Year in Review: Financial Regulation
Since the European System of Financial Supervision (ESFS) was introduced in 2010, several 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, a huge backlog of EU legislative acts needs to be incorporated into the EEA-agreement and transposed into Norwegian law. In 2019, more than 200 financial legislative acts were incorporated into the EEA-agreement and this activity has continued in 2020.
Payment Services & Fintech
On 12 December 2019, the Norwegian Financial Supervisory Authority (the «FSA») finally opened for applications for cohort 1 of the regulatory sandbox. The deadline for applying for cohort 1 was 12 February 2020. The FSA received 12 applications and two applicants were permitted into the sandbox, Quesnay AS (AML solutions for firms subject to the AML legislation) and Sparebank1 SR-Bank (digital financial advisor solutions using AI). Applications for cohort 2 of the regulatory sandbox opened on 12 December 2020 and are open to 12 February 2021.
On 18 December 2020, the Norwegian parliament passed a new Financial Agreements Act which ensures the implementation of the elements of PSD2 not yet transposed into Norwegian law. Thus, upon it entering into force, PSD2 will have been transposed into Norwegian law in full.
On 4 December 2020, the Norwegian Ministry of Finance presented a bill to the Norwegian parliament regarding the transposition into Norwegian law of EU’s Securitisation Regulation, which took effect on 1 January 2019. The regulation has not yet been incorporated into the EEA-agreement.
CRR/CRD IV was transposed into Norwegian law with effect from 31 December 2019.
Directive 2016/97/EU (the Insurance Distribution Directive or “IDD”) have not yet entered into force in Norway, and it is unclear when this will happen. The main purpose of IDD is to will increase the protection for buyers of insurance products with a focus on protecting consumers. IDD is inspired by the corresponding rules in MiFID II. The Ministry of Finance and the FSA are working on the required legislative changes and are not providing any guidance on when the proposed rules will be presented to the Norwegian parliament for approval. The fall session in 2021 is probably the first realistic opportunity.
On 12 October 2020, the FSA issued a somewhat surprising order to three investment firms and one management company regarding internal partnership models. The firms had organized their partner model through internal partnerships, with the authorized firm as general partner, and the partners as limited partners. The FSA found that such organization was illegal, because the internal partnership did not have authorization, and can not obtain authorization (in accordance with Norwegian law, only private limited liability companies and public limited liability companies may obtain such authorizations). The orders have been appealed to the Ministry of Finance, and the outcome of the appeals will define ownership models in authorized firms in the future.
Directive 2014/59/EU (the Directive establishing a framework for the recovery and resolution of credit institutions and investment firms or «BRRD») was implemented into the EEA-agreement on 1 January 2020. Norwegian investment firms subject to BRRD was given a deadline until 1 July 2020 to submit their recovery plan in accordance with BRRD to the FSA. Simonsen Vogt Wiig assisted several investment firms with the recovery plan, and in our experience the smaller investment firms believe the bar for being subject to BRRD should be raised considerably.
On 6 April 2020, the Ministry of Finance resolved amendments in the Norwegian Securities Trading Regulation regarding tied agents to investment firms. The amendments included a withdrawal of the previous requirement stating that an investment firm could not enter into agreements with tied agents encompassing more persons than 50% of the investment firm’s permanent employees. The Ministry of Finance stated that the regular investor protection mechanisms of MiFID II were sufficient. It will be interesting to see if this amendment will lead to a surge in tied agents going forward, hereunder whether some investment firms will take the role as so-called ‘authorization hotels’ for tied agents. It should be noted that the FSA strongly advised against the amendment.
The FSA have shaken up the Norwegian fund industry initiating a comprehensive challenge on costs in 2020 to prevent undue costs being charged to investors. The FSA has ordered the managers of so-called closet index funds – index funds being branded and priced as actively managed – to either rebrand the funds or initiate active management. The FSA has also looked into the management of combination funds and the use of relevant reference indexes, and found several inconsistencies, possibly resulting in aggregated performance. Further, the FSA have through supervision of a smaller management company concluded that subscription and redemption fees may only cover the actual costs of such subscription and redemption, not including marketing and sales. Historically, subscription and redemption fees have been a few percent, however we have seen reduced fees the last few years following strong competition in the fund industry. With the FSA’s conclusion, subscription and redemption fees may only be a few basis points. It will be interesting to see whether the management companies will raise the management fee, or whether the investors will experience lower overall fees, as a result of this.
As we anticipated, the FSA have also initiated a shut down of kick-backs for investment firms, following the Danish Financial Supervisory Authority’s similar action last year. This has direct consequences for the fund industry, as it pretty much eliminates external distribution of funds. This may not be an issue for the larger management companies, but the smaller management companies will take a hit as they have to employ their own sales force to distribute their funds. The FSA’s shut down have resulted in 70% of the investment firms no longer receiving kick-backs, and an additional 16% have made adjustments to their payment model now receiving significantly lower kick-backs.
Last, but not least, the FSA has instructed the management companies to ensure that the ‘missing’ kick-backs are returned to the investors as lower fees, and not pocketed by the management companies. It has not been uncommon with a 50% management fee split to the distributor as kick-back. Hence, this shut down will have massive impact on the fund industry, and it will be interesting to see the development of the industry going forward.
Anti Money Laundering
After the new regulation entered into force on 15 October 2018, it has been a busy year in 2019 and 2020 for both the FSA and the entities subject to the regulation. The FSA has stated that they will increase their resources for AML supervision and has consequently strengthened its capacity regulate and ensure compliance within this area. The FSA correspondingly carried out over 40 inspections mainly focused on AML compliance in 2019 and 2020. The financial services industry in Norway are spending a lot of resources to implement systems and routines to ensure compliance.
From a regulatory point of view, there have been few new rules and regulations in 2020 save for additional guiding papers from the FSA. We are awaiting the entering into force of the Norwegian Act on the Registry for Beneficial Owners. The purpose of the legislation is to make it easier to report on any beneficial owners controlling more than 25 % of the clients to the companies that are required to do KYC. The legislation was approved on 1 March 2019, but it has not yet entered into force. Draft regulations are currently subject inquiry and the technical solution for the registry has as far as we know not yet been agreed. This final legislation is expected to enter into force sometime in 2021.
What will 2021 bring?
Brexit is now a fact, and UK is not a member of the EU anymore. This means that UK is considered a so-called third country, which will affect a substantial amount of financial regulatory rights. The deal between EU and UK provides no new transition period for financial services, nor any new arrangements to replace the existing ‘passport’. This leaves UK with unilateral declarations of equivalence under EU law and through domestic laws. Hence, financial services to and from UK is significantly complicated, and most Norwegian firms operating in UK have made organizational adjustments already. However, EU and UK have mentioned the possibility of a so-called ‘enhanced equivalence’, which could uncomplicate business in the future.
Regulation (EU) 2019/2033 (Regulation on the prudential requirements of investment firms or IFR) and Directive (EU) 2019/2034 (Directive on the prudential supervision of investment firms or IFD) will enter into force in EU on 26 June 2021. Neither IFR nor IFD has been implemented into the EEA-agreement, and it is unclear when they will enter into force in Norway. However, the FSA sent a supervisory briefing to Norwegian investment firms on 10 September 2020, alerting them to the consequences of IFR and IFD, and stating that is should be anticipated that they will enter into force in Norway at the same time as in EU. IFR states that investment firms with total value of consolidated assets equal to or exceeding EUR 15 billion will be subject to CRR, however, it is uncertain whether any Norwegian firms surpass this threshold. IFR and IFD will not result in any changes to the capital requirements for about half of Norway’s investment firms. A few of the remaining half will experience a significant increase in the capital requirements. Simonsen Vogt Wiig have guided several investment firms on the new capital requirements, and will follow the implementation into Norwegian law closely.
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 2020.