In a well-known decision of 29 August, 2011 (ATF 137 III 393), the Swiss Federal Supreme Court stated that in the context of a discretionary mandate, a client may validly waive the right to repayment of retrocessions (also called inducements) if he or she knows at least (i) the parameters on which the retrocessions are calculated and (ii) the order of magnitude of the expected retrocessions. The latter condition is met if the amount of the expected retrocessions is indicated, within a certain range, as a percentage of the assets under management.

In its decision 4A_355/2019 of 13 May, 2020, the Swiss Federal Supreme Court interpreted the above principles strictly, by considering that a clause stating that the retrocessions would amount to between 0% and 1% of the volume invested in certain types of products (e.g. funds, structured products), is not sufficient to constitute a valid waiver, as this clause does not enable the client to determine the foreseeable amount of retrocessions received by the portfolio manager.

1. The facts

B.X. and A.X. hold two accounts with a bank in Geneva. In August 2013, they entrust a discretionary management mandate to an external asset management company (C. SA) on the assets deposited with the bank.

The mandate signed by B.X. and A.X. indicates that C. SA may receive retrocessions from the bank or other third parties which form part of its remuneration. By signing the mandate, the clients waived their right to the repayment of such retrocessions. In addition, an information notice signed by the clients indicates that C. SA may receive (i) between 0% and 62% of the brokerage commissions invoiced by the bank to the clients and (ii) "a remuneration on the assets held in investment funds, structured products, other banking products or on contributions made by clients ranging from 0% to 1% of the volume invested" (free translation).

B.X. and A.X. terminated the mandate in December 2014 and demanded the payment of the retrocessions received by C. SA, amounting to approximately CHF 33,000. C. SA refused to return the retrocessions. The clients filed a request for payment in the Canton of Geneva, which was rejected by both the Geneva Court of First Instance and the Court of Appeal in the Canton of Geneva.

2. Approach of the Swiss Federal Supreme Court

Contrary to the cantonal courts, the Swiss Federal Supreme Court found that the information provided by C. SA was not sufficient to consider that the clients had validly waived their rights to receive the retrocessions.

According to the Swiss Federal Supreme Court, the client must be able to compare the foreseeable amount of retrocessions with the management fees to be received by the portfolio manager. Thus, the foreseeable amount of retrocessions must be indicated as a percentage of the assets under management.

In the present case, the Swiss Federal Supreme Court noted that the information provided by C. SA did not include any indication that would have enabled B.X. and A.X. to estimate the amount of retrocessions to be received by C. SA on the basis of the assets under management. The information only enabled the clients to calculate the retrocessions related to funds and structured products, but did not make it possible to assess in advance (i.e. at the beginning of the contractual relationship) the total amount of retrocessions to be received by C. SA. The Swiss Federal Supreme Court thus followed the reasoning of the clients, who argued that the percentage range was based on an inadequate criterion, namely the "volume invested", which can only be known as and when C. SA decides to invest in specific types of products.

3. Difficulty to determine a range of percentages based on assets under management

The Swiss Federal Supreme Court has strictly applied the principle already expressed in its 2011 precedent, according to which, to waive the repayment of retrocessions in advance, the client must be able to estimate the total amount of retrocessions to be received, using a range expressed as a percentage of the assets under management. This decision nevertheless takes a direction completely opposite to that adopted by the cantonal courts of first instance and second instance, which had made their own interpretation of federal case law. Contrary to the Geneva Court of Appeal, the Swiss Federal Supreme Court did not make any reference to FINMA Circular 2009/1 "Guidelines on asset management", which stipulates that asset managers must, when providing information on inducements, differentiate various product classes, insofar as this is possible.

The reasoning of the Swiss Federal Supreme Court does not appear to be in line with the practice followed by many financial institutions and external portfolio managers, which only communicate ranges of percentages according to the volume invested in certain types of products. One of the reasons for this practice is that the parameters on which the retrocessions are calculated generally vary according to the type of investment products.

While the client cannot in principle know in advance, i.e. at the time of signing the discretionary mandate, the volume that will be invested by the portfolio manager in each type of products, the same is true for the portfolio manager. Indeed, the latter generally does not know in advance the precise asset allocation and its evolution during the mandate (even if an investment strategy has been agreed with the client). The Swiss Federal Supreme Court does not provide guidance on how the portfolio manager should calculate the range of percentages to be communicated to its clients, and how to deal with the fact that the percentages may vary depending on the asset allocation, which is generally not known at the time when the discretionary mandate is signed. 

4. Practical impact

At this stage, it is difficult to estimate the practical impact of this decision by a three-judge panel of the Swiss Federal Supreme Court, because the legal analysis contained therein is relatively succinct.

That being said, considering the approach taken by the Swiss Federal Supreme Court, market participants who wish to keep retrocessions and distribution fees received in connection with asset management activities, but who do not communicate a range of percentages based on assets under management (as opposed to percentages based on the volume invested in specific types of products) should consider reviewing their documentation on retrocessions.