Author: | Published: 30 Sep 2004
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The development of the Icelandic financial system has reflected the political and economic evolution of the country from a poor dependency of the Danish Crown into a modern high-income republic.

The government was closely involved in the early development of banking in Iceland, and the first bank was the state-owned Landsbanki Íslands (National Bank of Iceland), which was established by law in 1885.

The Central Bank of Iceland, Sedlabanki Íslands, was established by an Act of Parliament in April 1961. It is a state-owned institution administered by a board of governors. The Central Bank is assigned most of the traditional central banking functions.

The Icelandic financial market has developed rapidly over the last 10 to 15 years. It is a small market by definition, but has the same institutional set-up as larger industrial countries. Aside from the Central Bank, these include three large commercial banks, savings banks, securities companies, various investment funds, insurance companies, large pension funds and, last but not least, a stock exchange - linked with the other Nordic exchanges through the NOREX Alliance.

NOREX is the name of the strategic alliance between the Nordic and Baltic stock exchanges. The NOREX Alliance is the first stock exchange alliance to implement a joint system for equity trading and harmonize rules and requirements between the exchanges with respect to trading and membership. The Alliance consists of the Copenhagen Stock Exchange, Helsinki Stock Exchange, Iceland Stock Exchange, Oslo Börs, Riga Stock Exchange, Stockholmsbörsen and Tallinn Stock Exchange. In the Icelandic Stock Exchange, shares of 60 to 70 Icelandic companies are listed and traded on a regular basis.

Supervision of the activities of all of the Icelandic financial institutions is in the hands of a unified financial supervisory authority that has broadly the same legal powers and follows the same methods and standards as supervisory agencies in other European countries.

Important rationalization has taken place in the Icelandic financial system. Until a few years ago, two of the main commercial banks were fully government-owned and so were a host of so-called investment credit funds. The government has now finished privatization of the banks and sold its stake.

In connection with the agreement on the European Economic Area (EEA) in 1993, Icelandic legislation and regulations regarding credit institutions and other financial institutions have been adapted to the various regulations and directives of the EU. A regulated stock market is a recent phenomenon in Iceland. All financial market and currency regulations date from the years 1992 to 1993, although subsequently amended and developed in the following years.

After a series of mergers in recent years, Iceland now has three main commercial banks, all of which are listed on the Icelandic Stock Exchange. They are, in order of their market cap, KB Bank (about 250,000 MISK), Íslandsbanki hf (about 100,000 MISK and Landsbanki Íslands hf (about 90,000 MISK).

The privatization process created opportunities for continued rationalization in the financial system creating ample opportunities, including closer ties with foreign financial institutions. In 2000, three foreign banks (two in England and one in Luxembourg) became subsidiaries of Icelandic banks. The Icelandic banks have since continued their expansion. At the end of 2003 KB bank had, for example, expanded its services to 10 countries and continued to expand in June 2004 by buying the Danish Bank FIH.

Iceland has consolidated its position in international markets in recent years. Ratings from international agencies confirm the good reputation that the Republic of Iceland has acquired as a fully valid participant in the international financial markets. Iceland's ratings entail an acknowledgement of quality for foreign investors and create opportunities for greater prosperity.

Introduction to legal aspects

As a member of the European Economic Area, Iceland has broadly transposed the EU Regulations and Directives with respect to the finance and banking sector. The EEA consists of the 25 EU member states and the three EFTA member states: Iceland, Norway and Liechtenstein. The EEA Agreement was signed on May 2 1992 and entered into force on January 1 1994. Icelandic legislation in this field has undergone extensive revisions in recent years. In 2003 new Acts on Financial Undertakings, Securities Transactions and Undertakings for Collective Investment in Transferable Securities (UCITS) and Investment Funds were adopted. The trend over the recent years is a withdrawal of the government from direct intervention in financial markets and from ownership of companies operating in them.

As of the beginning of 1994, all foreign exchange controls were abolished, with the exception of statistical reporting.

Next to commercial and saving banks, non-bank institutions (often banks' subsidiaries) have strongly developed, such as stockbrokers, leasing and other financial services (except for housing mortgages, which are still mostly handled by the State Housing Fund).

Four commercial banks exist in Iceland: three of them are listed on Iceland Stock Exchange and the fourth one is owned by over 20 local saving banks and acts as their service and clearing bank.

Capital adequacy of commercial and saving banks has been subject to the BIS standard since 1992.

Legal framework

Central Bank of Iceland

The Central Bank of Iceland is an independent state-owned institution organized in accordance with the Act of May 18 2001 on the Central Bank of Iceland.

The Central Bank's main objective is to ensure price stability, as defined by an inflation target of 2.5%. The Central Bank also has authority to, among others:

  • implement monetary policy;
  • administrate Iceland foreign exchange reserves;
  • act as fiscal agent for the government;
  • act as a borrowing agent for Iceland in international markets; and
  • act as a lender and clearing agent for commercial and saving banks and other credit institutions.

The government no longer has direct access to Central Bank financing.

Financial Supervisory Authority

Iceland has implemented most of the EU directives regarding financial undertakings. Accordingly, the Financial Supervisory Authority (FSA), whose organization and activities are governed by the Law of June 16 1998 on Official Supervision of Financial Operations, has extensive authority over such entities. The FSA is an independent entity resulting from the merger of the former Bank Inspection of the Central Bank and the Insurance Inspection. The role of the FSA is to ensure the activities of parties subject to supervision are in accordance with laws, regulations, rules or by-laws governing such activities, and that they are in other respects consistent with sound and proper business practices.

Financial undertakings

According to the Act of December 13 2002 on Financial Undertakings, only licensed financial institutions may act as intermediaries (brokers, dealers, and investment advisers). About 20 financial institutions qualify to act as intermediaries in securities trading. The Financial Supervisory Authority supervises their activities. Non-Icelandic firms must be authorized securities dealers in their home country to obtain a licence to operate in Iceland.

A financial undertaking may be granted a licence to operate as:

  • a commercial bank;
  • a savings bank;
  • a credit undertaking;
  • an electronic money undertaking,
  • a securities company;
  • a securities brokerage;
  • a management company of undertaking for collective investment in transferable securities.

Savings banks are subject to specific rules, particularly regarding share capital and voting rights.

Financial undertakings must operate as limited liability companies, with specific requirements for saving banks. The law sets minimum requirements with respect to share capital and guarantee capital depending on the type of financial undertaking.

Authorized activities traditionally include the following:

  • receipt of repayable funds from the public in the form of deposits or debt certificates;
  • granting of credit, which is financed by repayable funds from the public;
  • asset leasing, including movable assets or real estate;
  • issuing and handling of payment cards and electronic money;
  • trade and services in financial instruments (subject to the Act of March 10 2003 on Securities Transactions, see below);
  • operation of undertakings for collective investment in transferable securities.

However, the following entities do not need a licence to act as financial instruments brokers, insofar it relates to the reception and transmission of instructions and the execution of such instructions:

  • central banks of member states of the EEA and other public institutions handling or dealing with national credit issues;
  • insurance companies;
  • affiliated companies providing intra-group services, district court or supreme court attorneys and certified public accountants;
  • managers of staff investment funds; and
  • parties that are mainly trading in commodities between themselves or with producers or parties using these products on a commercial basis and that exclusively provide to producers or parties services connected with securities transactions and only to such extent as necessary as a result of their principal activities.

The law limits holdings of financial undertakings in undertakings that are not financial undertakings, ownership of own shares and large exposures. In short, a financial undertaking may not:

  • own a qualifying holding in undertakings that are not financial undertakings or undertakings connected with the financial sector, exceeding separately 15% and in total 60% of the own funds of the financial undertaking concerned, and the total book value of holdings acquired by a financial undertaking may not exceed 100% of its own funds;
  • own or accept as collateral its own shares in an amount exceeding 10% of the nominal value of the company's paid-up share capital, without the approval of the FSA. Ownership in excess must be sold within three months;
  • have exposure resulting from one or more customers, which are internally linked to one another, that exceeds 25% of the financial undertaking's own funds, or have a total of large exposures (that is, exposure exceeding 10% of own funds) exceeding 800% of its own funds.

Financial undertakings within the EEA

Commercial and savings banks based in countries of the European Economic Area and that have received operating licences from the competent authorities in those countries may establish branches in Iceland two months after the FSA receives an announcement to this effect from the competent authorities in their home countries.

The FSA must obtain from the competent authority in the home country of the foreign bank the following information:

  • a description of the activities of the branch, its structure and proposed activities in Iceland;
  • confirmation that the proposed activities are permitted in the home country;
  • the address of the branch;
  • the names of managers of the branch;
  • the amount of own funds and the solvency ratio of the bank; and
  • measures taken in the home country, where these exist, to guarantee deposits in the branch.

Commercial and savings banks based in any country of the EEA that have received operating licences from the competent authorities in those countries may provide services in Iceland without establishing branches, after the FSA has received a notification to that effect from the competent authorities in the home country concerned. Authorization to provide services in Iceland from abroad may however not be more extensive than the operating authorizations held by the undertaking in its home country.

The Swiss financial undertakings

The conditions that apply to financial undertakings established in the EEA apply to Swiss financial undertakings provided the same requirements are made for them as for financial undertakings established within the EEA and a cooperation agreement has been concluded between the FSA and the competent Swiss authorities.

Financial undertakings outside the EEA

The FSA may authorize a financial undertaking established in a country outside the EEA to open a branch in Iceland or to provide services in Iceland from abroad without establishing a branch, provided that the undertaking is authorized to carry out activity in its home country similar to that which it proposes to carry out in Iceland and provided that such activities be subject to similar supervision in its home country.

Holdings in an Icelandic financial undertaking

Acquisition or increase (up to specified levels of voting rights) of a qualifying holding in a financial undertaking is subject to prior approval of the FSA under a specific application procedure. A qualifying holding is defined as any direct or indirect holding in an undertaking, which represents at least 10% of the share capital, guarantee capital or voting rights or any other holding, which enables the exercise of a significant influence on the management of the company concerned.


The management of financial undertakings is in line with European standards in terms of management practices and responsibility applicable to limited liability companies.

Capital adequacy

The Act on Financial Undertakings provides that the own funds of a financial undertaking, as defined by the law, cannot at any time be less than 8% of their risk-weighted asset base. The risk-weighted asset based is evaluated with regard to its total assets, off-balance-sheet items, foreign exchange risks and other market exposures, in accordance with the rules set by the FSA regarding the assessment of risk-weighted asset base for the calculation of the capital adequacy ratio of financial undertakings.


Managing directors, auditors, personnel and any employees and agents of financial undertakings are bound by a confidentiality obligation regarding any information concerning business dealings or private concerns of customers and other matters they become aware of in the course of their work and that should be kept secret according to law or the nature of the case. This confidentiality obligation survives the termination of their employment. These rules apply unless a judge requests that the information be supplied to a court or the police or there is a legal duty to provide the information.

Insurance companies

Insurance activities are governed by Act of May 11 1994 on Insurance Activities and are supervised by the FSA. Foreign insurance companies domiciled in another EEA member state may conduct insurance business in Iceland through a branch or as cross-border activity provided that the foreign insurance company appoints a representative/general agent authorized to represent the foreign insurance company vis-à-vis all public authorities and third parties. Insurance companies from outside the EEA may conduct insurance business in Iceland through a branch subject to a number of requirements.

Financial markets

Securities transactions

The Act of March 10 2003 on Securities Transactions regulates the activities of financial undertakings on the securities market, insider rules, market manipulation as well as public offering of securities not to be listed on a stock exchange or a regulated OTC.

When trading in securities, financial undertakings will have to observe specific rules, including rights and obligations with respect to:

  • good business practices;
  • rules applicable to the collection of information about customers;
  • information to be given to customers with respect to its activities and to investment choices and applicable commissions;
  • impartiality and equal treatment with respect to information, prices and other terms of business;
  • obligation to conclude a written agreement and provide reports in case of permanent commercial relationship;
  • separation of assets and financial instruments; and
  • endorsement or transfer of financial instruments.

The Act on Securities Transactions also contains rules regarding the activities of market marker and the treatment of insider information and insider trading, as well as to the supervision of securities transactions by the FSA.

Iceland Stock Exchange

The Iceland Stock Exchange (ICEX) is the official trading place for stocks and bonds, including treasury bonds, in Iceland. Trading on ICEX is carried out in accordance with the Act of April 6 1998 on Activities of Stock Exchanges and Regulated OTC Markets on a fully computerized basis. It is operated together with NOREX.

The bulk of the securities are issued in dematerialized form in the Icelandic Securities Depository (ISD). ISD keeps individual accounts for securities holders and nominee accounts for financial institutions, as well as share registers for listed companies. All trading related to dematerialized securities must be notified to the Securities Centre through authorized account operators. It is possible for a securities holder to have several accounts and to deal through several account operators.

Registration in ISD constitutes conclusive evidence of title. Any other rights attached to a listed security, including any form of charge or pledge, must also be registered to be enforceable against third parties.

ICEX is the only licensed stock exchange in Iceland. ICEX also has a licence to operate a regulated OTC market, that is, a regulated market for securities that are not officially listed on a stock exchange.

Trading is carried out by the Nordic SAXESS trading systems but, to ensure that share prices take account of all trades, traders are required to notify all trades even if effected outside the various trading systems. Such trades are to be notified within strict time limits, that is, five minutes.

The Act on Activities of Stock Exchanges also regulates listing requirements and accompanying rights. ICEX is under the supervision of the Financial Supervisory Authority.

Before shares can be listed on ICEX, the issuer must submit a listing prospectus in accordance with EU directives. The issuing of a prospectus is dependent upon ICEX's approval. A prospectus must contain all the information necessary for investors to form an opinion of the issuer, its securities and their value.

Only members of the Iceland Stock Exchange can serve as coordinators for listing securities on the exchange.

Author biography

Sophie Romaniello

LOGOS legal services

Sophie Romaniello is a French-speaking Belgian native who graduated as a lawyer from the Catholic University of Louvain, Louvain-la-Neuve, Belgium, in 1997. She worked in the mergers and acquisitions departments of two large Belgian law firms in Brussels for almost five years and as in-house lawyer in an internet company designed by and for the steel industry before she joined LOGOS legal services in Iceland in May 2003. She practices corporate law, with a broad expertise in M&A, employee incentive plans, joint ventures and directors' liability, IT law and distribution law, and recently joined the banking team at LOGOS, headed by leading experts in this field, the partners Pétur Gudmundarson, Jakob Möller and Óttar Pálsson. Sophie is the author and co-author of various publications on shareholders' rights and on criminal liability for companies. She is fluent in English and Dutch and has good knowledge of Italian.

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