Finland implemented the EU resolution and recovery regime for credit institutions and investment firms by the deadline at the turn of the year. The Finnish regulations apply to all local banks and intermediaries until 1 January 2016 when the most significant Finnish financial institutions will become part of the EU’s Single Resolution Mechanism (SRM).
A new body, the Finnish Resolution Authority (FRA) will be established and, meanwhile, its tasks are vested in the Ministry of Finance. The new regime imposes an additional regulatory burden on banks and larger investment firms. In this article, we present the parallel regimes, the new Finnish rules and the SRM as well as some of their effects on Finnish institutions.
Parallel Rules for Significant EU Banks and Other Institutions
According to the Finnish Financial Supervisory Authority, (FIN-FSA), the Finnish financial sector is generally in good health and the overall capital position of the Finnish banking sector is still strong (see FIN-FSA press release of 30 September 2014). Nevertheless, as part of the completion of the EU Banking Union, the turn of the year introduced significant changes to EU banks and investment firms concerning recovery and resolution. The Banking Union has been a key objective of the EU in the aftermath of the financial crisis. Another significant change is the transfer of the licensing of credit institutions and the supervision of the most significant banks and financial groups in the Eurozone to the ECB as of 4 November 2014 in the context of the Single Supervisory Mechanism (SSM).
The directive providing for the establishment of a European-wide framework for the recovery and resolution of credit institutions and investment firms (2014/59/EU, BRRD) entered into force on 2July 2014. The EU member states were to adopt and publish the implementing regulations to comply with the BRRD by 31 December 2014. In addition, the EU has adopted a directly applicable regulation governing the resolution of the most significant financial institutions in the Eurozone, i.e. a regulation establishing a Single Resolution Mechanism for them (806/2014, SRM Regulation).
The Finnish legislation implementing the BRRD and adopting the amendments necessitated by the SRM regulation entered into force on 1 January 2015. Finland is part of the Eurozone, and thus, the major banks and financial groups domiciled in Finland will ultimately be subject to the SRM instead of the Finnish rules implementing the BRRD. However, as the SRM Regulation will in material respects take effect only as of 1 January 2016, the Finnish regime will be applied across the board to all Finnish institutions for a transitional period.
Finnish Recovery and Resolution Rules
In Finland the BRRD was implemented mainly through two new acts, namely the Act on Resolution of Credit Institutions and Investment Firms (in Finnish: Laki luottolaitosten ja sijoituspalveluyritysten kriisinratkaisusta, 1194/2014, Resolution Act) and the Act on the Financial Stability Authority (Fi: Laki rahoitusvakausviranomaisesta, 1195/2014, FRA Act). The latter regulates the FRA, which will be the national resolution authority with counterparts in all EU member states. The Ministry of Finance will handle the responsibilities of the authority until the authority is fully operational (at the latest 1 January 2016). The implementation also involved amendments to dozens of existing acts, most notably to the Finnish Act on Credit Institutions (in Finnish: Laki luottolaitostoiminnasta, 610/2014), and repealed the Act on the Temporary Bank Levy and the Act on the Government Guarantee Fund.
Under the new regime, credit institutions are generally required to draw up recovery plans to secure the continuation of business in financial distress. These plans must include options for measures to restore the financial viability of the institution and they must be updated annually. The plans will have to be submitted to the FIN-FSA for scrutiny. In addition, investment firms with the obligation to hold at minimum EUR 730,000 in share capital shall maintain and update a recovery plan. The Finnish Ministry of Finance has furthermore issued decree 1286/2014 on the minimum contents of the document.
In the context of the new legislation, the FIN-FSA has been empowered to apply early intervention tools to banks and investment firms. These tools are available if the FIN-FSA has weighty reasons to believe that the institution will fail its licensing conditions, liabilities or obligations under the capital adequacy regulations within the next 12 months. The early intervention tools encompass, among other things, the rights of the FIN-FSA to require the bank’s management to implement measures included in the recovery plan, to convene a general meeting of shareholders to take necessary decisions for recovery, to require the removal of members of the bank’s management and to require changes to the legal and financial structure of the institution.
Pursuant to the Resolution Act, the FRA shall set up and maintain a resolution plan for each institution. The resolution plan must be ready for execution in the case the institution has to be placed in a resolution process.
The Resolution Act vests the FRA with resolution powers and tools as provided in the BRRD. If the FRA considers that an institution is failing or likely to fail, and there is no reasonable prospect that any private or early intervention measures or write-down of capital instruments would prevent the failure and resolution is necessary in the public interest, the FRA is empowered to declare and initiate a resolution process in respect of the institution.
During the process, the institution could be subject to a number of resolution tools: mandatory writedown of debts or conversion of debts into equity (bail-in), sale of business, bridge institution and asset separation. To continue the operations of the institution, the FRA has the power to decide upon covering the losses of the institution by reducing the value of the institution’s share capital or cancelling its shares. This is a precondition for any support from a newly established resolution fund administered by the FRA.
The early intervention and crisis administration regime entitles the authorities to invoke extraordinary protections in respect of the contractual parties of the credit institution. Firstly, the early intervention or crisis administration measures shall not be regarded as events of default by counterparties if the bank’s continues to fulfil its obligations. The resolution process also allows the FRA to impose a temporary stay until the end of the next banking day on payments and performance of the credit institution’s other obligations as part of the protective measures. Furthermore, the FRA is empowered to restrict the right of secured creditors to enforce their security in respect of the credit institution’s assets. In addition, the FRA may postpone the counterparty’s right to terminate or cancel an agreement with the institution in order to provide the possibility for effective resolution.
The Resolution Act did not repeal the Finnish special legislation governing interruption of the operations of a deposit bank, which has been in force for more than a decade. The Finnish Act on the Temporary Interruption of the Operations of a Deposit Bank (in Finnish: Laki talletuspankin toiminnan väliaikaisesta keskeyttämisestä, 1509/2001, as amended) still makes it possible to interrupt the operations of a bank for a period of not more than one month if it is evident that the continuance of the operations would seriously endanger the stability of the financial markets, the undisturbed operation of the payment systems or the interests of the creditors. In the context of the new legislation, the power to declare an interruption was vested with the FRA. When a bank is subject to a resolution process, its operations may not be interrupted. While in resolution, the institution and a company belonging to the same group are shielded from the initiation of bankruptcy proceedings and company reorganisation unless the FRA decides to cancel the resolution and initiate the insolvency proceedings.
Single Resolution Mechanism for Eurozone
The SRM Regulation will become applicable in two stages: its provisions relating to setting up resolution plans for institutions and cooperation between the authorities are already in force. The remaining and more material parts of the regulation vesting resolution powers with a pan-European authority, the Resolution Board, are to be applied as of 1 January 2016.
The Resolution Board will have jurisdiction over all 1) cross-border groups, 2) entities not part of a group and groups which are considered significant under the SSM and 3) entities that have received financial aid from the European Stability Mechanism or from the European Financial Stability Facility and that the ECB has decided to exercise all of the relevant powers over directly  ). These powers replace the FRA’s power in respect of the Finnish institutions that become subject to the SRM Regulation. The SRM Regulation provides much the same set of tools and early intervention measures to the Resolution Board as the BRRD and its Finnish implementing legislation does to the FIN-FSA and to the FRA. A pan-European Single Resolution Fund will be established to ensure efficient application of the resolution tools.
As the three largest Finnish financial groups are subject to the SRM Regulation ( ), a major part of the Finnish financial sector transferred from the scope of domestic legislation and from the jurisdiction of the Finnish authority to the single European mechanisms and supervision at the end of last year.
The Practical Effects of the New Legislation
The recovery and resolution legislation has not taken its full effect yet. Furthermore, it establishes a complex and multi-layered system with consequences that have not yet materialised. Naturally, one would hope that the resolution tools would not be needed in practice.
The SRM covers the Eurozone, but a number of Finnish institutions are members of pan-Nordic or Scandinavian consolidated groups. As Sweden remains outside of the single Eurozone mechanisms, it remains to be seen how the overarching powers of the European authorities in respect of significant institutions will fit with the traditional supervisory structures set up for Nordic financial groups and conglomerates in practice.
During 2015, the Finnish financial sector shall contribute the new resolution fund in total approximately 80 million euros as stability contributions. Furthermore, the financial sector shall pay administrative fees to cover the costs of the FRA. This comes in addition to the contributions to be made to the Finnish deposit guarantee scheme.
Apart from the administrative changes relating to the establishment of the FRA and the Finnish resolution fund, the new legislation requires banks and investment firms to draft plans and documentation to prepare for a distressed financial situation. In international practice, living wills tend to be relatively extensive documents requiring a fair amount of work. For investment firms in particular, the drafting of such documents is a new and somewhat unexpected burden.
The intrusive powers of the resolution authorities also cover bond holders, other creditors as well as shareholders of financial institutions. The risk that a bond may become subject to bail-in or write-down or that the shareholding may be wiped out in a resolution process may need to be taken into account as an additional risk factor in offering documents when these institutions act as issuers.