Regulation in the Finnish Financial Markets in 2018
The new year began with a number of regulatory changes affecting financial markets all over the European Union, and Finland is no exception. The updated Markets in Financial Instruments Directive (MiFID II), its accompanying regulation (MiFIR) and the revised Payment Services Directive (PSD2) were implemented in Finland in early January, while preparations continue for the implementation of the Insurance Distribution Directive (IDD) and the revised EU prospectus regime later in the year. Listed companies will need to take into account new requirements for reporting non-financial information and alternative performance measures as part of their annual reporting.
MiFID, MiFIR and PRIIPs put to practice in January 2018
MiFID and MiFIR entered into force on 3 January 2018. Finnish legislation underwent review correspondingly, and amendments were introduced especially to the Finnish Investment Services Act and to the Finnish Act on Trading in Financial Instruments in addition to a number of smaller changes to related laws.
Together with the new information requirements for packaged investment products (PRIIPs) entering into force, market participants have put great effort into becoming compliant with all new requirements, such as providing their clients with updated information and terms. While the first impression would be that all key things are in place, in practice the following months will reveal any potential details that require further review. Regulators have also recognised a need to make certain amendments to Finnish laws in order to fix technical errors and to address some remarks made during the legislative process.
While listed companies are not, to a large extent, affected by the revised MiFID, it is worth noting that certain provisions of the Market Abuse Regulation (MAR) will become applicable following MiFID II’s entry into force. The European Securities and Markets Authority (ESMA) now maintains a database where anyone can search for the trading venues of any traded security. This register should help listed companies when they acquire their own shares, as they should remember that, according to Article 5 of MAR, companies will need to report buy-backs not only to their competent local authority (such as the Finnish Financial Supervisory Authority, FIN-FSA) but also to the other competent authorities of any trading venues where their shares are traded. This obligation applies even if the company has not itself applied to be traded in such a trading venue (such as a multilateral trading facility, MTF). The revised MiFID also allows an MTF to be registered as a growth market for small and medium sized enterprises, but at least for the time being, the local MTF, i.e. Nasdaq First North Finland, has not published such registration.
While authorities will monitor adherence with laws, rules and regulations in a normal manner, we expect them to exhibit some leniency in their interpretation when new processes are being adopted. As a practical example of the complexity of the regulatory burden to all parties, even ESMA states that data on listed securities (as referred above) stored in its registers when the MiFID went live were incomplete. If you encounter any problems in interpreting or complying with the new requirements, we recommend open dialogue and are happy to assist you in any way we can.
Preparations underway for the full application of PSD2, IDD and the revised prospectus regime
The Finnish financial markets will naturally face new regulations also post-MiFID. The amended Finnish Payment Services Act implements the revised Payment Services Directive (PSD2). These amendments entered into force on 13 January 2018. In practice, many of the actual changes to the market will have to wait until the autumn of 2019 for the application of the related Regulatory Technical Standards (RTS) and for the introduction of the technical interfaces provided by the RTS. Unlike the corresponding authorities in many other European countries, the FIN-FSA has stated that the so-called screen scraping method for providing new payment services, such as payment initiation services, cannot be used during the transitional period unless it meets strict requirements especially related to the identification of a third-party service provider.
The implementation of the Insurance Distribution Directive (IDD) into Finnish law has been delayed from February 2018 to late October 2018. This delay is mainly due to a delay in delegated Commission Regulations.
The Securities Markets Act will also be amended by July 2018 to conform to the new EU Prospectus Regulation. For example, under the new regime, the national prospectus threshold is expected to be raised up to EUR 8 million. The new EU Prospectus Regulation will become effective in its entirety only in the summer of 2019, and the relevant provisions of the current national legislation will apply until then.
Focus on reporting in listed companies
Aside from the new prospectus regime, which will become fully applicable in the summer of 2019, listed companies are not facing significant new securities markets regulation at the moment. Nevertheless, keeping up with all existing requirements should ensure that companies stay busy. This spring, for the first time ever, companies are facing a legal obligation to report non-financial information as well in connection with their annual accounts. Companies familiar with environmental, social and governance reporting will not face any significant issues due to this, but this requirement will entail additional administrative work for companies that are reporting non-financial information for the first time.
The FIN-FSA has recently reviewed the practices of listed companies on presenting so-called alternative performance measures (APM) as a part of their financial reporting, and, in many instances, they have found these practices to be unsatisfactory to some extent when compared to the requirements issued by ESMA. The FIN-FSA paid special attention to the grounds provided for presenting each APM, the reconciliation calculations used for the APMs and the grounds provided for any adjustments made and for presenting adjusted financial figures. A large number of Finnish listed companies have provided their guidance on adjusted profit figures, and it will be interesting to see if fewer companies will opt to use non-GAAP figures in future.
The proposals for updating the Finnish Corporate Governance Code are expected to come out by the summer of 2018 in preparation for the upcoming legislative changes due to the Shareholders’ Rights Directive and its implementation into the Finnish Companies Act during the fall of 2018.
Risks related to the banking sector under the scrutiny of the FIN-FSA
With regard to the regulation and supervision of the banking sector, the FIN-FSA continues to monitor the level of household indebtedness. FIN-FSA has stated that it is ready to restrict the maximum loan-to-collateral ratio for new residential mortgage loans should the risks keep growing. Based on its decision from the summer of 2017, banks using an internal ratings-based approach (IRBA) will need to apply a minimum risk weight level of 15% on residential mortgage loans from 1 January 2018 onwards. The largest Finnish banks use IRBA models, and while the Basel IV reforms are still years away, banks can already be expected to have to gradually prepare for these changes. The market prices of mortgages may well rise due to these changes in future.
Nordea’s plan to move its headquarters to Finland will have an impact on the FIN-FSA’s supervision of the banking sector. In addition to its supervision of Nordea, the FIN-FSA has stated that it will invest in boosting the effectiveness and efficiency of its supervision of other significant financial market operators and supervisory areas in 2018. The FIN-FSA intends to intervene at an early stage in all behaviour that jeopardises customer protection. The FIN-FSA also states that the digitalisation of the financial sector will require constant monitoring and a capability to provide an early response to new initiatives.
New Financial Institutions & Regulation Team
To enable us to respond better to the growing number of assignments in the field of financial regulation, we have set up a new Financial Institutions & Regulation team focusing on various legal and regulatory matters in the financial sector. The team will be co-headed by our Capital Markets Partner Juha Koponen and Counsel Ari Syrjäläinen. Both of them have a long track record and expertise from various fields of work in the financial markets. As the former head of legal services at OP Corporate Bank (formerly Pohjola Bank Plc), Ari has good insight into the field also from our clients’ point of view. The team combines Borenius’ industry expertise and knowledge from various fields of law, utilising our experts from all relevant practices for the needs of our clients from a fintech start-up to the largest financial institutions.