Year in Review: Financial Regulation
The most sweeping and consequential event of 2019 was probably the incorporation into the EEA-agreement of more than 200 legislative EU-acts. Since the European System of Financial Supervision (ESFS) was introduced in 2010, a number of legislative acts have been adopted in the EU without being incorporated into the EEA-agreement. This is mainly due to Norwegian constitutional issues. These constitutional issues were resolved in 2018, and as result, more than 200 financial legislative act were incorporated into the EEA-agreement during the course of 2019 (some of them mentioned below). However, there are still more than 100 financial legislative acts that have yet to be incorporated into the EEA-agreement and this backlog continues to impede the cross-border operations of Norwegian financial institutions.
Payment Services & Fintech
On 1 April 2019, Norwegian legislation implementing the public law part of the second payment services directive (PSD2) became effective. Regulations implementing the most of the private law part of PSD2 were adopted with effect from the same date. A new Financial Agreements Act that will implement the part of PSD2 that remains unimplemented is expected to be adopted sometime in 2020.
On 7 June 2019, the Norwegian Government (King in Council) resolved to authorize the EEA-committee in its 13 June meeting to incorporate PSD2 (Directive 2015/2366/EU) into the EEA-agreement. Consequently, from 13 June, the EU passporting regime started applying to the new types of payment services regulated by PSD2, namely payment initiation services (PIS) and account information services (AIS). Thus, subsequent to PSD2 being incorporated into the EEA-agreement, Norwegian providers of such services, so-called «PISPs» and «AISPs», have a right to passport their services into the various EEA jurisdictions, and vice versa.
The regulatory technical standard supplementing PSD2 (Commission Delegated Regulation (EU) 2018/389) (the «RTS») became effective in Norway on 14 September 2019. The RTS contains regulatory technical standards for strong customer authentication (SCA) and common and secure open standards of communication (the so-called APIs). On 23 October 2019, the Norwegian Financial Supervisory Authority (FSA) announced that card issuers, acquirers and e-commerce companies have until 31 December 2020 to implement SCA solutions for card payments relating to e-commerce.
On 12 November 2019, the Norwegian FSA announced that they would open a regulatory sandbox for FinTech companies by the end of 2019, and published criteria that will have to be met in order to qualify for admission into the sandbox. The application deadline for the first batch of companies to be admitted into the sandbox is 12 February 2020.
In April 2019, the Norwegian Ministry of Finance adopted a new regulation pertaining to debt-based crowdfunding, mitigating the uncertainty concerning whether lenders on crowdfunding platforms perform financial activities that require a license. Pursuant to the exemption, lending of up to NOK 1 million per year per lender will not trigger license requirements.
On January 1, 2019, changes to the Norwegian Financial Institutions Act (Finansforetaksloven) concerning the deposit guarantee scheme for banks came into effect. The changes implement a revised EU Directive (2014/49/EU) that aims to harmonize the guarantee schemes across the EU and enhance the consumer protection of bank deposits. The level of Norwegian deposit protection remains at NOK 2 million per depositor per member bank, despite the EU Directive mandating that the maximum deposit guarantee is EURO 100 000. It is currently somewhat unclear whether the EU will permit Norway to continue this level of deposit protection.
On 1 July 2019, a national debt register was established. Gjeldsregisteret AS, a company in the EVRY Group, was granted a license from the Ministry of Children and Families to operate the register. The purpose of the register is to prevent private households from taking on too much debt by providing banks and other creditors with information about an applicant’s aggregate debt situation.
On 19 December 2019, the Norwegian Ministry of Finance promulgated regulations that implement CRR/CRD IV (the third revision of the EU capital requirements framework). The regulations will enter into force in Norway 31 December 2019.
On 23 December 2019, the Norwegian FSA published MREL (minimum requirement for own funds and eligible liabilities) for 8 Norwegian banks, namely DnB ASA, Sparebank 1 Nord-Norge, Sparebank 1 SMN, Sparebank 1 SR-Bank, Sparebank 1 Østlandet, Sparebanken Sør, Sparebanken Vest and Norwegian Finans Holding ASA.
In 2019, MiFID II and MiFIR were finally incorporated into the EEA-agreement, and thus became applicable to Norwegian investment firms. On the back of the new legislation, the Norwegian FSA stepped up its supervision of the investment firms, initiating several targeted supervisions of their compliance with the new rules on product governance, independent investment advice, employee knowledge and competence, and kick-backs. Following the Danish Financial Supervisory Authority’s shut down of kick-backs early in 2019, it will be interesting to see what position the Norwegian FSA will take on this issue.
In June, the Norwegian FSA published a circular on project finance companies and alternative investment funds that that caused some discussion. To the surprise of the Norwegian project finance sector, the Norwegian FSA asserted that most project finance companies set up by investment firms qualify as alternative investment funds and require a manager with authorisation as alternative investment fund manager. As a result, most investment firms now structure the project finance companies they set up as alternative investment funds and have transferred the management of these companies to alternative investment fund managers,.
Simonsen Vogt Wiig established the Norwegian Investment Firms Network early in 2019, and hosted four events throughout the year where we presented the latest developments in financial regulatory law relevant to investment firms. We had the pleasure of hosting more than 40 of Norway’s 100 investment firms. We will continue to host this successful series of network events in 2020.
Tax is one of the key elements to consider when advising clients on funds structuring. Securities funds within the context of the Norwegian Securities Funds Act (or similar foreign funds) are taxed more lightly than alternative investment funds (or similar foreign funds). Securities funds within the context of the Norwegian Securities Funds Act are comparable to the EU UCITS, the main characteristics of which being (i) capital is raised from an indeterminate group of investors, (ii) the fund mainly invests in financial instruments and deposits, and (iii) there are redemption rights for investors. Typically, alternative investment funds, like private equity funds and venture capital funds, do not meet these criteria.
In light of the above, a decision by the Norwegian Supreme Court in September 2019 was of particular interest. The Supreme Court, in a 3-2 decision, found that a mutual fund established on the Cayman Islands and managed from Norway, qualified as a foreign fund similar to a Norwegian securities fund, and thus benefited from the more favorable Norwegian tax regime. In relation to the criteria mentioned above, it should be noted that the fund (i) was not marketed publicly and subscriptions could be rejected at the discretion of the fund, (ii) it invested in limited partnerships (not assessed by the Supreme Court), and (iii) had running redemption on 75% of NAV.
During 2019, Simonsen Vogt Wiig has seen an increase in enquiries from Norwegian management companies doing business in the UK, and foreign management companies marketing UK funds in Norway. Unsurprisingly, the reason for this increase is Brexit, which has raised a number of issues for management companies. On 20 December 2019, members of Parliament in the United Kingdom voted in favor of the Withdrawal Agreement Bill, meaning the United Kingdom will leave the EU on 31 January 2020. This will start a transition period of 11 months to agree on the future relationship between the EU and the united Kingdom. The impact of Brexit on the fund sector is highly uncertain. The United Kingdom wants to remain part of the EU financial sector, like the EEA countries, but EU has indicated they will not permit cherry-pick among the freedoms of the single market. In particular, the status of UK UCITS funds – the possibility of UK funds to be marketed in the EU, and whether UK will benefit from an equivalence decision by the EU – will be key points of the deal to be reached within a year from now.
Anti Money Laundering
The new Norwegian act on money laundering and terror financing that became effective on 15 October 2018 (the «AMLA») has proven to be more relevant than one would hope for. In the wake of its implementation, we have seen several high-profile AML cases involving large Scandinavian banks, including Danske Bank and DnB. Hopefully, compliance with the requirements of AMLA will improve once the actors obtain knowledge about and experience with this complex set of regulations.
Looking forward to 2020, it is not to surprising that the AML department of the Norwegian FSA has increased its staff significantly. The Norwegian FSA has also stated that AML will be one of their top priorities in 2020 and 2021 with more frequent on-site inspections and the full use of the sanctions at their disposal, including fines.
Another expected development in 2020 relating to AML is the coming into force of the Norwegian Act on Registry of Persons with Significant Control, which is expected to occur in the first half of 2020. This will hopefully aid in identifying the actual persons that control companies by hiding behind complex structures.
We also mention that the FSA recently published a proposal pertaining to certain changes and adjustments to the AMLA and related regulations, and asked for feedback prior to writing up a specific proposal. There are no major changes proposed, but we will revert to this in a newsletter when the authorities have prepared a concrete proposal based on the feedback.
What will 2020 bring?
One of the major financial regulatory initiatives anticipated to materialize in 2020 is the EU legislation on sustainable finance. In December 2019, the EU ambassadors endorsed a political agreement between the EU Council and the EU Parliament on a EU-wide classification system, the so-called ‘taxonomy’, which will provide businesses and investors with a common language to identify what economic activities qualify as environmentally sustainable. The taxonomy aims to encourage private investment in sustainable growth, contribute to a climate neutral economy and prevent so-called green-washing. In addition the EU have implemented financial legislation on green benchmarks, green transparency, green duties and disclosures, labels for green products and green advice and management. Simonsen Vogt Wiig will continue to focus on this key area in 2020.
Right before Christmas, the EU Council and the EU Parliament agreed on another important piece of financial legislation, namely rules pertaining to crowdfunding platforms. The initiative is part of the EU Capital Market Union, which objective is to provide easier access to new financing sources. It should be noted that this preliminary agreement has not yet been endorsed by the EU ambassadors, but endorsement is anticipated early in 2020 when the technical work is finalized. The new rules will remove barriers impeding the ability of these platforms to operate cross-border by harmonizing the minimum requirements when operating in their home market and other EU countries. The new rules will also increase legal certainty through common investor protection rules. The new regime will apply to both equity and debt crowdfunding of up to EUR 5 million over a 12 month period, thus benefiting from an exemption from MiFID II and the prospectus regulations.
On 19 December, 2019, the EU Commision announced a consultation on a EU regulatory framework for crypto-assets and published a questionnaire to this effect. As a firm that is following the crypto-assets market closely and advice extensively on these matters, Simonsen Vogt Wiig is following this initiative with great interest.
This article is part of a series of articles where the different practice groups in SVW will summarize the most important regulatory happenings in Norway in 2019.