Prudential regulationi Relationship with the prudential regulator
The FSA's supervision of banks is primarily carried out through inspection visits to a bank, its branches and other undertakings that may hold relevant information on behalf of the bank (such as parties to outsourcing arrangements with the bank). In addition, banks are under a general obligation to provide the FSA with adequate information for effective supervision, and the ability to ask for such information and conduct supervision on that basis is a tool frequently used by the FSA. The FSA prepares and publishes a report on its website after an inspection visit. The bank that is the subject of the report is also required to make it publicly available.
The FSA may also obtain information from foreign banks conducting business in Denmark on a cross-border basis to assist financial supervisory authorities in other countries.
The FSA is authorised to impose various sanctions on banks if supervision shows non-compliance with the applicable legislation. Available sanctions include payment of administrative fines; withdrawal of a banking licence; or an order to a bank to dismiss a managing director or to order a member of the board of directors to resign. Breaches of financial regulation are also subject to criminal sanctions. Generally, breaches of the FBA are punishable with fines and, in more serious cases, by imprisonment for up to four months. A new regulation was introduced in late 2016 with the intended purpose of generally increasing the level of fines imposed on Danish financial institutions, as the previous regime was considered too lenient when compared with those under international trends. As this new legislation has not had any significant impact on the level of fines actually imposed for breaches of the FBA, the Danish political environment continues to focus the sanctions (or the lack of the same) being imposed on financial institutions. The highest fines imposed for breaches of financial regulation are still related to anti-money laundering (AML) compliance, not compliance with the FBA.
As a direct consequence of the financial crisis, the powers of the FSA have been extended in an attempt to try to reduce the number of distressed banks in Denmark. The FSA has therefore been granted the authority to assess the business models of financial entities to ensure that such entities will not become distressed. The FSA has also been vested with powers to intervene at an early stage if there is a risk that a financial undertaking will become distressed: for example, in the event of a large increase in a bank's lending activities or where a bank has heavy exposure to the real estate sector. Intervention could be by way of ordering a cut in loans to a specific branch or by way of requiring an increase in own funds.
Finally, the FSA is subject to an obligation to advise the Danish Consumer Ombudsman about cases of breaches of the conduct of business rules, and particularly when customers may have suffered a financial loss. The Consumer Ombudsman has the power to sue banks that have breached the conduct of business rules and may be appointed as group representative in group litigations (class actions). There has so far been only a limited number of examples in practice where this right to pursue class actions has been used by the Consumer Ombudsman.
The financial undertakings subject to supervision pay an annual fee to the FSA, as the costs of the FSA are intended to be covered by the financial undertakings subject to supervision. Danish banks pay the most significant part of these costs.ii Management of banks
Rules on the management of banks are set out in Chapter 8 of the FBA and an executive order issued pursuant thereto by the FSA.
Danish banks must be established as public limited liability companies, and are managed by one or more managing directors and a board of directors. A person cannot be a managing director and board member at the same time. Larger banks are required to employ an internal auditor to assist the external auditors. Managing directors and board members are required to comply with the FSA's fit-and-proper requirements.
As part of the post-financial crisis regulatory reforms, extended fit and proper requirements have been introduced, including a requirement to use the time needed to fulfil the job undertaken. In addition, banks whose shares are traded on a regulated market or that have had an average of 1,000 employees during the past two years are required to establish a nomination committee with the responsibility, inter alia, to evaluate the board on an ongoing basis, suggest new board members, and ensure that the board has adequate diversity in terms of gender, competences and qualifications.
The board of directors must define the major areas of activity of the bank and determine a risk profile for the bank stating, inter alia, possible substantial risks and how to deal with them. Banks that must have a committee as mentioned above should also have a risk committee, whose primary tasks would be to assist the board when determining the risk profile, and to ensure that remuneration policies and the daily business comply with the determined risk profile. Further, the board of directors is required to prepare policies on the most substantial activities of the bank, including policies on credit risk and liquidity. Written guidelines to management are prepared by the board on the basis of these policies. These guidelines determine the situations in which decision-making powers lie with management, when management is required to report to the board and when the prior approval of the board is required before a final decision is made.
Each bank is required to have in place an effective risk-management strategy, including written procedures for all significant areas of activity, and effective procedures to identify, manage, monitor and report the risks to which the bank is or may be exposed. The FBA and the above-mentioned executive order describe in detail the minimum requirements applicable to banks in relation to, inter alia, their organisation, internal controls, accounting practices, board meetings, credit organisation, credit risks, market risks and conduct of business.
The frequency of board meetings is not explicitly determined, but the FBA requires that the board of directors meet when it is considered necessary, and all members are required to be summoned. The external auditor and the chief internal auditor have a right to be present at board meetings when issues relevant to auditing or financial reporting are being addressed.
A bank is subject to an obligation to immediately inform the FSA of matters that are of material significance to the continued operations of the bank. Board members, managing directors and the responsible actuary may all be held individually responsible in the event of non-compliance, and they are required to immediately inform the FSA if they have cause to believe that the bank does not comply with the applicable capital and solvency requirements.Prior approval of the parent company
Certain decisions may be made subject to the prior approval of the parent company of a bank, but a general delegation of decision-making by the board of directors is not possible. Nor can the board of directors delegate its liability. It is not permissible for employees of a bank's parent company to participate in board meetings on a permanent basis. In addition, Danish bank secrecy rules prevent the disclosure of information about private customers to a parent company.Restrictions on bonus payments
Another direct consequence of the financial crisis was the implementation of new restrictions on remuneration in financial undertakings. Many of these derive from EU legislation, including the European Capital Requirements Directive, which introduced new rules on remuneration in the financial sector. These have been implemented in the FBA, pursuant to which banks are required to have remuneration policies and practices satisfying the effective level of risk management. Remuneration policies are subject to a say on pay principle, meaning that they must be approved by the general meeting.
Variable remuneration in banks, including bonus payments, has been significantly restricted, and the variable part of the remuneration of managing directors and members of the board of directors may not exceed 50 per cent of the fixed basic remuneration, including pension. In addition, management is required to determine a suitable limit on variable remuneration of employees with a significant influence on the risk profile of a bank: the variable remuneration of those employees is set at a maximum of 100 per cent of the fixed remuneration, including pension, with a possible increase to 200 per cent if so decided by the general meeting and if certain additional requirements are complied with. At least half of the variable remuneration is required to be granted in shares, share-linked instruments or other instruments reflecting the creditworthiness of the bank. Stock option programmes may not constitute more than 12.5 per cent of the variable and fixed remuneration paid to the managing directors and the board of directors. At least 40 per cent of a variable remuneration must be paid to employees over a period of at least three years (four years if the recipient is a managing director or a board member). This requirement increases to 60 per cent if the variable remuneration is particularly high. In addition, payment of variable remuneration may only be effected if a bank's financial situation has not significantly worsened since the variable remuneration was granted.iii Regulatory capital and liquidity
The experiences of the financial crisis have also led to an update of the rules on capital and liquidity requirements.
The final versions of the CRD IV Regulation and the CRD IV Directive, adopted in June 2013, entered into force on 1 January 2014. CRD IV was implemented into Danish law with effect from 1 April 2014. The phasing-in of the capital requirements follow the path as set out in the CRD IV Regulation and CRD IV Directive, the latter by implementation through the FBA.
The Danish implementation of CRD IV has resulted, inter alia, in the previous requirements on base capital applicable to banks being replaced by a separate own funds requirement, which is defined in accordance with the CRD IV Regulation. The requirement now is to calculate an individual solvency need, calculated as the adequate amount of separate own funds as a percentage of the total risk exposure, but never less than the own funds requirements and the initial capital requirement, as set out in the CRD IV Regulation. The FSA may determine that an individual bank should comply with a higher own funds requirement. Further, the new additional capital buffer requirements set out in CRD IV have been implemented into Danish law. Both the capital conservation buffer and countercyclical buffer rate, used to determine the institution-specific countercyclical capital buffer, were gradually phased in, reaching full effect on 1 January 2019.
All in all, the Danish implementation of the CRD IV Directive in general mirrors the Directive, which means that requirements on the appointment of systemically important financial institutions (SIFIs) have also been implemented in line with the Directive. The appointed SIFIs are currently Danske Bank A/S, Nykredit Realkredit A/S, Nordea Kredit Realkreditaktieselskab, Jyske Bank A/S, Sydbank A/S, SparNord Bank A/S and DLR Kredit A/S. The appointed SIFIs will also have to fulfil a systemic risk buffer, which will be between 1 and 3 per cent of the amount of the SIFIs' total risk exposure. The systemic risk buffer will be determined individually for each SIFI.Consolidated supervision
The FSA exercises consolidated home state supervision in respect of Danske Bank, and established collective supervision of Danske Bank in 2009. Further, the FSA participates in the collective supervision of Nordea, SEB, Svenska Handelsbanken, TrygVesta and NASDAQ OMX.Liquidity
Danish banks are required to have appropriate liquidity at all times according to Section 152 of the FBA.
With effect from 1 October 2015, new liquidity coverage requirements entered into force via the liquidity coverage requirement (LCR) ratio. The LCR ratio is a requirement that credit institutions should have enough high-quality liquid assets in their liquidity buffer to cover the difference between the expected cash outflows and the expected cash inflows over a 30-day stressed period. Subject to CRD IV Regulation, the LCR ratio has been implemented progressively and was fully phased in on 1 January 2018. Further, the FSA has imposed specific liquidity requirements on each Danish SIFI based on their individual business model.
The FSA has also laid down requirements on, inter alia, the rules of procedure relating to the preparation of stress tests. These requirements apply to, inter alia, Danish banks and branches thereof, and branches of banks incorporated outside the EEA area and the European Union.iv Recovery and resolution
As previously mentioned, the international financial crises materially affected the Danish banking industry: no less than five bank packages have been introduced by the government with the overall aim of securing the financial stability of the Danish banking sector. Whereas the first bank packages were mainly focused on supporting the liquidity and regulatory capital positions of the banks, the subsequent focus has been on the resolution of failed banks in an orderly manner to ensure financial stability and confidence in the Danish banking industry.
As part of these bank packages, procedures have been introduced to facilitate the controlled winding up of stressed Danish banks to ensure that it is possible to transfer and continue their day-to-day banking operations in the event that emergency procedures are required to be implemented. As part of this procedure, banks are required to maintain policies and procedures to ensure that, in the event of distress, they are able, within no more than 24 hours, to provide the required, among other things overviews of customers and accounts to facilitate an expedient transfer. Danish banks are thus required to maintain detailed recovery and resolution plans to facilitate a transfer.
The recovery and resolution regime set out in the Bank Recovery and Resolution Directive (BRRD) was implemented into Danish law with effect from 1 June 2015 through the enactment of a new act on the recovery and resolution of Danish banks, mortgage credit institutions and certain investment firms. The appointed Danish resolution authority is Financial Stability, which, as part of the introduction of the new regime, was converted from a private limited liability company to a public authority. At the same time, responsibility for Danish deposits and investor guarantee schemes was transferred to Financial Stability. The Danish implementation of the BRRD, as was the case with CRD IV, in general mirrors the requirements of the Directive.