Martin Bernet of Schellenberg Wittmer analyses the potential impact of the proposed far-reaching reforms in the field of financial disputes by the Swiss government:
"Each of the proposed measures would in and of itself substantially change the environment of financial litigation in Switzerland. What is more, the combination of the various elements of the draft bill has the potential of bringing about sweeping changes and of establishing a claims culture."
For a number of reasons, Switzerland has traditionally been considered as a defendant-friendly jurisdiction. An important factor is the “costs follow the event” rule, which is accentuated by the plaintiff’s obligation to advance the court fees at the outset of the case. Another reason is the lack of procedural instruments allowing for collective redress.
However, should the Swiss government’s recent proposals for a Financial Services Act (FSA) survive political debate, the current litigation landscape may radically change as far as financial disputes are concerned.
The proposals do not come as a total surprise. In fact, since the financial crisis hit the markets in 2007–2008, there has been an intense debate on whether the position of plaintiffs should generally be improved. In particular, losses suffered by many individuals as a result of the Lehman bankruptcy and the Madoff scam fuelled demands for improvements in the financial sector. In early 2013, the Swiss Financial Market Supervisory Authority (FINMA) presented a paper that indicated that it intended to include in the FSA an entire chapter with measures aimed at improving the enforcement of claims by private clients against financial service providers. In July 2013, the Swiss government published a general report on collective redress across all areas of the law, where it identified shortcomings in Swiss law in the area of legal remedies in case of mass damages.
The draft bill of the FSA now proposes the following measures:
(i) tightened obligations of financial service providers to produce all documents related to a client and the services performed, combined with a shifting of the burden of proof on the service provider; (ii) an obligation of financial service providers to participate in, and financially contribute to, a mediation/ombudsman procedure; (iii) either a simplified arbitration procedure or a fund sponsored by the financial service industry that can be tapped for funding claims against service providers; (iv) the right of interest groups to pursue collective claims against service providers for the benefit of similarly affected clients; and (v) a mass settlement procedure modelled after Dutch law. While the compulsory participation of financial service providers in an ombudsman mediation procedure is but an extension of the current system, the other proposals have the potential to drastically change financial litigation in Switzerland.
Pursuant to the draft bill, the financial service provider bears the burden of proof that it complied with its legal information and disclosure obligations. There is thus a legal presumption of a breach, and it is up to the service provider to prove compliance. If that proof is deemed to be lacking, the court will, as a result of another legal presumption, assume that the client would not have undertaken the transaction in question. In other words: it will be left to the financial service provider to prove that three of the four requirements for a damage claim are not met (ie, breach of duty, causal link between breach and loss, and fault). The only requirement that the client would have to prove would be its alleged loss. This represents a fundamental deviation from established principles of civil liability.
In order to alleviate the cost risks of clients, the draft bill proposes two alternative solutions: either (i) the creation of an arbitration court with jurisdiction to hear claims brought by private clients by the financial service industry at its own cost, or (ii) the establishment by the financial industry of a litigation fund.
The Swiss government prefers the creation of an arbitration court. This is a concept developed by the banking industry (but apparently not fully supported by all banks). The arbitration solution provides for an option for clients to bring claims against financial service providers before an arbitration tribunal consisting of a chairperson and of co-arbitrators nominated in equal numbers by the financial industry and by client organisations. The arbitration will be free of charge or at least low-cost for the clients. The procedure will be simplified and efficient. Arbitration would not be mandatory (ie, clients would be able to elect to bring their claims before state courts).
The proposed litigation fund is primarily intended for private (as opposed to commercial) clients. It would be available not only to destitute individuals, but also to large portions of the middle class. The threshold would be that the client does not live in “extraordinarily good financial circumstances”. This responds to the assessment that the cost barrier to the courts primarily affects the middle class, which is not eligible for legal aid. Meritless claims and claims in excess of 1 million Swiss francs would not be subject to funding. The litigation fund would also be available to interest groups that are not in extraordinarily good circumstances. The 1 million Swiss francs limit would not apply in this case. The litigation fund would pay the court costs, the plaintiff’s reasonable legal fees, and fees for experts, as well as adverse cost orders in case the claim is not admitted. The courts would decide on applications for funding.
The draft bill also proposes an expansion of the right of interest groups to bring claims for the benefit of certain groups. Swiss law already recognises such a right but it is so strongly restricted that it has virtually no practical significance. According to the draft bill, any association or other organisation can bring an action against a financial service provider for breach of its duties if the organisation is not-for-profit and if its articles provide for the protection by the organisation of the rights of specific groups, in particular of private clients. The organisation can only claim for injunctive and declaratory relief but not for damages. The declaratory relief is meant to determine the existence or non-existence of a breach of legal obligations by financial service providers. The shift of the burden of proof described above would also presumably operate in such cases.
The proposed group settlement procedure allows interest groups to enter into a settlement with financial service providers, which the court, if satisfied by its terms, will declare binding on all clients affected by a particular breach of duties by the financial service providers. The clients have the right to opt out. The proposal largely follows the Dutch Act on Collective Settlement of Mass Damage Claims of 2005.
Each of the proposed measures would in and of itself substantially change the environment of financial litigation in Switzerland. What is more, the combination of the various elements of the draft bill has the potential of bringing about sweeping changes and of establishing a claims culture. If, for example, in a Lehman-type situation that affects a large number of clients, an interest group launches an action for a declaratory judgment, it will benefit both from the litigation fund and from the shifted burden of proof. If it obtains appropriate support in the media and in addition launches a group settlement procedure, the financial service provider will come under tremendous pressure to settle even if it has a good case.
The consultation process requires interested circles to submit comments by mid-October 2014. There will no doubt be fierce opposition by the financial service industry. It will be interesting to see whether all of the proposals will meet the same degree of resistance. The government seems determined to go ahead. Harsh criticism of early concept papers did not make it change its course. If only parts of the current draft bill outlast the consultation and ensuing parliamentary process, Swiss financial industry litigation will be very different from what it is now.