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What are the principal governmental and regulatory policies that govern the banking sector?
The main regulatory objectives underpinning the banking sector in Sweden are to ensure financial stability and to protect customers. There are a number of regulations in place aimed at avoiding the risk of bank failures, reducing the impact of failures and to protect customer sand investors. Market efficiency, increased competition, and prevention of financial crimes are other objectives of Swedish financial markets regulation.
Primary and secondary legislation
Summarise the primary statutes and regulations that govern the banking industry.
Swedish banks are limited liability companies and are as such subject to, for example, the Swedish Companies Act (2005:551), but there is also a comprehensive set of sector-specific regulation. Among the key financial regulations applicable to banks are the Swedish Banking and Financing Business Act (2004:297) and the Credit Institutions and Securities Companies (Special Supervision) Act (2014:968). These regulatory frameworks set out the general requirements that banks need to fulfil in order to be authorised to provide their services, and the conditions for providing such services, as well as the authorities’ supervisory powers.
Another key regulation is the Resolution Act (2015:1016) even though this is mainly relevant in a crisis scenario (see question 3). Banks are also subject to security legislation such as the Securities Market Act (2007:528) and in relation to any services offered to consumers there is an additional layer of rules to consider, such as the Swedish Consumer Credit Act (2010:1846) containing certain mandatory provisions aimed at protecting the consumer.
Swedish banks are also subject to a comprehensive set of EU regulations. For example, the key capital requirements and restrictions on large exposures are set out in the Capital Requirements Regulation, which is directly applicable in Sweden.
Finally, it should be noted that there is a wide range of secondary regulation at both EU and national level, such as guidelines and recommendations from the European Banking Authority and the Swedish supervisory authorities.
Which regulatory authorities are primarily responsible for overseeing banks?
The primary authority is the Swedish Financial Supervisory Authority (SFSA). The objectives of the SFSA are to contribute to a stable financial system that is characterised by a high level of confidence and well-functioning markets that meet the needs of households and firms for financial services, while at the same time providing comprehensive protection for consumers. The SFSA is responsible for both authorisation and prudential supervision and has disciplinary and enforcement powers.
The Swedish National Debt Office (SNDO) acts as resolution authority and is further responsible for managing the Swedish depositor protection scheme. The SNDO has some powers to act also on a pre-crisis stage (in relation to their crisis planning, see question 12), but generally they will only play a role in case of bank failures, whereas the SFSA will deal with the day-to-day supervision.
Riksbanken, Sweden’s central bank, is not directly involved in the supervision of banks, but may be part of any crisis management in its capacity as ‘lender of last resort’, providing credits to banks that are unable to fund themselves through ordinary market channels.
Government deposit insurance
Describe the extent to which deposits are insured by the government. Describe the extent to which the government has taken an ownership interest in the banking sector and intends to maintain, increase or decrease that interest.
Sweden established a depositor protection scheme in January 1996, in accordance with the relevant EU directives. Each institution covered by the scheme (primarily Swedish financial institutions) is required to pay annual fees out of which any potential payments under the scheme will be made. A number of amendments have been made to the depositor protection scheme since 1996, with a more substantial change entering into force on 1 July 2016 following agreement on a revised EU deposit guarantee directive in 2014. These revisions resulted in, for example, faster payouts to insured depositors.
The maximum guaranteed amount under the Swedish depositor protection scheme is an amount corresponding to €100,000. The guarantee applies to depositors in all categories except other banks and securities firms. The guarantee has certain restrictions: it does not apply, for example, to savings in the form of securities, securities funds, insurance plans or individual pension savings plans.
In respect of depositor protection, it should also be mentioned that certain depositors are entitled to preference under Swedish insolvency law (thus ranking ahead of unsecured non-preferred creditors) in case a bank should enter into insolvency proceedings or be subject to resolution procedures.
The Swedish government took certain ownership interests in the banking sectors following a financial crisis in Sweden during the early 1990s. This ownership has, however, since then be transferred to private shareholders. During the global financial crisis of 2008-09, no ownership interests were taken in the Swedish banks, even though certain other supportive actions (eg, guarantee programmes) were implemented to ensure financial stability.
Transactions between affiliates
Which legal and regulatory limitations apply to transactions between a bank and its affiliates? What constitutes an ‘affiliate’ for this purpose? Briefly describe the range of permissible and prohibited activities for financial institutions and whether there have been any changes to how those activities are classified.
Swedish financial markets law restricts certain related party transactions. Specifically, a bank may not provide services on terms other than those normally applied by the institution or enter into other arrangements on conditions that are not commercially justified with, or to the benefit of:
- a member of the board of directors;
- a delegate in a leading position who alone or in conjunction with any other person may decide on loan applications that are at the discretion of the board of directors;
- an employee holding a leading position in the firm;
- a shareholder or another holder of an ownership interest (other than the state) with a holding equal to or exceeding three per cent of the aggregated capital;
- a spouse or a partner of any person referred to above; or
- a legal entity in which such person as referred to above has an important financial interest in the capacity of a partner or a member.
Even if a certain transaction with a related party is permitted as such (being commercially justified) Swedish financial markets law require that the board of directors of the bank approve the transaction.
If the shares in the bank are listed on the Swedish stock market, there are also additional requirements imposed by the Swedish Securities Council in order to avoid conflicts of interest. For example, there is a requirement to make certain transactions with members of the management or a major shareholder subject to shareholder approval. There are also specific provisions relating to valuation of any assets transferred.
As for the range of permissible and prohibited activities, a bank is only allowed to conduct financial activities and business related thereto. Any assets owned will, as a main rule, need to relate to the services provided.
What are the principal regulatory challenges facing the banking industry?
In recent years there has been a rapid increase in the volume of mortgage lending in Sweden and the level of indebtedness owed by Swedish households is at historically high levels. This has not only resulted in large credit risk exposures for the Swedish banks but the discussion about a housing bubble has also triggered regulatory changes such as amortisation requirements on mortgage loans. The general view is that Swedish banks are well capitalised, but it may still be the case that the authorities choose to further strengthen the regulatory regimes to cater for a possible downturn in the Swedish housing market or a more general deterioration of the economic conditions in Sweden.
In respect of the major Swedish banks there is also a challenge in the fact that Sweden has chosen to, at the moment, not participate in the EU European banking union. Even though financial markets law is largely harmonised across Europe, Swedish banks face regulatory requirements that in certain cases go beyond those applicable in other countries. To this end it should be noted that the recent move of the headquarters of Nordea from Sweden to Finland was, according to Nordea, partly a result of Swedish authorities charging resolution fees (meaning the fee to be paid to the resolution fund to finance resolution actions pursuant to the Swedish Resolution Act (see question 12)), which are substantially higher than those charged by Finnish and EU authorities.
Finally, the outcome of the Brexit discussions and the arrangements that will eventually be agreed between the United Kingdom and the European Union may affect the regulatory landscape for Swedish banks too, including the regulatory conditions that need to be satisfied in order to access UK financial markets.
Are banks subject to consumer protection rules?
Consumer protection is one of the main objectives underpinning Swedish financial markets law. A large part of the regulatory framework applicable to banks is aimed at indirectly protecting customers by ensuring a safe and sound business within the bank, but there is also certain legislation aimed more directly at consumer protection, for example, in case of consumer lending activities.
To this end it should be noted that the practice of providing small (and expensive) loans with fast payouts and limited credit assessments has been somewhat in focus the last couple of years. Depending on the structure of the business and its funding, the companies providing these are not always covered by the general bank and financing licensing requirements. Legislation was introduced to deal with this issue and to ensure that companies providing loans to consumers are always subject to a licensing requirement. More recently, certain limits have also been introduced on the interest and fees that may be charged for consumer credits.
The responsibility for ensuring compliance with consumer credit rules is shared between the SFSA and the Swedish Consumer Agency.
In what ways do you anticipate the legal and regulatory policy changing over the next few years?
Following the recent financial crisis there were massive calls for regulatory change, and the regulatory regimes applicable to banks were strengthened accordingly. We believe that one change over the next few years may be an increased focused on a proportionate application of these new regulatory regimes, so that the business conducted by smaller and non-systemically important banks are not disproportionally burdened.
Another recent trend has been the rapid development of the fintech sector. Swedish regulators are closely following this development, and given that the current regulatory regimes are essentially designed around the traditional banking business model, it may be that certain regulatory changes will be implemented in order to enable a continued growth and competition within this sector while at the same time ensuring that any financial stability and consumer protection issues are effectively mitigated.
Extent of oversight
How are banks supervised by their regulatory authorities? How often do these examinations occur and how extensive are they?
The SFSA applies a risk-based approach to supervision, meaning that they focus on the largest banks. In respect of these banks the SFSA has designated supervisory teams who are regularly discussing and following up with the banks regarding, for example, their financial performance and position. The Swedish supervisory model is generally fairly informal and is, to a large extent, based on discussions between the banks and the supervisor. In our experience this is somewhat different compared to dealing with, for example, the European Central Bank, and it may be that the general trend to centralise regulation and supervision within the European Union will also steer the SFSA to adopt a somewhat more formal approach in the future.
As for the smaller banks, the supervision is much less frequent and is mainly based on the regular reports submitted by the banks to the SFSA - for example, in respect of their financial condition and capital adequacy ratios.
How do the regulatory authorities enforce banking laws and regulations?
The SFSA has a number of powers that can be used to enforce applicable laws and regulations. These include the power to issue injunctions to limit or reduce the risks of the operations of the banks, take other measures ensuring compliance or prohibit the company from executing certain decisions. The SFSA may also issue warnings, impose fines and ultimately withdraw a bank’s licence.
What are the most common enforcement issues and how have they been addressed by the regulators and the banks?
In recent years, fines have been levied by the SFA on the basis of a wide range of issues. However, a fairly common theme is non-compliance with relevant valuation methods and capital regulations. Other examples are inadequacies in the way in which the banks handle conflicts of interest, shortcomings in their credit risk management and credit processes and failure to comply with legal requirements relating to governance, risk management and control. A couple of cases that have recently attracted some attention and publicity relate to money laundering issues.
In what circumstances may banks be taken over by the government or regulatory authorities? How frequent is this in practice? How are the interests of the various stakeholders treated?
Sweden has implemented the European Banking Recovery and Resolution Directive (2014/59/EU) (BRRD) by way of the Swedish Resolution Act. The Resolution Act is broadly aligned with the BRRD and enables the authorities to take control over a failing bank (or a bank that is deemed likely to fail) and take various actions aimed at restructuring and winding up the business in a way that ensures that financial stability is maintained.
A bank will be deemed ‘failing’ if any of the following criteria are satisfied:
- the bank infringes the requirements for continued authorisation in a way that justifies the withdrawal of the authorisation by the SFSA;
- the assets of the bank are less than its liabilities;
- the bank is unable to pay its debts as they fall due; or
- the bank needs extraordinary public financial support, except when the support is given in order to prevent or remedy a serious disturbance in the Swedish economy and takes the form of:
- a state guarantee for liquidity facilities provided by the Swedish central bank;
- a state guarantee for newly issued debt; and
- an injection of own funds or a purchase of capital instruments on market terms and subject to certain other criteria being met.
A bank will be deemed ‘likely to fail’ if there are objective elements to support that any of the above situations will occur in the near future.
In addition to the requirement that a bank is ‘failing or ‘likely to fail’ (which will be determined by the SFSA) the Swedish National Debt Office (SNDO) - being the resolution authority - will need to establish the following in order to initiate a resolution procedure:
- that there are no alternative measures available which would prevent or remedy the failure within a reasonable time frame; and
- that resolution actions are necessary with regard to the public interest.
A resolution action is deemed to be in the public interest if resolution is necessary for the achievement of any of the resolution objectives (and provided that it is proportionate to such interests) and winding up of the bank under normal insolvency procedures would not meet those resolution objectives to the same extent.
There are different resolution objectives set out in the Swedish Resolution Act (eg, relating to depositor and investor protection) but the Swedish authorities have been clear on their view that, in practice, it will only be the objective to safeguard financial stability that will trigger resolution actions. On that basis, resolution will only be applied in respect of systemically important banks, whereas a non-systemically important bank that is deemed ‘failing’ or ‘likely to fail’ will be subject to ordinary insolvency procedures (assuming that the threshold for such procedure is met).
When resolution is initiated, the SNDO will take control over the bank. The voting rights in respect of the shares in the bank will at such time be immediately and automatically transferred to the authority and the SNDO will also be able to exercise the rights of the board of directors.
In addition, the SNDO has a number of other resolution powers, which broadly follow the powers set out in the BRRD. These include, for example, write-down and conversion of debts (bail-in), transfer of shares or assets to a private purchaser and temporarily public ownership.
Given that a resolution procedure will have far-reaching effects on the failing bank and its shareholders and creditors, there are a number of safeguards built in to the Resolution Act. One key protection is the ‘no-creditor-worse-off’ principle pursuant to which a stakeholder is guaranteed an economic compensation that, at least, is equal to what such a person would have received in case the bank were to have been wound down by way of ordinary insolvency procedures. There are also safeguards aimed at protecting certain specific types of transactions, such as secured transactions and netting and set-off arrangements.
The Swedish Resolution Act contains certain preventive measures, which are continuously applied by the banks and the authorities, but the actual resolution powers have not yet been tested in practice. Based on the view expressed by Swedish authorities regarding the public interest threshold (see question 12) resolution actions will only be relevant in respect of systemically important banks, and it is therefore likely that we will see fairly few cases of the resolution powers actually being exercised by the authorities.
What is the role of the bank’s management and directors in the case of a bank failure? Must banks have a resolution plan or similar document?
Banks are generally required to prepare recovery plans, the aim of which are to plan for actions to take in case of a deteriorating financial position. Banks which are members of a group subject to consolidated supervision may be exempted from the requirement to prepare an individual recovery plan and will instead be included in the recovery plan prepared by the parent entity.
In addition to the recovery plan (dealing with actions to be taken by the bank itself) the SNDO is required to prepare resolution plans. The purpose of these plans is to prepare for possible resolution actions to take in case the recovery actions to be taken by the bank are not sufficient to remedy the deteriorating situation. As part of the SNDO’s resolution planning the authority will also assess the bank’s ‘resolvability’, that essentially means whether the bank has a corporate structure and business model which enables the SNDO to effectively take resolution actions. Again, the SNDO is of the view that resolution actions will only be relevant for systemically important banks and, accordingly, the authority has only prepared resolution plans for the largest Swedish banks.
Are managers or directors personally liable in the case of a bank failure?
Bank failures will not automatically result in director liability, but civil liability under the Swedish Companies Act may be relevant in cases where a director intentionally or negligently harms the company. Disciplinary actions may also be imposed by the SFSA in case of breaches of relevant financial markets legislation, including by way of personal fines and banning orders for the directors (subject to such directors having acted intentionally or having been grossly negligent). There are also criminal offences that may be relevant in respect of director misconduct prior to, or during the course of, a bank failure.
Describe any resolution planning or similar exercises that banks are required to conduct.
See question 13.
Describe the legal and regulatory capital adequacy requirements for banks. Must banks make contingent capital arrangements?
In recent years, numerous initiatives have been made to tighten-up the regulatory standards applicable to banks and their capital management. In Sweden, this has mainly been done by way of transposing the revised Capital Requirements Directive 2013/36/EU (CRD IV), and to amend national legislation to cater for the introduction of Capital Requirements Regulation (EU) No. 575/2013 (CRR), which is directly applicable across the European Union.
CRD IV and CRR introduced several new capital and liquidity requirements, such as new minimum requirements and capital buffer requirements. The minimum requirements comprise a 4.5 per cent minimum common equity tier 1 ratio, a minimum 6 per cent tier 1 ratio and an overall 8 per cent capital ratio. There are certain legal and structural requirements for eligibility as common equity tier 1 instruments, additional tier 1 instruments and tier 2 instruments. On a broad level, tier 1 instruments are shares and deeply subordinated debt with mechanics for automatic write-down or conversion into shares in case certain capital ratios are reached. Tier 2 instruments will rank ahead of tier 1 instruments but will be subordinated to unsecured senior debt of the bank.
The 8 per cent capital ratio referred to above is fully binding and, if breached, could lead to a withdrawal of the bank’s licence. However, as mentioned above, CRD IV and CRR also introduced certain capital buffers:
- the capital conservation buffer;
- the institution-specific countercyclical capital buffer;
- the systemic risk buffer; and
- the buffers for systemically important institutions.
The size of the buffers, other than the capital conservation buffer, is intended to be different depending on the existence of cyclical and structural systemic risks. The buffers may thus vary over time as well as between institutions and the overarching purpose is to provide for a more formal framework for contingent capital arrangements than that previously in place.
When in breach of the buffer requirements, the banks will face restrictions on, among other things, payment of dividends. However, the buffer requirements are not binding in the same way as the 8 per cent minimum requirements and a breach cannot lead to a withdrawal of the licence. That said, most banks arguably consider also the buffer requirements as more or less binding given the commercial aspects of having to face, for example, dividend restrictions.
The SFSA is also able to - and have done so in respect of the largest Swedish banks - require additional capital (pillar 2 capital) to cover those risk elements that it deems are not fully covered by the requirements referred to above. Any additional pillar 2 requirements will be determined in connection with SFSA’s supervisory review process and in accordance with the process set out in the CRR. The pillar 2 requirements imposed on the Swedish banks are currently not binding requirements.
CRD IV also includes a leverage ratio, which is defined as tier 1 capital divided by a measure of non-risk-weighted assets. The leverage ratio is currently only a pillar 2 provision in Sweden, but the proposed revisions of the CRR-CRD (see question 20) includes a binding leverage ratio of 3 per cent.
How are the capital adequacy guidelines enforced?
The SFSA is responsible for overseeing and enforcing compliance with the capital adequacy framework. This is mainly done on the basis of periodic capital adequacy reports which are submitted to the SFSA by the banks, but the SFSA also has the power to make ad hoc investigations.
What happens in the event that a bank becomes undercapitalised?
There are a number of different actions that can be taken by the bank and the authorities depending on the financial position, market conditions and other relevant circumstances. However, broadly speaking, the first step would be for the bank to try to remedy the situation, for example, by way of implementing certain parts of its recovery plan. In case there is a breach of the buffer requirements, restrictions on distributions will also apply. In these cases, it is further likely that the SFSA will take certain supervisory actions, which could include, for example, orders to reduce exposures by way of divestments or otherwise.
A continued deterioration of the financial position of the bank would trigger contractual write-down and/or conversion of capital instrument, and the SFSA could also decide to write-down or convert certain debt instruments even if they do not include a contractual provision to this effect.
Ultimately, the banks would be subject to resolution actions (if deemed systemically important) or its licence would be revoked which would lead to mandatory liquidation or bankruptcy procedures (if not deemed systemically important).
What are the legal and regulatory processes in the event that a bank becomes insolvent?
Systemically important banks would generally be subject to resolution procedures, whereas non-systemically important banks would be wound down by way of ordinary bankruptcy procedures.
Recent and future changes
Have capital adequacy guidelines changed, or are they expected to change in the near future?
Following the financial crisis, a substantial revision of the capital adequacy framework was made to implement the revised CRD and the introduction of the CRR (see question 16). A further revision of this framework was adopted by the European Commission in November 2016. The final shape of the new rules is still uncertain and will need to be agreed between the Council and the European Commission, but the proposal from the European Commission entails, among other things, more risk-sensitive capital requirements, a binding leverage ratio and new requirements to address excessive reliance of short-term wholesale funding and to reduce long-term funding risks.
Ownership restrictions and implications
Describe the legal and regulatory limitations regarding the types of entities and individuals that may own a controlling interest in a bank. What constitutes ‘control’ for this purpose?
Any entity holding, directly or indirectly, a controlling interest in a bank needs to be approved by the SFSA. For the purpose of the relevant rules, ‘control’ is defined to mean a holding of 10 per cent or more of the shares or votes in the bank, or which otherwise enables a significant influence over the management of the firm.
In their ownership assessment, the SFSA will consider if the relevant entity is suitable to exercise a significant influence over the management of the banks. To this end, the entity’s reputation and financial strength will be taken into consideration as well as whether:
- the holder will impede the business of the credit institution being conducted in such a manner as is compatible with the legal requirements; and
- if the holding has a connection to or can increase the risk of money laundering or certain financial crimes.
Are there any restrictions on foreign ownership of banks?
There are no such restrictions.
Implications and responsibilities
What are the legal and regulatory implications for entities that control banks?
See question 24.
What are the legal and regulatory duties and responsibilities of an entity or individual that controls a bank?
In contrast to the bank itself, there are no restrictions on the business activities of the owner as long as it does not have an impact on the general ownership criteria. This means that a bank can be owned also by companies conducting business that is wholly non-financial in nature. However, the management of the owner (to the extent that the owner is a legal entity) will need to be approved by the SFSA, which also means that any changes to the management need to be reported to the authorities.
To this end it should also be noted that to the extent that a holding company qualifies as ‘financial holding company’ or ‘mixed financial holding company’ it will be covered by consolidated supervision conducted by the SFSA, which will trigger certain additional regulatory requirements. Broadly speaking, an entity will be deemed to be a ‘financial holding company’ or a ‘mixed financial holding company’ if its subsidiaries are banks or investment firms or engage in certain other forms of financial activities.
What are the implications for a controlling entity or individual in the event that a bank becomes insolvent?
A shareholder may be liable to the company for any losses incurred by the company, provided that the shareholder has acted with intent or is deemed to have been grossly negligent.
In case of a deteriorating financial position, the SFSA further has the power to reduce the share capital of the bank, thus incurring losses on any direct shareholder. This power is subject to the ‘no-creditor-worse-off’ principle. The SFSA’s power would cover also situations where a bank is deemed likely to become insolvent in the near future and could thus have potentially far-reaching consequences for any direct shareholder. It should also be noted that the SFSA - in addition to the power to reduce the share capital of the bank - may write down and/or convert certain subordinated debt provided by a shareholder into equity.
The powers referred to above apply even if no resolution process has been initiated. To the extent that the bank is subsequently subject to resolution, a wide range of additional powers becomes available to the authorities which can have major implications for the shareholders.
Changes in control
Describe the regulatory approvals needed to acquire control of a bank. How is ‘control’ defined for this purpose?
See question 21. In addition to a situation where a controlling interest is acquired a transfer of shares is also subject to approval from the SFSA in cases where a shareholder reaches any of the thresholds of 20 per cent, 30 per cent and 50 per cent of the shares or voting rights in the bank.
A change in control may also be subject to approval from Swedish and EU competition authorities and may need to be notified pursuant to Swedish securities market law in case of banks whose shares are listed on the Swedish stock market.
Are the regulatory authorities receptive to foreign acquirers? How is the regulatory process different for a foreign acquirer?
There is no difference in the process for a Swedish and foreign acquirer.
Factors considered by authorities
What factors are considered by the relevant regulatory authorities in an acquisition of control of a bank?
See question 21 regarding the general criteria to be approved for bank ownership.
Describe the required filings for an acquisition of control of a bank.
The SFSA has prepared specific forms that can be used for the notification, but there is still a lot of information that needs to be filled in and appended, such as structure charts, curriculum vitae for members of the management, descriptions of capitalisation and business plans. The process can therefore be lengthy.
Once the application has been submitted, the acquirer is given a designated case handler at the SFSA and it is generally advisable to informally approach this person in connection with the application submission to ensure that the there are no problems with the application.
Timeframe for approval
What is the typical time frame for regulatory approval for both a domestic and a foreign acquirer?
The SFSA has 60 business days to complete its review of the application. The time period starts from the date of completed application submission, meaning that the time period may be longer than 60 business days in certain cases. In practice, an approval may be obtained before 60 business days, but it depends on, for example, the overall work load at the SFSA, the scope of the application and the structure of the acquiring entity or group. To the extent that an acquirer is regulated elsewhere in the European Union, the SFSA will also need to coordinate with the relevant foreign authorities.
Update and trends
Update and trends
We see a growing interest among Nordic financial institutions to exploit the possibilities of moving their business out to other Nordic countries, with the aim of finding the most beneficial regulatory environment (eg, the recent move of Nordea from Sweden to Finland), which generally seems to be considered by more institutions now than a few years ago. Whether this development will continue is, among other things, dependent on whether any additional Nordic countries (Finland is already a member) will participate in the EU European banking union, in which case there would be more limited possibilities to take advantage of any form of regulatory arbitrage.