Stricter financial regulation and stronger supervision for banks

The Government endorsed the bill on 9 September 2010 and the President of the Republic is expected to present the proposal to Parliament on 10 September.

Capital adequacy requirements will be made stricter, especially by imposing tougher qualitative requirements for solvency capital and by tightening the restrictions on individual counterparty risks relative to other credit institutions. Under the proposal, core capital (Tier 1 capital) may comprise hybrid financial instruments only as stipulated by law. Restrictions on major customer risk would be made more stringent so that, unlike at present, the restrictions would also apply to customer risk related to other credit institutions and investment firms.

Securitisation of assets would be admissible only if the company securitising its assets remains responsible for a sum equivalent to 5% of the amount of assets to be securitised.

Under the proposal, the Finnish Financial Supervisory Authority would be obliged to make sure that the performance remuneration schemes of credit institutions and investment firms are such that they do not encourage unwarranted risk-taking. The remuneration systems should also be able to meet the conditions specified in the Directive, which would be provided for by Government Decree. The aim is to issue the decree later in the autumn.

Upon enactment of the Act, the requirements itemised in the decree would not be applied retrospectively to existing binding employment and pension contracts. However, where a credit institution or investment firm has a considerable number of binding agreements at the time the Act enters into force, the Financial Supervisory Authority should take this into account in their general evaluation of entities? capital adequacy and, where necessary, set an additional capital requirement as specified in the relevant legislative provisions.

Based on the bill, the Financial Supervisory Authority would be expected to establish a supervisory college for those credit groups operating in several EU Member States for whose consolidated supervision it is responsible. The members of the college would include supervisors from those other Member States where the credit group concerned has significant business activities. A supervisory college would also be expected to be established where a Finnish credit institution has a significant branch in another EEA country. The college would be responsible for coordinating financial supervision and ensuring smooth exchange of information between the different authorities.

These amendments are the first ones in a comprehensive financial markets regulatory reform package to be introduced as a result of the recent financial crisis. There are several other proposals currently being prepared in the Basel Committee on Banking Supervision and in the European Commission for further tightening financial markets regulation. These proposals will be brought into effect by Directive, and the Commission Proposal is due to be submitted next year.

Besides the amendments warranted by the Directives, the Government proposes improved supervision of branches of foreign credit institutions operating in Finland. The Financial Supervisory Authority would be empowered to revoke the license of a branch if its liquidity is not sufficiently well ensured. Moreover, when a third-country credit institution establishes a branch in Finland, it would be required to place at least EUR 5 million at the disposal of the branch, which corresponds to the minimum capital requirement for credit institutions being set up in Finland.

The scope of application of administrative sanctions used by the Financial Supervisory Authority would be broadened so that the administrative fine specified in the legislation could be imposed on all supervised entities which neglect to comply with their reporting requirements as detailed in the law.

Additionally, deposit terms and conditions applied by branches of foreign credit institutions operating in Finland would have to meet the general terms and conditions endorsed by the Financial Supervisory Authority within one year of entry into force of the Act.

The legislative provisions should become effective as of 31 December 2010. However, some of the Financial Supervisory Authority regulations provided for by law should enter into force at a later date in line with provisions on the entry into force of the Directives.

Inquiries:

Mr Erkki Sarsa, Legislative Adviser, Ministry of Finance, tel. 358 9 160 33064, email [email protected]