Federation of Finnish Financial Services
Bulevardi 28, FI-00120 Helsinki, FinlandTel. +358 20 7934 200
Fax +358 207934202
E-mail fk(at)fkl.fi
firstname.lastname(at)fkl.fi
Credit institutions legislation
Credit institutions legislation
Banking has traditionally been an industry strictly regulated by laws and authorities’ regulations. Much of the regulation has been introduced in an effort to protect the claims of investors, notably depositors.
The core of banking regulation in Finland is the Credit Institutions Act, which was revised in early 2007. The Act applies to business consisting of acceptance of repayable funds from the public, provision of finance for own account, transmission of payments or issuance of electronic money.
Besides the Credit Institutions Act, the operations of authorised deposit taking banks are governed by other pieces of legislation such as the Act on Commercial Banks and other Credit Institutions in the Form of a Limited Company, the Act on Cooperative Banks and other Cooperative Credit Institutions, and the Savings Bank Act. These laws contain provisions on eg how a bank is set up, administered and wound up. Mortgage credit banks, instead, are governed by the Act on Mortgage Credit Banks, which came into force in 2000. Moreover, banks are naturally regulated by legislation on securities markets and a number of other laws governing business operations.
Concept of credit institution
According to the definition given in the Credit Institutions Act, credit institution is an undertaking authorised to carry on credit institution activity. A credit institution may be a deposit bank, financing institution, or payment institution, terms which are all given exact definitions in the law.
Concept of deposit bank
Deposit bank is a credit institution that may accept deposits and other repayable funds from the public. Deposit banks are required to be members of the Deposit Guarantee Fund. Deposit banks comprise commercial banks, savings banks and cooperative banks. Other credit institutions are only authorised to accept repayable funds other than deposits from the public.
Concept of deposit
The term deposit refers to repayable funds which are covered by the deposit protection scheme either in full or in part. Deposits may only be accepted for placement into accounts governed by terms and conditions which are in compliance with the general terms and conditions approved by Financial Supervision.
Scope of business conducted by deposit banks
Deposit banks may only engage in operations listed in the Credit Institutions Act and related activities. The permitted activities include:
1) accepting deposits and other repayable funds from the public
2) other funding
3) lending, financing and arranging finance
4) financial leasing
5) transmission of payments
6) issuance of electronic money, related data processing and storing of data on electronic media for the account of other undertakings
7) collection of payments
8) foreign exchange
9) trustee operations
10) securities trading and other securities services
11) guarantee issuing
12) credit reference services
13) housing and estate agent services as part of home saving programmes
14) other activities comparable to the activities referred to in items 1 to 13 above.
Only deposit banks may accept deposits from the public.
Other types of credit institutions
Besides deposit banks, there are two more types of credit institutions defined in the Credit Institutions Act, viz. financing institutions and payment institutions. Financing institution is a credit institution that may accept repayable funds other than deposits from the public, provide finance for its own account, transmit payments and issue electronic money. Payment institution is a credit institution that may transmit payments and issue electronic money.
Financial institutions
Financial institution is defined in the law as an undertaking whose principal activity is to provide one or more of the financial services listed in the Credit Institutions Act or to acquire holdings. No authorisation is required for engaging in the activities of a financial institution. Consequently, a financial institution is not supervised as an independent entity; it is covered by consolidated supervision of a credit institution. The objective of consolidated supervision is to get all interests of a credit institution under single supervision. Consolidated group is defined in the Credit Institutions Act to comprise a credit institution, its holding company, and a financial company which is a subsidiary of the credit institution or its holding company.
Establishment of credit institution
Credit institutions require an authorisation to do the business that they engage in. Authorisations in Finland are granted by Financial Supervision, which is required to grant a licence if the applicant meets the requirements set for an authorisation. Such requirements include sufficient evidence of the reliability and suitability of shareholders and administrative staff to ensure that the credit institution will be managed professionally in accordance with sound and prudent business principles.
Credit institutions are required to have an initial capital of at least €5 million.
Principle of single licence and home state supervision
The Credit Institutions Act also contains provisions prompted by Finland’s accession to the European Union. This means provisions on eg the right ensured to Finnish companies to establish business in other states which are part of the European Economic Area. Credit institutions authorised to do business in Finland may conduct the business of credit institutions in any state that is part of the European Economic Area. Correspondingly, credit institutions authorised in any other state of the European Economic Area are free to provide services in Finland without a separate licence. In compliance with the principle of home state supervision, credit institutions are supervised, save a few exceptions, by the supervisory authorities of the home state of the credit institution, ie the state where the credit institution has its registered office.
Shareholder control
The new Credit Institutions Act equips supervisory authorities with increasingly better tools to supervise credit institutions and their shareholders. For instance, acquisitions of major holdings in credit institutions are to be reported in advance to Financial Supervision. This disclosure requirement commences if any party is going to buy at least 10% of the shares or votes in a credit institution. Financial Supervision may then be against the acquisition and deny the shareholder the right to exercise its vote if the authority considers it likely that the holding may harm the operation of the credit institution in accordance with prudent and sound business principles.
Restrictions on shareholdings
The Credit Institutions Act also limits the right of credit institutions to hold shares and participations in undertakings engaging in operations other than the business permitted to credit institutions. The total of such shareholdings in any one company may not equal more than 15% of the credit institution’s own funds. This restriction is only applied to companies in which the credit institution has a holding of more than 10% of the shares or votes. The right of credit institutions to own real estate is restricted to a maximum of 13% of the total assets of the credit institution concerned. These restrictions apply to holdings of both individual banks and consolidated groups.
Capital adequacy
Capital adequacy rules make up the cornerstone of credit institution regulation.
Capital adequacy standards have been harmonised across borders for quite a while now not only within the EU but also more widely at the Basel Committee on Banking Supervision operating at the Bank for International Settlements.
The capital adequacy of a bank or a credit institution is determined as the ratio of the bank’s capital to risk-weighted assets, ie lending, investments and off-balance sheet commitments. Each asset item is given its own minimum capital requirement according to the underlying risk. The scope of a bank’s operations thus depends on the size of the bank’s capital and on the risk content of the bank’s operations.
All banks are required to have capital for an amount that represents at least 8% of the total amount of their lending, investments and off-balance sheet commitments. This requirement on capital adequacy applies to both individual deposit banks and their consolidated groups.
For the purpose of assessing capital adequacy, capital is determined in a way different from that used in accounting. In the capital adequacy regime, a bank’s capital is divided into two classes, Tier 1 capital and Tier 2 capital. Tier 1 capital is made up of shareholders’ equity or equivalent funds plus share premium account and statutory reserves. Tier 2 capital, instead, is represented by eg revaluation reserve and less preferential commitments such as subordinated debt.
Liquidity
According to the Credit Institutions Act, deposit banks are required to maintain their liquidity and ensure that they at all times have sufficient means for meeting their payments. To support their liquidity, banks are required to have cash reserves which consist of not only cash but also claims which are easily convertible into cash as provided in the law.
Risk management
The Credit Institutions Act also includes provisions on credit institutions’ risk management methods. The core of this regulation is that no credit institution may in its operations take risks so large that they materially threaten the solvency of either the credit institution or the consolidated group that the credit institution is part of. Secondly, credit institutions are required to have risk management systems adequate for their operations.
Besides the basic rule of risk management, the Credit Institutions Act sets detailed limits for large exposures. Large exposure refers to an exposure to a customer for an amount that accounts for at least 10% of the own funds of the credit institution. The total amount of large exposures may not represent more than 800% of the own funds of the credit institution. Moreover, credit institutions are required to limit their exposure to one single customer or one single customer group to 25% of the own funds of the credit institution. Exposure to customer is considered to include all claims that the credit institution has on the customer, including shares held by the credit institution and issued by the customer, and all off-balance sheet commitments which may involve a default risk. Credit institutions are required to provide supervisory authorities with regular reports of their large exposures. Concentration of risks is also supervised by the authorities both in individual credit institutions and on a consolidated basis.
Deposit protection
All deposit taking banks are required to be members of the Deposit Guarantee Fund set up in 1998. The size of contributions to the Fund depends on the bank’s capital adequacy and on the amount of deposits covered by the protection.
The amount of each depositor’s deposits, both principal and interest, is protected by the Deposit Guarantee Fund up to €25,000. If a bank is unable to pay the funds deposited according to the deposit agreement, the Deposit Guarantee Fund pays the amount of the deposit within three months of the date at which Financial Supervision establishes that the bank has failed to settle the claim of the depositor because of financial problems.
Proceeds from the sale of a customer’s home are protected for the full amount, if deposited with a bank not earlier than six months before Financial Supervision establishes that the bank is insolvent. Proceeds from such home sale are to be used in full for the purchase of a new home.
Regardless of the number of deposits held by a customer with any one bank, the deposits are protected up to €25,000 with the bank concerned. For the purposes of deposit protection, banks that are fully or partly liable for meeting each other’s commitments are considered to make up one bank.
The protection covers deposits held by each family member separately and each holder of a joint deposit accounts also separately. The depositor referred to in the law does not include persons who are only authorised to operate the account. The protection extends to all private individuals, businesses, funds and public bodies such as municipalities and the church.
Branches of foreign banks set up in Finland are covered by the protection provided in their home country.
Customer protection
The Credit Institutions Act includes a whole chapter on customer protection. Banking customers are ensured overlapping protection provided by two separate pieces of legislation, and compliance with the laws is also supervised by two separate authorities, the Consumer Ombudsman and Financial Supervision. The protection provided by the Credit Institutions Act, however, is wider than that provided by consumer protection legislation, as it covers all customers of the bank regardless of whether they can be considered consumers in the sense referred to in other legislation.
Banking secrecy
While discharging the duties entrusted to them, such as lending and asset management, bank employees gain access to financial and other information on their customers and other persons. Payments transmission is another area where customer information is made available to the bank.
One of the requirements imposed on banking is that customers can be confident that their financial and private affairs are kept secret. No bank employee or member of a bank’s operating body may disclose information on their customers’ affairs to third parties. Banking secrecy protects not only private individuals but also corporate and institutional customers. Compliance with banking secrecy is a practice as old as banking itself.
Yet there are exceptions to banking secrecy rules. The rules are ignored if information is asked by eg Financial Supervision, tax authorities or police, who are both entitled to access the bank for customer information with certain restrictions. These authorities’ right to get confidential information from banks has been widened in Finland in recent years.
Banks’ own business secrets are to be kept apart from banking secrecy. Any information that reveals the identity of a banking customer is covered by banking secrecy. Disclosure of information on a certain customer group, instead, is not considered confidential, unless the information can be linked to a certain customer. This information may be disclosed by individual banks at their discretion, unlike the practice applied to confidential information.
REGULATION OF OTHER CREDIT INSTITUTIONS
Banking laws
Besides the Credit Institutions Act, there are a number of other laws governing the business of credit institutions in Finland, such as the Act on Commercial Banks and other Credit Institutions in the form of a Limited Company, the Savings Banks Act, and the Act on Cooperative Banks and other Cooperative Institutions. These laws contain provisions for the particular types of credit institutions on eg assignment, merger and demerger of business.
Regulation of foreign credit institutions
The operations of foreign companies engaging in the business of credit institutions in Finland are regulated by the Act on the Operation of a Foreign Credit Institution or Financial Institution in Finland. The Act includes provisions on the right of a credit institution authorised outside Finland to set up a branch or otherwise provide services in Finland. Some of the provisions of the Credit Institutions Act also apply to branches of foreign credit institutions in Finland. Credit institutions established in a state that is a member of the European Economic Area need not apply for a separate licence to set up a branch in Finland whereas non-EEA entrants do need a licence. The legal relationships involved in the business of foreign branches in Finland are primarily governed by Finnish law and any action arising from the business is to be settled in Finnish courts. Although foreign branches are required to comply with Finnish authorities’ decisions and regulations, the branch’s business in Finland is primarily supervised by the home state supervisor.
Regulation of mortgage credit banks
A revised Act on Mortgage Credit Banks came into force at the beginning of 2000. The law applies to operations where a mortgage credit bank issues secured bonds and lends the proceeds to the public against collateral. The money is lent against shares in either real estate or residential housing companies or against real estate mortgage. The credits granted and the collateral provided are placed as security for the bonds by recording them in a register of collateralised bonds kept by the mortgage bank. Moreover, mortgage credit banks may grant credits to public bodies and have them collateralised by either a guarantee from or a claim on the borrowing public body. Loans to public bodies may serve as security for the bonds issued in the same way as loans to the public. The law also provides for the order of priority of the claims that the two types of bondholders have on the issuing mortgage bank if the bank becomes insolvent.
OTHER LEGISLATION
Money laundering
The key principle behind regulation designed to prevent money laundering is that credit institutions are required to identify their customers. If a transaction or several connected transactions amount to more than €15,000 or if there is reason to suspect that the funds involved in the transaction(s) come from an illegal source, the bank is required to establish the identity of the customer. The law also imposes a duty of care on credit institutions, which means that credit institutions are required to find out why and for what purpose their services are being used if they detect that the transaction differs from the ordinary in respect of either its size or structure.
If after meeting the duty of care or otherwise it has reason to doubt the legality of the source of the assets involved in the transaction, the credit institution is required to immediately report the case to the Money Laundering Clearing House at the National Bureau of Investigation and either refuse to execute the transaction or interrupt execution for the purpose of further investigation. If execution cannot be interrupted or if refusal is likely to make it more difficult to find out the beneficiary, the transaction may be executed. Reporting to the Clearing House may not be disclosed to the suspected person. The Clearing House may oblige the credit institution to suspend execution of the transaction for no longer than five weekdays.
Cross-border payments
The Finnish Credit Transfers Act regulates payments transmission between banks. Based on the EU directive on cross-border payments, the law applies to credit transfers between Finland and other countries in the European Economic Area for amounts not higher than €50,000 and to all credit transfers within Finland regardless of the amount. The biggest development for Finnish payments transmission is that payments can now be transferred on the basis of a mere account number.
Domestic credit transfers must reach the destination within the agreed time period. If no time limit has been agreed, the funds transferred in a domestic credit transfer must reach the payee’s account not later than the banking day following the date of acceptance of the payment order. The payee’s bank must pay the funds transferred in a credit transfer to the payee’s account not later than the banking day that follows the date at which the funds were paid to the account of the payee’s bank. Payments transferred within the European Economic Area must reach the payee’s account not later than the fifth banking day from the date the payer’s bank accepted the payment order. The payee’s bank must make the funds available to the payee on the following banking day. Consequently, the funds must reach destination not later than the sixth banking day from the date the payer’s bank accepted the customer’s payment order. If a payment is delayed, the payer is entitled to receive penalty interest from the bank for the period of the delay. The customer is also entitled to claim refund of any credit transfers that have not been executed. The payer’s bank’s refund liability, however, amounts to a maximum of €50,000.
Charges on cross-border payments
The European Parliament and the Council have issued Regulation No 2560/2001 on charges levied on cross-border payments amounting to a maximum of €50,000. Starting from 1 July 2001, charges levied on cross-border credit transfers within the European Union are the same as the amount charged for domestic credit transfers, providing that the payment meets the criteria set for an EU payment in the regulation, ie that the amount of the payment is not higher than €12,500, that the payee’s account number is given in IBAN (International Bank Account Number) format, that the payee’s banking connection is given in BIC (Bank Identifier Code) format, accompanied by no other information, and that the payer and the payee each pay the charges levied by their own bankers.
Cheques and money orders are not covered by the above regulation.
Updated in October 2007
