Securities custody to be opened up to competition

Costs of securities custody are expected to decrease as custody becomes open to competition. Transparency of security holdings will remain at the current level in Finland as banks are building up a real-time data collection system. The reform will link Finland even more effectively to the European capital markets and encourage related actors to stay in Finland.

The EU’s CSD Regulation was introduced in September 2014. The Regulation obligates Finland to open up securities custody to competition.

The Ministry of Finance is currently drawing up a Government Bill enabling the necessary amendments required by the Regulation to be incorporated into national legislation. The Government is set to put the Bill before Parliament this autumn.

The EU Regulation will open up competition between CSDs. Currently, there is only one CSD operating in Finland, and all investors as well as issuers and custodians of securities (banks and investment firms) employ its services.

Cross-border services between EU countries

In future, CSDs can offer their services in the EU region in a cross-border manner by way of what is known as the EU passport. Hence, market dependence on any single CSD is lessened.

One of the most essential changes brought about by the Regulation is that the issuer of securities has a free choice between CSDs authorised in the EU region. Hence, shares in a Finnish company can also be entered into a foreign book-entry system.

The opening up of competition is expected to reduce the capital costs to Finnish companies.

The investor has the choice

From now on, the investor may choose what kind of custody to use:

• Direct holding: The holdings of an investor are recorded in the investor’s name on a book-entry account maintained at a CSD.
• Indirect holding (nominee register): Securities are recorded on a book-entry account in the name of a bank. The bank may transfer the securities for custody to another bank or investment firm, in which case there are several custodians in the chain.

Today, only foreign investors can make use of indirect holding of securities in Finland. Indirect holding must be opened up to domestic investors as well, so competition in this sector between CSDs and banks can be increased in compliance with the EU Regulation.

Pressure to cut custody costs

Investors will benefit from the reform, since custody costs for securities are expected to be reduced with increasing competition. In future, the investor can purchase custody services from a domestic or foreign CSD.

Today in Finland, custody is offered by one CSD only. Opening up the competition will bring pressure on the markets to lower custody prices. This applies to CSDs as well as to banks.

In 2010, the Ministry of Finance commissioned a  report on the economic impacts of indirect holding of securities and on nominee registration. (See Appendix, in Finnish)

Real-time information on holdings

In Finland, the transparency of the ownership of Finnish securities holdings will remain at the present level. Securities custodians operating in Finland will build up a system compiling holder data from the custodians’ client systems.

The system will be built during a transition period of two years. It will be maintained by the Finnish Patent Office.

The data collection system is in real time, and hence, for example, the media’s access to information will remain at the present level in cases where the custodian operates in Finland.

No information for the system is obtained from custodies abroad, as Finnish legislation cannot regulate the systems of other countries.

Authorities’ access to information to be safeguarded

The reform will not affect the authorities’ access to information when the custodies are in Finland. The authorities will obtain information on direct holdings and indirect custody similarly.

The reform will affect the authorities’ access to information from abroad, since holder information is not necessarily obtained from custodians operating abroad to the same extent as from domestic operators. The reason for this is the lack of EU regulations.

However, the Bill includes provisions safeguarding the authorities’ access to information.

The risk of impairment of the authorities’ access to information will be further diminished by the international automatic exchange of tax information, which the authorities will launch at the beginning of 2017. Hence, the exchange of information will commence before the indirect holding of securities expands during the two-year transition period.

Impact of consultation rounds

The Ministry of Finance started the preparations of the project in spring 2014. A working group was set to prepare related Bills, which were then circulated for comments in summer 2014. The project was continued at the Ministry of Finance as part of the official duties of the public servants involved and a new consultation round was held in November 2014.

The Ministry of Finance made use of the feedback received from the consultation rounds. The proposed real-time information on holdings in Finland, for example, was taken into consideration.

Additional information:

Armi Taipale, Legislative Counsellor, tel +358 2955 30399, [email protected]