The Swedish Financial Supervisory Authority (SFSA, Finansinspektionen in Swedish) has presented a proposal for the Authority to adopt a new principle-based approach in respect of its supervision of the Swedish financial market and its adoption of regulations.
The SFSA has two overall purposes in its supervision: (a) stability and (b) good consumer protection on the financial market. With these purposes in mind the SFSA has proposed a principle-based approach. The following eight principles will be the basis of the SFSA's supervision going forward.
Confidence: financial institutions shall actively prevent lack of confidence in the financial market. Furthermore, a financial institution shall have enough knowledge about its clients to prevent itself being used for criminal purposes.
Financial strength and protection of the client's funds: financial institutions shall have the ability to fulfil their obligations in respect of having an internal capital relate to the risks in the operation. Further, the clients' funds shall be handled with care and kept separate from the financial institutions' own funds.
Internal governance and control: financial institutions shall have adequate and effective routines in respect of internal governance and control.
Knowledge and competence: financial institutions shall ensure that all employees have the knowledge and competence needed in order to perform their duties properly.
Transparency: financial institutions shall be organised in a way that ensures a sufficient transparency.
Treatment of clients: financial institutions shall have their clients' interests in mind and identify and handle the conflicts of interests that may arise between clients or between the financial institution and its clients.
Information: financial institutions shall provide their clients with relevant and intelligible information about their products and services.
Cooperation with the competent authority: financial institutions will have a dialogue with the SFSA and provide the Authority with any information required to help the SFSA exercise proper supervision.
The full content of the principles are not determined at this stage. The SFSA has announced that the principles shall not be seen as formal rules but as the overall aim of the rules on the financial market. The SFSA has stressed that as long as the purposes of these principles are met, the financial institutions are free to take measures and organise their business at their sole discretion.
As a result, questions shall only be discussed and supervised where necessary in case the relevant institution is unable to provide an appropriate explanation of its adopted measures to the SFSA. However, a financial institution may not be sanctioned if it breaches one of the principles. A sanction issued by the SFSA must always be based on a breach of a formal rule, such as a provision in the Securities Market Act (Lag 2007:528 om värdepappersmarknaden).
Furthermore, the SFSA has highlighted the importance of a partnership between the Authority and financial institutions. This partnership shall be based on a mutual confidence: the SFSA can rely on the financial institutions to follow its principles and the financial institutions can rely on the SFSA not to intervene in their business without good reason, taking the eight principles and laws or regulations into account.
The principles shall also be seen as a tool in the SFSA's regulatory work. In those cases where the SFSA has the authority to use its regulatory power more freely, the SFSA shall adopt regulations that are principle-based as opposed to detailed regulations. The SFSA powers are of course restricted by the EU legislation in the area.
At this stage the principle-based approach is only a proposal from the SFSA. It is now up to the persons acting on the financial market to comment on the proposal and participate in workshops in order to develop the principle-based approach. The SFSA aims to have an action plan in place by the end of September 2008, setting out the details on how the financial institutions together with the SFSA can move towards a principle-based approach.