Author: | Published: 9 Jul 2001
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Market structure and trends

The financial markets in Finland – especially those for banking and insurance – are characterized by a high concentration of activities. Finland's banking system is dominated by three groups – Nordea, Sampo and Okobank, while the Sampo and Pohjola groups are the major players in the insurance market. These large banking and insurance institutions are the result of a restructuring and consolidation process undertaken by financial institutions following the recession and banking crisis of the early 1990s. This process has, during the past decade, increasingly moved from domestic mergers to cross-border restructuring, with financial institutions seeking to create international (Nordic) financial conglomerates. One example of this development is the creation of Nordea, which is a combination of the Finnish bank Merita and its Swedish and Norwegian counterparts Nordbanken and Christiania Bank. A more recent example is Sampo's bid for the Norwegian insurance company Storebrand, potentially creating the largest Nordic banking and insurance conglomerate to date.

Finnish credit institutions have traditionally focused on retail banking, with a wide range of additional financial services, such as securities trading, real estate brokerage, financing and, more recently, insurance, being provided by affiliated companies. As a consequence of the consolidation process and, perhaps more importantly, because of the rapid development of banking technology, Finnish banks have undergone dramatic change, significantly reducing the number of branch offices as well as personnel. Services traditionally provided by branch offices are being processed using the latest developments in information and telecommunications technology. According to statistics published by the Finnish Bankers' Association in May 2000, 85% of Finnish payment transactions are effected electronically, and the use of online banking services is steadily increasing. In the wake of the emergence of large financial conglomerates, foreign credit institutions are now entering the Finnish market with smaller scale operations, often offering specialized products tailored to attract certain customer categories.

The Finnish insurance market is operated both by limited liability insurance companies and mutual insurance companies as well as, to some extent, insurance associations and foreign insurance companies. As a result of the extensive deregulation of the Finnish insurance market during the past few years, foreign insurance companies may now offer all categories of insurance products, including statutory employment insurance. A distinctive feature of Finnish insurance is that employment pension insurance and accident insurance schemes included in the statutory system of social insurance – the largest insurance line, maintained by pension funds and qualified pension insurance companies – are organized within private insurance institutions. The relatively high level of state benefits provided by the statutory employee pension scheme has, from a European perspective, kept the Finnish market for voluntary life and pension insurance less significant, although eg the interest in private pension insurance has somewhat increased among consumers, as concerns about the funding of future statutory pension benefits are being expressed, due to, among other factors, changes in the age structure of the population.

Investment firms operating in the securities market include domestic service providers as well as an ever-increasing number of foreign branches and EEA-authorized, cross-border service providers. Finnish investment firms are also increasingly making use of the possibilities offered by information technology through, eg electronic marketing and other service provision in cooperation with the operators of internet portals. Continuing discussions on further possibilities to outsource services, such as marketing, data services and even customer identification, further reflect the aim of investment firms to concentrate activities on their core business.

The main regulatory bodies and their powers

The players in the Finnish financial market are supervised by the Finnish Financial Supervision Authority (the FSA), operating as an independent decision-making body in conjunction with the Bank of Finland and under the governance of the Ministry of Finance. While the Ministry of Finance is responsible for the development of legislation and the authorization of self-regulatory rules and regulations relating to the financial markets, the FSA, in addition to having extensive supervisory powers over, among other things, credit institutions and investment firms, is vested with the authority to issue supplementary instructions regulating the activities of the supervised entities.

Insurance institutions and the insurance industry are supervised by the Finnish Insurance Supervision Authority (the FISA) and the Ministry of Social Affairs and Health. The FISA supervises insurance companies' general compliance with regulations, and is authorized to a certain extent to issue sanctions for non-compliance. The Ministry for Social Affairs and Health is responsible for legislative developments in the insurance field as well as for the maintenance of a stable and competitive insurance market, and is vested with the authority to grant and revoke insurance company licences or prohibit the issuance of insurance policies.

As a result of the creation of financial conglomerates operating in both the financial and insurance markets, the question of combining the supervisory authorities has been raised. A possible reorganization is being investigated, but for the time being the supervisory authorities will continue their activities separately, as described.

Types of financial institutions and key legislation

Credit and financial institutions

Finnish credit institutions are regulated through the Credit Institutions Act (1607/1993, as amended – the CIA) and the Foreign Credit Institutions Act (1608/1993, as amended – the FCIA), which were enacted to bring Finnish banking legislation into line with the relevant EU directives. In addition, banking activities are governed by the guidelines and regulations issued by the FSA and by specific laws concerning different types of banks.

The CIA covers all business activities involving the taking, on a professional basis, of deposits and other repayable funds from the public and the use of such funds to offer credit and other comparable financing, either directly or through an undertaking belonging to the same consolidation group. Credit institutions comprise not only deposit banks (commercial, cooperative and savings banks) but also other institutions, such as mortgage banks, and finance and credit card companies. Undertakings that, as their main business, provide services offered by credit institutions without accepting deposits or other repayable funds from the public, are defined as financial institutions.

Investment firms

The Investment Firms Act (579/1996, as amended – the IFA) and the Act on the Right of Foreign Investment Firms to Provide Investment Services in Finland (580/1996, as amended – the FIFA) implement the EU directive on investment services. The IFA regulates the activities of investment firms by setting forth requirements for, among other things, the segregation of client funds, identification of customers, capital adequacy and risk management of investment firms. Issues relating to the marketing of securities, code of conduct rules and administration of insider trading are addressed by the Securities Markets Act (495/89, as amended – the SMA).

Insurance companies

The marketing and selling of insurance products in Finland is regulated by the Insurance Companies Act (1062/79, as amended), the Foreign Insurance Companies Act (398/95, as amended) and the Insurance Contracts Act (543/94, as amended), which implement the relevant EU directives, and by guidelines and regulations issued by the Ministry of Social Affairs and Health.

The Insurance Companies Act regulates the establishment and operation of insurance companies, their capital requirements and structure, corporate governance, changes of ownership etc, and provides, above all, that an insurance company may not engage in any other business activity than the provision of insurance services. It may, however, hold a majority of the shares or votes in companies engaged in associated activities as well as in housing and real estate companies, credit and financial institutions, and investment funds. Another significant limitation is the prohibition on insurance companies that grant life insurance coverage providing other additional coverage than accident and health insurance. This limitation on the allowed insurance activities applies vice versa to insurance companies providing non-life insurance coverage.

Establishing an operation

Credit and financial institutions

A credit institution must be authorized by the Ministry of Finance, and may only engage in a limited scope of activities including accepting deposits and other repayable funds from the public and other funding; lending and financing activities; financial leasing; payment transfer services; collection of payments; foreign exchange dealings; trustee activities; securities trading; guarantee services; credit reference services; brokerage activities relating to holdings in housing companies and residential real estate in connection with home saving; and other comparable business and possible ancillary activities. A financial institution (that is not a credit institution) may offer services that do not include deposit taking from the public or securities operations without an operating licence, with the exception of financial institutions belonging to the consolidation group of an EEA credit institution.

Separate procedures, defined in the FCIA, exist for the establishment of a presence by foreign credit and other financial institutions in Finland. For institutions holding an operating licence in another EEA member state, the Finnish legislation reflects the principle of freedom of establishment, by allowing services to be provided, to the extent covered by the licence in the home state and permitted in Finland, either directly or through a branch. A branch may be established subject to notification to the FSA from the supervisory authority in the home state, and may start its activities when the FSA has communicated any requirements or conditions regarding its establishment, or in any event within two months of the FSA's receipt of the notification.

The establishment of a branch by a non-EEA credit institution requires a separate licence from the Ministry of Finance. Such a branch will be entitled to provide services permitted for credit institutions in Finland to the extent covered by its operating licence. A non-EEA credit institution may also choose to open a representative office in Finland subject to notification to the FSA, but will in such case not be allowed to engage in the full range of activities open to credit institutions in Finland.

Investment firms

The provision of investment services is subject to licensing by the Council of State. A licence may be granted to a Finnish limited liability company operating as an investment firm subject to the fulfilment of certain criteria, such as eg capital requirements. Also, a licensed Finnish credit institution may provide investment services in Finland. An investment firm may only provide services that are defined in the IFA as investment services and such non-core services that are expressly included in its licence. It may be noted that the IFA only applies to the provision of investment services on a professional basis, ie systematically, regularly and continuously constituting the service provider's actual business.

An EEA licensed investment firm may provide investment services in Finland either directly or by establishing a branch. The commencement of operations is subject to notification to the FSA from the supervisory authority in the home state. A branch may be set up when the FSA has communicated any requirements or conditions regarding its establishment, or when two months have elapsed from the FSA's receipt of the notification.

An investment firm licensed in a state outside the EEA must, to provide services directly or establish a branch in Finland, apply for a separate licence from the Council of State. A non-EEA investment firm may also open a representative office in Finland subject to notification to the FSA.

Insurance companies

An insurance company may, subject to obtaining a licence from the Ministry of Social Affairs and Health, be established either as a limited liability insurance company or as a mutual insurance company. Licences are granted separately for each line of insurance.

The Foreign Insurance Companies Act allows foreign insurance companies established in an EEA member state to engage in insurance business either directly or through a representative office in Finland without applying for a separate Finnish licence. Activities may be started as soon as the Ministry of Social Affairs and Health has received notification from the supervisory authority in the home state. A representative office may, subject to notification, be established based on the principle of freedom of establishment.

An insurance company established outside the EEA may only engage in insurance business in Finland upon obtaining a licence from the Ministry of Social Affairs and Health, and establishing a representative office in Finland.

Financial services online/e-banking

A recent statement issued by the FSA concluded that the general legislation and regulations governing the provision of financial services form the basis for the regulation of financial services in information networks. The EU directive on electronic commerce is expected to clarify the current uncertainties relating to the conflict of laws in connection with regulatory issues, while conflict of laws issues with respect to contractual obligations will generally be settled in accordance with the Rome Convention. The rights of consumers will be protected by the provisions of the consumer legislation in the consumer's home state. In Finland, a service provider may not use contract terms or engage in marketing activities that are contrary to good practice or otherwise unfair towards a consumer.

The rules governing electronic contracting are based on the principle of freedom of contract. If not otherwise provided by law, contracts may be executed in any form – including electronic form. So far there is no unambiguous answer to the question of whether contracts for the provision of financial services may be executed in electronic form only. The requirement of the SMA, for example, to execute agreements for the provision of investment services in writing does not, as interpreted by the FSA, automatically exclude electronic contracting. The provisions on the identification of clients for money laundering purposes, as well as the general confidentiality provisions must, however, always be complied with.

The processing of personal data is regulated by the Personal Data Act (523/1999, as amended – the PDA), which contains requirements concerning, among other things, the registration, processing, protection and transfer of personal data. As a general rule, data controllers based in Finland are required to comply with good data processing practices and to ensure that their processing activities comply with the requirements set forth in the PDA. The storage and processing of customer information within financial institutions must be organized on a need-to-know basis, regardless of the fact that all employees of a financial institution are bound by the general confidentiality obligation.

Acquisition of financial institutions

Credit institutions

A transfer of shares in a credit institution that causes the holding of a shareholder to reach, exceed or fall below 10% of the share capital or voting rights of that credit institution requires prior notification to the FSA. A holder of such a stake must also notify the FSA in advance if its proportion of the share capital or the voting rights of the credit institution reaches, exceeds or falls below 20%, 33% or 50% of the aggregate share capital or voting rights of the company.

Investment firms

Similarly, transactions causing a shareholder's holding in an investment firm to reach, exceed or fall below 1/20, ie 5% of the share capital or voting rights require prior notification to the FSA. A holder of such a stake must also notify the FSA in advance if its stake in the share capital or the voting rights of the investment firm reaches, exceeds or falls below 1/10, 1/5, 1/3 or 1/2 of the aggregate share capital or voting rights of the company.

Insurance companies

Transactions causing a shareholder's holding in an insurance company to reach, exceed or fall below 10% of the share capital or voting rights in the insurance company also require prior notification to the Ministry for Social Affairs and Health. A holder of such a stake must also notify the Ministry in advance if its stake in the share capital or the voting rights of the insurance company reaches, exceeds or falls below 20%, 33% or 50% of the aggregate share capital or voting rights.

In all the above situations, the FSA, in respect of credit institutions and investment firms, and the Ministry of Social Affairs and Health, in respect of insurance companies, may, within three months of the filing, object to the acquisition if they consider the proposed holding to operate to the detriment of the prudent and sound management of the institution in question. The relevant authority may suspend the exercise of the voting rights of the shareholder or set other conditions for the acquisition.

For the purposes of determining the abovementioned stakes in the share capital and voting rights, shares held by a controlled undertaking, or by a pension fund, foundation of the shareholder, or controlled undertaking, and shares carrying voting rights, the exercise of which, on the basis of an agreement or otherwise, is dependent on a decision by the shareholder alone or together with a third party, will be regarded as shares held by that shareholder.

A disclosure of holdings is also required when a shareholder is a party to an agreement or other arrangement that, if completed, would cause its holding to reach, exceed or fall below one of the above thresholds. For example, a holding that may be acquired by exercising options or warrants, or by converting convertible bonds, is to be disclosed if one of the thresholds, with certainty, would be reached or exceeded upon exercise. Also, acceptances of a conditional tender offer received by the offeror may, together with the offer itself, be held as an "agreement or other arrangement" that would have to be disclosed.

Competition regulations

Concentrations in the banking and insurance sector, including takeovers, asset purchases, mergers and joint ventures, are regulated by the Act on Restrictions on Competition (480/92, as amended – the Competition Act).

A concentration must be notified to the Finnish Competition Authority (FCA) if the combined aggregate worldwide turnover of the parties exceeds FIM 2 billion and where the aggregate worldwide turnover of at least two of the parties exceeds FIM 150 billion provided that the target company or its consolidated company is operating in Finland. The definition of turnover for purposes of the Competition Act corresponds to the relevant EU directives both with regard to credit institutions and insurance companies.

Notification must be made by the acquirer within one week of the event creating the concentration (eg signing of a binding agreement). The FCA must, within one month of notification, either clear the concentration or decide to initiate further investigations. In the event of a second phase investigation, the FCA must, as a rule, within three months either clear the concentration or petition the Competition Council to block it.

Failure to comply with the filing obligation or implementation of a transaction prior to clearance may lead to fines up to FIM 4 million, or in exceptional cases up to 10% of the total turnover of the undertaking in breach. The FCA's decision can be appealed to the Competition Council and, with certain restrictions, further to the Supreme Administration Court.

Continuing supervision

The FSA continuously supervises the authorized players in the financial markets to ensure the sufficiency of their financial condition and fulfilment of other prerequisites with regard to their activities. The FSA has large powers to perform examinations of and obtain information from the supervised entities. Formal inspections of controlled entities may be carried out to the extent and at such intervals as necessary, and the FSA may also attend meetings of their corporate bodies. The FSA may, and has, issued instructions for information to be submitted by controlled entities, thus creating a comprehensive obligation in addition to the requirement to file financial statements and regularly submit reports and information on, among other things, risk exposure, risk management, capital adequacy and liquidity.

The financial position and condition of insurance companies, including solvency and sufficiency of underwriting reserves and assets available to cover reserves, is supervised by the FISA and the Ministry of Social Affairs and Health. Insurance companies are required to submit financial statements and reports of their operations, as well as any other reports that the Ministry may separately request. The Ministry has extensive powers to carry out examinations of insurance companies at any time, and it may also, at its discretion, attend meetings of their corporate bodies.

Disclosure requirements

Credit institutions are required to notify the FSA of any changes in their management, including the members of the supervisory board and the board of directors, the managing director and the auditors, as well as their deputies, within one month of the day on which the change was effected. An annual update of the information on the entity's management must be submitted to the FSA by the end of June.

Any changes in the control of a credit institution that are subject to the disclosure requirements described above must be notified immediately to the FSA by the credit institution. In addition, an annual notification of significant holdings must be filed within one month of the annual general meeting. The annual ownership report must, according to FSA instructions, not only include information on significant holdings covered by the pre-purchase notification procedure, but also all holdings of more than 5% of the share capital or voting rights.

Insurance companies are subject to corresponding reporting obligations on management and control changes, but to the Ministry of Social Affairs and Health.

The relevant home state authority is responsible for the authorization and supervision of Finnish branches of EEA credit institutions, while the FSA authorizes and supervises branches of non-EEA credit institutions. However, the FSA supervises general compliance with Finnish legislation by all foreign institutions and may prohibit supervised entities from continuing their operations in the case of a material or continued breach of the pertinent legislation or FSA instructions.

The authorization and supervision of the activities of EEA insurance companies in Finland remain the responsibility of the supervisory authority of the home state, while the operations in the Finnish market by non-EEA insurance companies are supervised by the FISA. For all insurance services offered in Finland, whether by domestic or foreign companies, the FISA has the authority to ensure that Finnish consumer protection and insurance contract regulations, as well as good Finnish insurance practice, are observed.

Capital requirements and bank secrecy

Capital adequacy

The relevant EU banking directives and the Basel Committee guidelines on capital adequacy have been implemented in Finland through the CIA, which requires Finnish credit institutions to ensure that the aggregate amount of own funds equals its founding capital. In addition, credit institutions are required to maintain a capital adequacy ratio of at least 8% of its own funds in relation to its risk-weighted assets and off-balance sheet items. The CIA further contains detailed provisions on the means for calculating the capital adequacy and risk classification of assets. The capital adequacy requirements are applied to the global assets of Finnish credit institutions.

Customer exposures

A credit institution or any of its affiliated companies may not incur risk that fundamentally endangers the solvency of the institution or its consolidation group. Further, no exposure to a single customer or its consolidation group may exceed 25% of a credit institution's own funds, and the aggregate of large exposures, representing more than 10% of the credit institution's own funds, may not exceed 800% of the credit institution's own funds. Under the transitional provisions of the CIA, the customer exposure limitation requirements must be met by the end of 2001 at the latest.


A deposit bank is required to ensure its liquidity by maintaining a cash reserve (in the form of cash and cash equivalent items) equalling not less than 10% of all its liabilities (excluding certain liabilities to the Bank of Finland, and liabilities deriving from the allocation of funds for special purposes by the Finnish government).

Bank secrecy

Under the confidentiality obligations applicable to both credit institutions and investment firms, anyone, including the management, employees and persons performing assignments for the relevant institution, who obtains information on the financial position, private personal circumstance or trade or business secret of a client, is required to keep it confidential. The strict secrecy obligation is limited only by the right of certain authorities to gain access, under certain circumstances, to such information.

Corresponding requirements on the maintenance of a sufficient cash reserve and the safeguarding of own funds, as well as a prohibition on incurring risks that endanger solvency, apply to investment firms, while insurance companies are subject to detailed requirements on the safeguarding of operating capital and the coverage of underwriting reserves.

When a bank becomes insolvent

Insolvency proceedings

Finnish bankruptcy proceedings are, generally, initiated either by the debtor itself or by its creditors through a petition to the competent district court. Bankruptcy proceedings are started and the debtor is declared bankrupt at the moment the court adjudicates in favour of the petition. Simultaneously, the court appoints a provisional administrator of the bankrupt estate. In principle, all creditors rank equally in bankruptcy proceedings, with the exception of claims secured by a lien or pledge, a right of retention or a legally registered encumbrance on the debtor's property, for which the creditor is entitled to payment from the proceeds of the sale of such property regardless of other creditors. Claims secured by a business mortgage entitle the creditor to payment with priority only up to an amount equal to 50% of the liquidation value of the debtor's encumbered business assets. Fraudulently or preferentially conveyed property of the debtor, either before or after the date of the petition for bankruptcy, may be recoverable to the estate. Cross-border bankruptcies are not, as a rule, recognized in Finland, except for bankruptcies initiated in the Nordic countries.

Mutual deposit guarantee fund

Membership of the mutual deposit guarantee fund, established in 1998, is mandatory for all deposit banks. The fund's assets are collected from banks in the form of annual contributions, the amount of which consists of a fixed fee calculated on the aggregate guaranteed deposits of the bank, and an additional fee based on the bank's consolidated capital adequacy. Contributions vary according to whether the bank is a Finnish entity or a branch office of a bank authorized within or outside the EEA. In the case of the liquidation of a bank, compensation up to EUR25, 200 (FIM150, 000) per depositor will be paid for the capital of and interest on a depositor's deposits in each bank. However, funds deriving from the sale of the depositor's permanent residence are, under certain conditions, protected up to their full amount. The FSA decides on payments out of the assets of the mutual deposit guarantee fund. Claims by other financial institutions are not covered by the fund.

Compensation fund for investors

Investment firms and credit institutions providing investment services are required to belong to the investor compensation fund, established in 1998. The fund safeguards payment of clear and indisputable payments when an investment company or a credit institution, for any reason other than temporary insolvency, is incapable of paying the claims of an investor within a determined period of time. The fund's assets are collected by means of annual contributions, the amount of which depends on the number of investors (excluding professional investors) of the relevant investment firm or credit institution, capital adequacy, and how risk-prone the investment services are considered. Only claims of non-professional investors are compensated from the fund. The amount of compensation paid to investors is 90% of the claim, with a maximum limit of EUR20, 000. Losses due to a decrease in the stock value or incorrect investment decisions are not compensated.

Roschier-Holmberg & Waselius

Keskuskatu 7A
Helsinki 00100

Tel: +358 9 664 303
Fax: +358 9 175 451