A Finnish Ministry of Justice working group has issued a proposal for an Act on Financial Collateral Arrangements (the Act). The purpose of the Act is to implement the Directive on Financial Collateral Arrangements (2002/47/EC). The proposal is now subject to comments, and the Finnish parliament is expected to consider it within the next two months.
The Act relates to use of securities and account money as collateral on the financial markets. It aims to allow the use of internationally recognized collateral arrangements in Finland and to clarify collateral arrangements under Finnish law. The Act will apply to collateral arrangements where collateral is granted by, among others, a public institution, a credit institution, an insurance company or investment firm or where collateral is granted to any of these entities by a limited liability company, a trust or a partnership. However, the Act will not apply to collateral arrangements entered into with a person or when securities that are not publicly traded are used as collateral.
The Act includes certain significant changes from a Finnish law perspective, such as allowing parties to agree on collateral arrangements based upon transfer of title. In Finnish legal doctrine assignment as security (when the assignee retains possession of the assigned object) often has not been considered binding on the assignee's debtors. The Act will allow assignment as security based on an agreement between two parties and will ensure that this arrangement is considered binding on third parties and will not be reviewed in light of provisions relating to the pledge.
The Act also allows parties to agree on terms giving the security holder the right of disposal regarding pledged assets. The pledgee can, during the term of the security arrangement, convey or otherwise dispose of the pledged securities or account money and will be obligated only to return equivalent assets to the pledgor. Another significant amendment is the right of the pledgee to convert the pledged assets into money immediately after the due date of the secured obligations. As an alternative the pledgee may take ownership of the assets in cases where this has been agreed.
The Act also contains certain provisions relating to insolvency proceedings under which the pledgee may sell the securities or set off account money against the debt irrespective of insolvency proceedings (that is bankruptcy or reorganization). For example the statutory stay on payments in reorganization will not prevent the pledgee from receiving payment. The parties of a collateral arrangement can agree on the close-out netting of their obligations.
Although the Act only relates to the use of securities and account money as collateral and is restricted to collateral arrangements between legal persons, it will result in certain previously unrecognized collateral arrangements become acceptable under Finnish law. The acceptance of collateral arrangements based upon transfer of title and pledge arrangements allowing the pledgee to convey and otherwise dispose of assets is expected to enhance the possibilities of Finnish credit institutions and other entities in the international financial markets as well as the collateral value of Finnish securities.