managers to the ruling of March 22, 2006, however, was that they included waivers of retrocessions claims in their contracts. According to current case law, however, these are only effective if the customer was not only fundamentally informed about the occurrence of retrocessions, but was also familiar with the possible range of these retrocessions and had given his consent by means of an explicit signature.

Since the reclaim of retrocessions for affected investors, without the appropriate legal representation with the necessary expertise, has often turned out to be difficult in the past, companies such as the Swiss Liti-Link AG , based in Kriessern , have the necessary assignment and reclaim processes specialized.

The judgment of the Federal Supreme Court of October 30, 2012

At the end of October 2012, the Swiss Federal Supreme Court ruled in a landmark ruling that an investor with an asset management mandate is not only entitled to the reimbursement of retrocessions that had accrued to his bank from third-party product providers, but also that internal company retrocessions (so-called "portfolio maintenance commissions") are paid to the investor belong, if he has not expressly waived them in advance. Since then, a broad debate has been going on in Switzerland about the future of retrocessions and the actual scope of the reimbursement claim. At the time of the judgment, the following were particularly controversial:

  • Whether the reimbursement claim relates only to bank customers with an asset management mandate or, similarly, to other custodian customers ("investment advisory customers"),
  • whether the statute of limitations for such claims is five or ten years, the Swiss tax authorities (Finance Directorate of the Canton of Zurich, February 12, 2013) assume a limitation period of ten years (see below),
  • whether the banks have to make such reimbursements of their own accord or whether this only has to be done on request (this has been the practice of almost all banks to date),
  • how retrocessions refunded are to be taxed retrospectively (see below),
  • which formulations of the terms and conditions permit reclaims and
  • which formulations of the terms and conditions exclude retrocessions for the future.

In fact, most Swiss banks today, with a few exceptions, rely on the validity of their customers' payments according to the above. Judgment of March 22, 2006 waivers. Individual banks have meanwhile made repayments of their own accord. Many banks have already adjusted the contracts after the first Federal Supreme Court decision on retrocessions in 2006, but it is disputed whether these changes made it clear to the customer which amounts he might forego by accepting them. Investor advocates argue that only those changes to contracts and terms and conditions exclude reimbursements if the bank customer has been explicitly informed of the amount of the waiver involved. In any case, many independent asset managers and financial advisors have not yet adapted their contracts to the changed case law.

Further jurisprudence created more clarity (e.g. statute of limitations debate).

Federal court ruling of June 16, 2017 (4A_508 / 2016)

A client (customer) has the right to surrender the retrocessions that the agent (bank, asset manager) has received from third parties (group-internal and group-external product providers) during the last ten years. With the Federal Supreme Court judgment 4A_508 / 2016 a limitation period of ten years was determined. The statute of limitations begins to run on the day on which they were received by the agent. The Federal Supreme Court writes in a press release:

«According to the Swiss Code of Obligations (OR), the regular limitation period for claims is ten years (Article 127 OR). A limitation period of only five years applies to periodic services such as rent and capital interest (Article 128 No. 1 OR). The claim to surrender of retrocessions does not represent such a periodic performance from a continuing obligation. Rather, the client's claim to surrender arises from the fact that the agent received the retrocession from third parties. Each individual release obligation of the agent is based on a separate basis, which is why the general limitation period of ten years applies to retrocessions. "

Commercial court judgment of November 15, 2017 (HG 150054)

With its judgment of November 15, 2017 (HG 150054), the Commercial Court of the Canton of Zurich approved a lawsuit by the BVK for the surrender of retrocessions in the amount of around CHF 12 million (plus interest). The court affirmed a duty of surrender even in the absence of a conflict of interest and thus ( obiter dictum ) also in the case of "execution only". With regard to the question of waivers and the statute of limitations, the Commercial Court of Zurich followed the strict previous court rulings on retrocessions. The judgment has now become legally binding.

Federal court ruling of August 14, 2018 (BGE 144 IV 294 (6B_689 / 2016))

It is clear that an asset manager who does not inform his clients about retrocessions and accordingly does not give them up is guilty of unfaithful business management under Art. 158 Para. 1 StGB.

Number of people affected

According to a study, Swiss banks generated around CHF 4.2 billion in 2012 alone, or 12.4% of the value added in the banking sector, through the receipt and retention of retrocessions. Unfortunately, there is no precise information about how many customers or former customers of Swiss banks and Swiss asset managers are affected and accordingly can claim back the retrocessions that have been made.

In Germany alone, it can be assumed that at least 120,000 people are affected. This estimate is based on the number of voluntary reports for tax evasion that have been made in Germany since the Swiss tax CD scandal . A current report speaks of at least 135,000 voluntary disclosures, which bring the German tax authorities about EUR 7 billion in subsequent tax revenue.

Media coverage

Despite several highest court judgments and the high number of people affected, retrocessions are rarely reported in the media. In the meantime, however, there is increasing international interest in Swiss retrocessions. It appeared some articles on retrocessions in the UK newspaper Daily Mail , Financial Times , The Daily Telegraph and The Sun .

Taxation of refunded retrocessions

In an official communication dated February 12, 2013, the Finance Directorate of the Canton of Zurich commented on the tax treatment of retrocessions paid back in accordance with Section 20 StG. The tax office distinguishes between bank retrocessions and product retrocessions : With the former, the banks charge their customers fees for buying and selling securities in the form of so-called brokerage fees . They pass part of this on to the (external bank) asset managers who initiated the transactions. In contrast, with product retrocessions, the issuers of securities (“product providers”) pass on part of the management fees to asset managers or banks if they hold their products in their customer accounts. These retrocessions also include the "inventory maintenance commissions". In both cases the investor pays too much, but in the first case the (bank-independent) asset manager benefits and only in the second case the bank itself. The judgment of the Federal Supreme Court of October 30, 2012 also refers to these product retrocessions.

The Zurich Tax Office has now in the above. Communication clarified: “ The reimbursement of incorrectly levied product retrocessions is taxable investment income. The reimbursement of bank retrocessions is irrelevant for personal income tax purposes. »The latter because it concerns reimbursed investment costs for tax purposes. Since these costs were tax-deductible, their subsequent reimbursement has no tax consequences.

Possible future waiver of retrocessions

According to a report in the Neue Zürcher Zeitung on October 31, 2013, " the banks [...] are preparing for a business world in which retrocessions are increasingly outlawed due to regulatory pressure ". This is confirmed by a recent announcement from the major bank Credit Suisse , which from July 1, 2014 “will only use investment instruments in its asset management mandates that do not contain any retrocessions, portfolio maintenance fees or distribution fees ” in its favor. Credit Suisse follows UBS . The NZZ also reports that the debate about the statute of limitations for the reclaiming of retrocessions is likely to be “ billions for the financial houses ”. “ So far, many banks have played for a limited time on the subject. »According to media reports, however, retrocessions are by no means obsolete. The Neue Zürcher Zeitung reported in detail on the strategy of the Swiss banks in October 2019.

Web links

General information

Legal and tax issues

Reclaiming retrocessions in Switzerland

Individual evidence

  1. ↑ Unauthorized withheld retrocessions from Swiss banks (web), www.litilink.com, May 24, 2017, Liti-Link AG
  2. ↑ Unclear limitation period (PDF; 82 kB), www.retrozessionen.com, April 23, 2013, Sibylle Brodkorb, lawyer, Winterthur
  3. ↑ Press release from the Federal Supreme Court: Retrocessions: The right to surrender expires after ten years. In: bger.ch - Federal Court, Tribunal federal, Tribunale federale, Tribunal federal. Swiss Federal Supreme Court, July 3, 2017, accessed on June 4, 2019 .
  4. ↑ Jean-Marc Schaller: Retrocessions: Commercial Court of Zurich affirms the obligation to surrender even in the absence of a conflict of interest. In: finblog.ch - on the pulse of law. finblog.ch, 2017, accessed on June 4, 2019 .
  5. ↑ Fidleg Solution Team: The show goes on - the criminal side of the retrocession. In: Fidlegsolution.ch. Fidlegsolution.ch, February 4, 2019, accessed on June 4, 2019 .
  6. ^ Daniel Paravicini, Fabian Gafner: Retrocessions - How next? In: finalix business consulting. finalix AG, 2014, accessed on June 4, 2019 .
  7. ↑ Finanzverwaltung NRW: Numbers, data, facts: Summary information on the subject of voluntary disclosure. In: Finanzverwaltung NRW. Finanzverwaltung NRW, June 4, 2019, accessed on June 4, 2019 .
  8. ↑ Exclusive: Voluntary disclosures bring the tax authorities 7 billion euros. In: Capital.de. June 19, 2018, accessed on December 3, 2019 (German).
  9. ↑ Britons who hold savings in Swiss bank accounts could be due £ 3bn. September 10, 2019, accessed December 3, 2019 .
  10. ↑ Subscribe to read | Financial Times. Retrieved December 3, 2019 .
  11. ↑ Subscribe to read | Financial Times. Retrieved December 3, 2019 .
  12. ↑ UBS and Credit Suisse owe up to 200,000 Brits compensation - are you owed thousands? November 8, 2019; Retrieved December 3, 2019 (UK English).
  13. ↑ Official notification of February 12, 2013 from the Zurich Finance Directorate at tax office.zh.ch.
  14. ↑ Michael Ferber: Credit Suisse waives retrocessions , NZZ of October 31, 2013
  15. ↑ Werner Grundlehner: Banks have been blocking for years: Retros tragedy continues . In: Neue Zürcher Zeitung . ( nzz.ch [accessed on December 3, 2019]).