3 Financial market regulatory developments

3.1 Introduction

In recent years, the Ministry has reported regularly on the key processes initiated to improve international and Norwegian financial market regulation following the financial crisis, which reporting has included the annual financial markets reports and national budget reports. Such processes and the development of new regulations may continue for a number of years. Consequently, the discussion in this chapter is in many respects based on, and represents an update of, information previously presented to the Storting by the Ministry.

Regulatory developments in Norway largely reflect the development of new regulations in the EU. The Norwegian authorities are committed to promoting solvency, liquidity and good conduct through government regulation and supervision of the financial sector. Primary responsibility for rules that promote financial stability lies with the national authorities, and the costs associated with financial imbalances are to a large extent imposed on the economy of the country in question. It is therefore important for each country to have at its disposal the policy tools needed to ensure stability in its financial markets. The Ministry will continue to emphasise the need to make use of the national freedom of action within international regulatory frameworks, thus enabling the Norwegian regulations to promote robust financial institutions. Robust financial institutions will also support the competitiveness of the Norwegian economy and that of its financial institutions.

3.2 Credit institutions

3.2.1 Capital requirements

3.2.1.1 Capital requirements and international developments in general

The capital adequacy rules are based on three so-called pillars. Pillar I concerns minimum capital requirements, whilst Pillars II and III concern capital needs assessments by institutions and information disclosure, respectively.

The capital requirements are expressed as minimum requirements in the form of a ratio. The denominator, called risk-weighted assets, is the value of all assets, with the addition of certain off-balance sheet items, weighted on the basis of the expected risk of loss associated with each asset or liability. The higher is the calculated risk of an asset, the larger is the denominator and, consequently, the higher is the capital requirement. Hence, the risk weights influence how much CET1 capital, tier 1 capital and total capital banks need to have behind each asset under the rules. For most institutions, the risk-weighted asset figure is much lower than total assets, i.e. the balance sheet value.

Banks either employ risk weights stipulated by the authorities (the standardised approach), or risk weights calculated by using internal risk models (often called the IRB approach), when setting the denominator used in calculating the capital adequacy ratio. The risk weights are different for different assets, but different banks may also use different risk weights for the same asset. The lower the risk weight, the higher the capital adequacy ratio for a given amount of total capital. The IRB approach is intended to align capital requirements more closely with the real risk of each bank. The IRB approach has often turned out to result in lower weights than would be implied by the standardised approach, for the same asset. Banks that employ internal models shall, under a transitional arrangement, maintain total capital corresponding to no less than 80 pct. of the minimum capital requirement under the Basel I rules. An important consideration is to prevent internal models from excessively reducing risk-weighted assets (the so-called Basel I floor). This is ensured by requiring the denominator used in calculating the capital adequacy ratios to be no lower than 80 pct. of what it would have been under the Basel I rules. Many EU and EEA countries have transitional Basel I floor provisions, but practical implementation differs.

The numerator used in calculating the capital adequacy ratio is total capital, which is the sum total of tier 1 capital (CET1 capital and other tier 1 capital) and Tier 2 capital. Total capital, and particularly tier 1 capital, absorbs losses incurred in the operations of institutions, thus serving as a buffer to prevent the losses of banks and other credit institutions from affecting their creditors and depositors.

The regulatory framework governing capital requirements has changed over time, and the recent financial crisis demonstrated that requirements had to be made stricter. The CRR/CRD IV regulatory framework, which was based on recommendations from the so-called Basel Committee for Banking Supervision, was adopted by the EU on 26 June 2013 and entered into force on 17 July 2013. The regulatory framework is referred to as CRR/CRD IV because the provisions are now separated into a directive; the Capital Requirements Directive (CRD IV), which is the fourth version of the EU Capital Requirements Directive, and a regulation; the Capital Requirements Regulation (CRR). Whilst a directive may often offer some scope for national adaptations, a regulation shall as a main rule apply directly in the member states. Nonetheless, CRR allows for some national choices in certain respects. The new provisions are to be introduced gradually, with full effect from 1 January 2019 at the latest.

Under CRR/CRD IV, the minimum capital requirement will remain that total capital shall represent 8 pct. of risk-weighted assets. CET1 capital shall represent no less than 4.5 pct. of risk-weighted assets, whilst tier 1 capital, which includes certain types of hybrid capital, shall represent no less than 6 pct.

Moreover, CRR/CRD IV includes a requirement for a so-called capital conservation buffer, which shall comprise CET1 capital and represent no less than 2.5 pct. of risk-weighted assets. The purpose of the capital conservation buffer is to ensure that institutions have a certain buffer for absorbing losses during periods of market turbulence and low economic activity.

Each member state may also introduce a requirement for a systemic risk buffer. The systemic risk buffer requirement may be stipulated as a percentage of risk-weighted assets for those financial institutions that are subjected to such a requirement. The systemic risk buffer shall serve to reduce non-cyclical systemic risk, which risk may have a significant negative impact on the financial system and the macro economy of individual member states. Such buffer requirements may be imposed on individual institutions, groups of institutions or all institutions.

A financial institution may be so large, or perform tasks that are so important, that the said institution in itself has a particularly large impact on the financial system. Such institutions are also important for the economy as a whole. It has therefore been argued, in the international regulatory debate in the wake of the financial crisis, that systemically important institutions should be especially robust. CRR/CRD IV requires globally systemically important institutions to be subjected to an additional buffer requirement of between 1 and 3.5 pct. of risk-weighted assets as from 1 January 2016. The buffer requirement must be met with CET1 capital. The buffer is intended to reduce the incentives of such institutions to assume excessive risk, thus reducing the risk that taxpayers must absorb the cost of a potential crisis. In addition, member states may stipulate that nationally systemically important institutions shall also meet an additional buffer requirement of up to 2 pct. of risk-weighted assets.

Moreover, CRR/CRD IV requires a counter-cyclical capital buffer, which is to vary between 0 and 2.5 pct. of risk-weighted assets. The purpose of the counter-cyclical capital buffer is to make institutions stronger and more robust to loan losses in a future recession and to reduce the risk that banks will contribute to the worsening of a potential cyclical downturn by curbing their granting of credit. This counter-cyclical buffer requirement is to be applied during periods of especially high credit growth or other developments that increase cyclical systemic risk. This counter-cyclical buffer requirement may be lowered or removed if the economy cools down. Whilst an increased counter-cyclical buffer requirement shall normally be announced no less than 12 months before it takes effect, such requirement may be reduced with immediate effect. Nonetheless, a counter-cyclical capital buffer is not a tool that should be used to fine-tune the economy. In a letter of 4 December 2013 setting out advice on counter-cyclical capital buffers, Norges Bank states, inter alia, the following:

«Robustness considerations suggest that the capital buffer should not be reduced as a matter of course, despite indications of a tapering off in financial imbalances. Any future advice on reduction of the buffer will be based on an assessment of market turbulence, the bank loss outlook and the risk of a creditor-driven setback for the Norwegian economy.»

CRR/CRD IV also allows for the introduction of a new minimum tier 1 capital requirement based on non-risk-weighted assets (a leverage ratio requirement), in addition to the new risk-weighted capital requirements. Such a leverage ratio requirement is intended to limit how much debt an institution can have relative to its balance sheet value. A binding leverage ratio requirement may be introduced from 1 January 2018 if thus agreed by the Council and the European Parliament, based on a report to be submitted by the Commission by yearend 2016. Institutions shall nonetheless report their leverage ratios from 1 January 2015.

In addition to provisions on the activities of banks and investment firms, as well as capital requirement for institutions, CRR/CRD IV includes, inter alia, a revision of the provisions on salaries and bonuses for bank and investment firm employees, as well as bank asset liquidity and funding requirements.

3.2.1.2 Capital requirements in Norway

Introduction

The initial part of the incorporation of the CRR/CRD IV provisions into Norwegian law entered into effect on 1 July 2013, cf. Act of 14 June 2013 No. 34 relating to amendments to the Financial Institutions Act and the Securities Trading Act based on proposals made by the Ministry of Finance in Legislative Proposition No. 96 (2012–2013) to the Storting. Draft regulations on the incorporation into Norwegian law of remaining parts of CRR/CRD IV are currently circulated for consultation.

In Norway, the minimum CET1 capital requirement will be 4.5 pct. of risk-weighted assets from 1 July 2013. Tier 1 capital shall account for 6 pct. of risk-weighted assets, whilst total capital shall represent no less than 8 pct. of risk-weighted assets. Furthermore, a capital conservation buffer comprised of CET1 capital, which shall represent no less than 2.5 pct. of risk-weighted assets, and a systemic risk buffer comprised of CET1 capital, which shall represent no less than 2 pct. of risk-weighted assets, will be required. The systemic risk buffer requirement will be increased from 2 to 3 pct. on 1 July 2014.

The Ministry is of the opinion that stricter capital requirements for banks, and particularly stricter CET1 capital requirements, benefit society as a whole. Individual banks may perceive this differently. Rate of return requirements in the capital market reflect risk. Consequently, banks must offer shareholders a higher expected return than they offer creditors. However, risk is reduced for both owners and creditors when the equity-to-assets ratio is increased. Hence, economic theory postulates that more equity will be accompanied by lower rate of return requirements for both equity and debt. This may nonetheless be a slow process, without any immediate adjustment. Whilst adjustments are taking place, this may in practice give rise to cost of capital differences for banks with the same underlying solvency. The market may also differ in its assessments of the trade-off between risks and returns, both over time and between investors.

It is advantageous for stricter capital adequacy requirements for banks to be introduced when the economy is performing well, thus enabling the capital to serve as a buffer for leaner times. This is why new Norwegian capital requirements are introduced somewhat earlier than required under the EU incorporation deadline. Some other countries whose economies are performing above the European average, including Sweden and Switzerland, are introducing such requirements now. The said countries have a larger banking sector, as measured by the ratio between total banking sector assets and GDP, than Norway. On the other hand, large banks in these countries are likely to have better access to equity markets than have Norwegian banks. What Norway, Sweden and Switzerland have in common is that they have their own and relatively minor international currencies, as well as domestic capital markets of moderate size.

CET1 capital buffer requirements

As mentioned, the EU framework regulates the buffer requirements in a directive. In Norway, it is intended for all buffer requirements to be calculated on the same basis as other capital requirements. The Ministry has recently completed a consultative process on draft regulations concerning the basis for calculating new buffer requirements and implications if buffer requirements are not met. Buffer requirements are discussed in more detail in section 3.2.1.1 above.

The Ministry is of the view that it is appropriate to stipulate special requirements for nationally systemically important financial institutions in Norway, and one reason for this is that the Norwegian financial market is characterised by a small number of banks having large market shares, and by the largest banks being a source of funding for the smaller banks. At the same time, Norway has a fairly large number of independent banks relative to its population. The Storting has resolved to introduce a special buffer requirement for systemically important institutions, which will be 1 pct. from 1 July 2015 and 2 pct. from 1 July 2016. The Ministry may, in the form of regulations, stipulate, inter alia, criteria for determining which institutions shall be characterised as systemically important, as well as special operating provisions and solvency requirements for such institutions, including a stipulation that the special buffer requirement shall be higher or lower than 2 pct.

On 11 November 2013, the Ministry circulated draft provisions on systemically important institutions for consultation. The draft was prepared by Finanstilsynet in consultation with Norges Bank. Finanstilsynet proposed that systemically important financial institutions be identified on an annual basis, and that institutions conforming to one or more of the criteria outlined in the consultation memorandum shall as a main rule be defined as systemically important. The draft proposes that institutions shall be considered systemically important if conforming to one or more of the following criteria:

1. total assets representing no less than 10 pct. of mainland Norway GDP or aggregate total assets in the Norwegian banking industry;

2. a market share of no less than 5 pct. of the Norwegian retail lending market;

3. a market share of no less than 10 pct. of the corporate lending market in one or more regions; or

4. a critical role in the financial infrastructure

In addition, the draft authorises the Ministry of Finance to include or exclude institutions from the group of systemically important institutions on the basis of qualitative assessments. Finanstilsynet proposes that DNB Bank, Nordea Bank, Sparebank 1 Nord-Norge, Sparebank 1 SR-Bank, Sparebank 1 SMN, Sparebanken Vest, Sparebanken Sør and Sparebanken Pluss1 be classified as nationally systemically important and subjected to, inter alia, an additional capital buffer requirement of 2 pct. Sparebanken Vest is the only one of these not to exceed the above threshold values, whilst Kommunalbanken is not included in the group despite exceeding the threshold values under criterions a and b.

The Norwegian capital requirements regulations authorise the Ministry of Finance to stipulate further provisions on counter-cyclical capital buffer requirements. Regulations on how to determine this buffer requirement were laid down on 4 October 2013. Norges Bank shall four times a year, and by the end of each quarter at the latest, prepare the underlying documentation (including a buffer guide). Norges Bank and Finanstilsynet shall exchange relevant information and assessments. Norges Bank will give advice to the Ministry concerning the level of the counter-cyclical capital buffer. Finanstilsynet may also express its views. The level shall for the time being be determined by the Ministry of Finance. Norges Bank recommended, in its Monetary Policy Report with financial stability assessments from December 2013, that the counter-cyclical capital buffer should be 1 pct. of risk-weighted assets with effect from 1 January 2015. Finanstilsynet endorsed this advice. On 12 December 2013, the Ministry of Finance stipulated that banks shall meet a counter-cyclical capital buffer requirement equivalent to 1 pct. of risk-weighted assets. The Ministry of Finance chose to grant banks somewhat more time to comply with the requirement. The counter-cyclical capital buffer requirement will therefore enter into effect from 30 June 2015.

The counter-cyclical capital buffer is a new policy tool. Norges Bank and the Ministry of Finance will assess the impact of the buffer requirement on the Norwegian economy on a regular basis, and are monitoring developments in the determination and implantation of this buffer requirement in other countries.

As from 1 July 2013, the CET1 capital requirement is 9 pct. (including buffer requirements) and the aggregate total capital requirement is 12.5 pct. for all banks. As from 1 July 2014, the CET1 capital requirement will be 10 pct. and the aggregate total capital requirement will be 13.5 pct. As from 1 July 2015, the aggregate total capital requirement, including a systemic risk buffer of 3 pct., a buffer for systemically important institutions of 1 pct. and a counter-cyclical capital buffer of 1 pct., will be 15.5 pct. of risk-weighted assets for systemically important banks and 14.5 pct. for other banks. Out of the minimum total capital requirement of 8 pct., 4.5 percentage points shall be in the form of CET1 capital. The remainder may be in the form of additional tier 1 capital and subordinated loans. All buffer requirements shall be met with CET1 capital. Any capital requirements imposed by Finanstilsynet on each of the institutions via the so-called Pillar II process will be additional to these requirements.

Internal models for the calculation of capital requirements

As mentioned, banks may use either the standardised approach or the IRB approach to calculate risk weights for their assets. It has turned out that use of the IRB approach may result in significantly lower risk weights than use of the standardised approach for the same loans. The risks of comparable portfolios are often assessed differently by different banks. The internal models used by banks in their risk weight calculations as based on, inter alia, the magnitude of previous losses incurred by them on similar assets. These models may provide a lot of useful information, but one disadvantage is that they often reflect structural changes that only influence risk after they occur. Since the purpose of capital requirements is to enable banks to cover future losses, this is a distinct weakness, which means that the model estimates need to be examined critically.

Residential mortgages have only entailed very minor losses for banks over the last twenty years. This period has largely been characterised by economic growth, rising housing prices and steep increases in household debts. Norwegian housing prices and debts are now very high relative to Norwegian household incomes, whilst the interest rate level is low. This implies that risk has increased, although the change in risk is not visible in the loss figures of banks. In addition, residential mortgages make up a significant portion of the balance sheets of banks. It is therefore necessary to examine the models used by banks to calculate capital requirements for residential mortgages, to ensure that capital requirements are adequately reflecting the risk. On 13 October 2013, the Ministry adopted amendments to the Capital Requirements Regulations, which increased the minimum residential mortgage «loss given default» (LGD) estimates of banks from 10 pct. to 20 pct. as from 1 January 2014. This amendment will have less of an impact on banks using the IRB approach, since the Basel I floor continues to apply.

The IRB models of banks need to be approved by Finanstilsynet before being used to calculate the capital requirement. Finanstilsynet is currently reviewing the models of banks with a view to, inter alia, making the requirements more stringent. It is likely that such review will result in somewhat higher and less disparate residential mortgage weights for Norwegian IRB banks. The Basel I floor will continue to be an effective threshold for most banks. It is important not to abolish the Basel I floor until a satisfactory level of risk-weighted assets has been established for banks, i.e. no less than the level currently implied by the floor. The provisions laid down by the EU require the Basel I floor to be applied until 31 December 2017, with scope for extension. An increase in the model-based risk weights will also reduce the effect of any future abolition of the floor. The floor may be of major importance to the banking subsidiaries of foreign banks, as foreign authorities evaluate the IRB model used by the group and thus, inter alia, the estimated probability of default.

The capital requirements should be forward looking. If capital requirements are not increased until the risk is reflected in higher losses, there is a danger that banks will find it very difficult to increase their capital adequacy ratios. Because the Norwegian economy is still performing reasonably well, Norwegian banks have registered favourable earnings and been in a position to prepare for stricter capital requirements. Banks have to some extent already taken the opportunity to do so, and if earnings remain at the same level ahead it will be fairly straightforward for banks to comply with these future requirements.

The use of IRB models as a basis for determining capital adequacy requirements is quite a recent regulatory development, and was introduced into the regulatory framework during the previous international collaboration process on capital adequacy requirements; Basel II. International developments demonstrated that banks used, during the run-up to the implementation of these regulations, the changeover and transition to internal modelling to expand their balance sheets with a smaller proportion of equity funding. This tendency was also in evidence in the Nordic region. Upon the introduction of new regulations relating to the Basel III process, it has also been noted that some banks have registered a significant reduction in risk-weighted assets when using IRB modelling. Since one of the purposes of the Basel III reform is to increase the overall solvency and equity of banks as a whole, this has in some cases had unfortunate implications. This has given rise to a debate as to how appropriate it is to link capital adequacy requirements to the individual risk models of banks, as well as to higher expectations for liquidity requirements and the use of individual non-weighted capital requirements. The regulations are therefore still in development by, inter alia, the Basel Committee and the EU.

However, the use of IRB models shall primarily serve as an internal management tool for each individual bank that makes use of models. The models shall contribute to more efficient use of capital and provide banks with tools for improved control of the return and risk of their commitments. This effect, which has organisational implications, is independent of whether or not such modelling serves as a basis for capital requirements stipulated by the authorities. The authorities, on their part, need to be aware that the introduction of IRB modelling may result in risk being shifted from banks that have introduced IRB modelling to banks that have not done so. However, the fact that a bank has not introduced IRB modelling does not mean that its risk management is inadequate. The size of the bank and the composition of the balance sheet of the bank are important factors in determining whether it can make use of sophisticated modelling tools, but also in determining whether to do so is at all necessary.

Links between banks and mortgage companies that can issue covered bonds

Banks have over time transferred well-secured residential mortgages to mortgage companies that can issue covered bonds. In order to prevent this from resulting in increased risk in the banking system, the Ministry intends to examine whether the links between mortgage companies that can issue covered bonds and banks are appropriate. This also has competition implications, as discussed in more detail in Chapter 3.5.

3.2.2 Liquidity coverage and funding structure requirements

Banks convert liquid, short-term deposits into long-term lending. This maturity transformation imposes a liquidity risk on banks. There may for various reasons be a discrepancy between the liquidity risk a bank deems to be beneficial and the liquidity risk it is beneficial for society for such bank to assume.

Moreover, since banks and mortgage companies borrow large sums from each other, liquidity failure in one institution may cause liquidity problems in other institutions. During the international financial crisis it was, for example, evident that banks in a situation of uncertainty became very reluctant to lend to each other, preferring to deposit surplus liquidity with the central bank. In a worst case scenario, domino effects may result in the stability of the entire financial system being threatened by a liquidity problem in only one or a small number of institutions.

CRR/CRD IV lays down new requirements with regard to the liquidity coverage and funding structure of banks. Section 2-17 of the Financial Institutions Act authorises the Ministry of Finance to stipulate detailed liquidity coverage and funding structure requirements for the institutions falling within the scope of the Act.

The liquidity coverage requirement (LCR) is a minimum requirement as to the volume of liquid assets a bank needs to hold to withstand periods of funding markets failure. The European Commission shall provide a final LCR definition by the end of June 2014. The Basel Committee completed its examination of the indicator in January 2014. The proposal from the Basel Committee implies that a bank shall always retain a holding of «high quality liquid assets» (HQLA) that exceeds its net cash outflow over 30 calendar days in a stress scenario. In order for an asset to be defined as HQLA, it must be readily and immediately convertible into cash with, at most, only a minor loss in value. Corporate and municipal bonds may, for example, be included if markets for these are sufficiently deep and liquid, provided that such bonds also have a high credit rating. Norway has a small market for securities that meet the original HQLA definition. The problem of illiquid securities is shared by a number of small countries. CRR/CRD proposes that institutions subject to the LCR must meet 60 pct. of the requirement from 2015. The requirement shall be stepped up gradually, until it is applied 100 pct. from 1 January 2018. Finanstilsynet has proposed that the LCR be introduced with full effect for the systemically important financial institutions from 1 July 2015. The Ministry will examine the time schedule. Norwegian authorities have accorded priority to early phase-in of the new capital requirements.

The LCR has been somewhat revised since the first proposal from the Basel Committee. The Basel Committee proposed amendments to the requirement in January 2014. The proposal calls for more assets to be classified as HQLA, as well as for certain changes to the stress scenario. If this LCR version is applied, it will become easier for banks to comply with the LCR.

In order to further reduce the liquidity risk of banks, the Basel Committee has proposed a net stable funding ratio (NSFR) requirement. This ratio expresses a requirement as to what portion of the funding of banks needs to be “stable”. The NSFR proposal of the Basel Committee has recently been circulated for consultation. The NSFR process lags somewhat behind the LCR process, and completion is expected in 2018 at the earliest.

Norwegian banks report quarterly to Finanstilsynet on the extent to which they meet the anticipated liquidity and funding requirements, cf. Figure 3.1. All banks report on the extent to which they comply with a version of the LCR, whilst 17 banks report on compliance with the NSFR requirement.

Source Finanstilsynet.

3.2.3 Nordic cooperation

Nordic financial markets have become more integrated over time. In recent years, the Nordic financial market supply side has seen a trend towards the largest groups establishing operations in several Nordic countries. Competition from such banks is important in the Norwegian market, because it increases domestic competition between banks and results in more choice for customers. Although there are many banks in Norway, most of these a limited in their geographical scope. The strict regulatory requirements applicable to banking also give rise to special barriers to entry in this industry.

The large Nordic banks make extensive use of internal models for calculating capital requirements and risk. Hence, such requirements may be lower than the capital requirements applicable to banks that use the standardised approach, and may be more difficult to compare between banks and between countries. If banking solvency requirements in Norway become more uniform, it will create a more level playing field in the market. The Government is cooperating with other Nordic authorities to promote more harmonised regulations for all undertakings with operations in any of the Nordic countries (host country regulation). Important considerations for Norwegian authorities include mutual recognition of the risk weights for residential mortgages and counter-cyclical capital buffers.

Cross-border harmonisation of solvency requirements is advantageous, but this consideration cannot be accorded so much priority as to impair the solvency of Norwegian banks, or capital requirements caused by differences between the Norwegian economy and another economies. Primary responsibility for financial stability lies with the authorities in each country, and experience from past crises shows that problems and costs must in most cases be handled at the national level. Banking market competition may be effective despite certain differences in regulatory requirements between different market participants.

Norwegian authorities are cooperating closely with the other Nordic countries on a common approach to capital and liquidity requirements for banks and financial institutions. In 2012, a Nordic working group comprising representatives from the Nordic ministries of finance was appointed to look into such an approach. Specific Nordic adaptations based on the recommendations of the Nordic working group are currently being pursued at the supervisory authority level. Finanstilsynet has, inter alia, received written confirmation from the financial supervisory authorities in Denmark and Sweden that they are interested in following up on the Norwegian initiative on Norwegian residential mortgage weights for every entity engaged in banking operations in Norway. Such cooperation is also discussed in the meetings of the Nordic Council of Ministers for Finance.

Nordic banks are not only competing for loan and deposit customers; they are also competitors in the international market for the funding of their own activities by debt and equity. Major national differences in the structure of regulatory frameworks governing, inter alia, capital adequacy may, even if the overall requirements are fairly similar, create an impression of differences in solvency and total capital between banks. If the capital market fails to recognise the reality behind apparent differences, it may result in different funding terms for banks with the same or similar risk. Such comparisons are difficult, because no two banks are perfectly identical. Both banks and authorities can contribute to shedding light on real solvency similarities and differences.

In addition, Nordic authorities are also collaborating on plans for handling a potential crisis in the Nordea Group, which is identified by the Financial Stability Board (FSB) as one of 29 globally systemically important banks. The parent company of Nordea is domiciled in Sweden, and it has large banking subsidiaries in Norway, Denmark, Finland, the Baltic countries and Poland. The purpose of such collaboration is to seek agreement between countries as to the handling of potential problems in the Nordea Group, thus ensuring that the authorities are well prepared in the event of problems. It is intended to establish a cooperation agreement, as well as a plan for government handling of a potential crisis in the Nordea Group. Corresponding processes are underway for each of the 29 globally systemically important banks, but none of these have been completed. The crisis management framework in all countries where Nordea has banking operations will change significantly upon the implementation of the planned EU Crisis Management Directive in the EU/EEA. After the Crisis Management Directive has entered into effect, crisis management should be in conformity with the system defined by that directive.

3.2.4 The deposit guarantee scheme

Deposit guarantee schemes serve an important consumer protection purpose and help to ensure that retail deposits constitute a good and stable source of funding for banks. Consequently, such schemes boost confidence in the banking system and promote financial stability. The Norwegian scheme functioned well during the financial crisis. Norway was the only EU/EEA country in the OECD area that did not introduce extraordinary government guarantee measures during the crisis of 2008. In 2009, the EU adopted amendments to the Deposit Guarantee Schemes Directive; Directive 94/19/EC, which introduced, inter alia, full harmonisation of coverage levels, at EUR 100,000 for national deposit guarantee schemes from 1 January 2011. This directive is not implemented in Norway. There has been an understanding between the European Commission and Norway that this matter shall be decided in connection with the deliberation of the directive proposal published by the Commission in July 2010. When the European Commission put forward, in July 2010, a proposal for a new, comprehensive directive on deposit guarantee schemes to replace the current directive, the Commission retained such full harmonisation and also proposed, inter alia, pre-funding of the schemes, a risk premium payment requirement for banks and a maximum reimbursement period for depositors of seven days. The EU ministers of finance and the European Parliament reached agreement on the directive on 17 December 2013. The Council of the European Union passed a formal resolution on 3 March, and the directive is expected to be adopted by the European Parliament between 14 and 17 April.

While full harmonisation of the coverage level at EUR 100,000 constitutes a major improvement on the schemes of most EU member states, incorporation of such full harmonisation in Norwegian law would reduce the coverage level in Norway by about 60 pct.

The Ministry has, on a regular basis, kept the Storting informed of developments in the EU regulation of deposit guarantee schemes and the extensive efforts of the Government and the Ministry to maintain the current coverage level from 1996, of NOK 2 million per depositor per bank. The Ministry of Finance stated the following in the supplementary proposition on the National Budget for 2014:

«The Storting has on numerous occasions been informed of the efforts pursued by Norwegian authorities in relation to the directive proposal on deposit guarantee schemes currently under consideration in the EU, and unanimously supported the efforts of the authorities to retain the Norwegian regulatory framework and its NOK 2 million deposit guarantee per depositor per bank. The EU has in its proposed directive suggested a continuation of the full harmonisation of a cover level of EUR 100,000, or about NOK 800,000. The so-called EU trilogue negotiations on the directive have now been resumed. The Ministry of Finance will continue to accord high priority to this matter.»

This matter has been pursued very actively by both the previous and the present Government, thus ensuring that the Norwegian position and arguments are well known to the EU. This has been unanimously endorsed by the Storting. The directive, in the form it is currently expected to be adopted, stipulates a five-year transition period, until yearend 2018, for countries with cover in excess of EUR 100,000 euro. In other important areas, like the payment period and the accumulation of guarantee funds, the directive proposes a transition period of up to ten years. It is only after the said ten years that the regulatory framework will be harmonised in the EU. The matter will now be submitted for technical review by the EU, and formal adoption by the Council and the European Parliament. Norway will subsequently negotiate on how to incorporate the directive into the EEA Agreement. The Norwegian deposit guarantee provisions will under no circumstance be amended until this has been done.

The Government will now continue to pursue this matter in connection with the coming negotiations on incorporation of the directive into the EEA Agreement. The Ministry will keep the Storting informed of developments in the matter.

3.2.5 Crisis management

In June 2012, the European Commission published a proposal for a directive on the recovery and resolution of credit institutions and investment firms in crisis (the Crisis Management Directive). EU political agreement concerning such directive was reached in December 2013. The directive is assumed to be EEA relevant. It is proposed that it be entered into effect in 2015. Provisions on internal recapitalisation, so-called bail-in, cf. below, shall apply from 2016 at the latest. The proposed directive distinguishes between various tools:

1. Preventive measures, for example enhanced supervision, requirements for all institutions to prepare recovery and resolution plans; so-called testaments, as well as scope for group entities to conclude agreements on the provision of intra-group support, on certain terms, if any entity is in financial difficulties;

2. measures that enable the authorities to intervene early when problems are impending; and

3. powers and tools for restructuring, separating or liquidating institutions when a crisis has materialised.

The objective is to be able to liquidate both small and large institutions without creating financial instability, and without burdening public budgets. In order to shield public budgets, the Commission is of the view that it is necessary to establish emergency funds/funding arrangements that are pre-funded by the institutions in each EU country.

The proposed directive introduces new tools for use in situations of crisis. One of four liquidation tools that may be used by national liquidation authorities is bail-in. What is meant by bail-in in the directive is reducing the liabilities of an institution and converting these into equity. There is a pre-defined order for using the amounts outstanding to creditors in a bail-in. Exemptions are also specified in terms of liability types that cannot be converted into equity. It is proposed that, inter alia, deposits covered by a deposit guarantee scheme and secured debts, including covered bonds and other instruments secured in similar ways, shall not be subject to conversion into equity. The three other tools are sale of the business, establishment of a bridge institution, i.e. a provisional transfer of the «healthy» assets of an institution to a government-controlled institution, and separation of assets, i.e. a transfer of the «bad» assets of an institution to a separate entity.

An overarching principle for the use of liquidation tools is that the shareholders of an undertaking shall incur losses before the creditors of such undertaking. A creditor of a bank shall, as a main rule, not incur a larger loss than such creditor would have incurred in the event of ordinary liquidation, and creditors with the same priority shall be treated equally. The authorities must have concluded, in order to be able to make use of the liquidation tools, that the institution is about to fail or likely to fail. The authorities shall reach such a conclusion if the institution is (or is likely in the near future to be) in violation of the conditions for engaging in licensed activities, without net assets (liabilities exceed assets), illiquid (unable to discharge liabilities as and when these fall due) or dependent on extraordinary government support measures. Nor can there be any prospect of alternative private sector measures – including measures from so-called «institutional protection schemes» and supervisory measures, including the tools for early intervention and reduction or conversion of additional tier 1 capital and tier 2 capital – preventing, within a reasonable time horizon, the institution from failing.

Finally, the crisis resolution must be necessary to realise, and be reasonably commensurate with, five crisis resolution objectives, including a requirement that liquidation of the institution by ordinary insolvency proceedings will not to the same extent serve to realise the objectives. The five crisis resolution objectives are:

• to ensure the continuity of the critical functions of the institution;

• to avoid significant adverse effects on financial stability;

• to protect public funds by minimising reliance on public financial support;

• to protect depositors and investors covered by deposit guarantee and compensation schemes;

• to protect client funds

The Norwegian system for dealing with financial institutions that encounter financial difficulties is laid down in the Guarantee Schemes Act. The Act authorises the implementation of a number of different measures, depending on how far the crisis in the financial institution has evolved and what can be done to remedy the situation. If need be, the Norwegian Banks’ Guarantee Fund may, inter alia, grant loans, furnish guarantees and provide equity to ensure sound and structured continuation or liquidation of institutions in crisis. These statutory provisions are additional to provisions enabling Finanstilsynet to intervene early in institutions in difficulties. The Ministry requested, in a letter of 26 June 2009, the Banking Law Commission to examine potential revision of the current Guarantee Schemes Act, including appurtenant regulations. This shall be adapted to any amendments to relevant EU directives.

3.2.6 EU banking union

There is agreement in the EU on the creation of a single supervisory authority for banks in the Euro zone; the so-called «single supervisory mechanism» (SSM). The decision to create such a supervisory authority was made in October 2013. The decision implies that the European Central Bank (ECB) assumes the role of overarching supervisory authority for all banks (credit institutions) in the Euro zone. The ECB will supervise about 150 of the most important banks in the Euro zone, i.e. banks with total assets in excess of EUR 30 billion or representing in excess of 20 pct. of GDP of their country of domicile, as well as banks believed by the ECB to be of special importance for other reasons. Supervision of the approximately 6,000 other banks in the Euro zone will continue to be the responsibility of national supervisory authorities, although the ECB may intervene in such banking supervision if the ECB deems such intervention to be called for.

The European Parliament and the Council recently agreed a joint EU crisis resolution mechanism, the «single resolution mechanism» (SRM), based on a proposal from the Commission. The purpose is to centralise expertise and resources for dealing with crises in banks in the Euro zone and any other member states that may join the banking union.

EU member states outside the Euro zone may join the banking union of their own volition. The banking union is not open to Norway and the other EEA/EFTA states.

3.2.7 Guidelines for prudent lending practices

Finanstilsynet issued guidelines for prudent residential mortgage lending practices in March 2010. Their purpose was to curtail the volume of loans that are high relative to both income and residential property value, in order to make households and banks better prepared for potential economic downturns. The guidelines were tightened in December 2011 by requiring, inter alia, loans to not normally exceed 85 pct. of the value of the residential property, cf. Box 3.2.

The guidelines laid down by Finanstilsynet stipulate requirements for banks’ own internal residential mortgage guidelines. These include, inter alia, requirements for institutions to obtain accurate information concerning the income and overall debt of the borrower, and for institutions to be able to calculate the ability of customers to service the loan based on their income, expenses, including interest and instalments, overall debt, as well as the implications of a 5 percentage-point interest rate increase. Finanstilsynet has embedded some degree of flexibility in the guidelines. Banks may, for example, deviate from the norm of an 85 pct. loan-to-value ratio if additional collateral is furnished or if the bank has concluded, based on a specific assessment, that it would be prudent to derogate from the guidelines.

In a letter of 25 October 2013, the Ministry of Finance requested Finanstilsynet to examine how the residential mortgage guidelines are implemented by banks, and what effect such measure may have had on households, banks and the housing market. The Ministry also requested an assessment as to whether the norms laid down in the guidelines should in future be issued in the form of a circular (guidelines) or whether a different legal format (regulations) might be more appropriate.

Finanstilsynet submitted its review of the guidelines to the Ministry on 28 January 2014.

The review indicates that the guidelines have served to curb the accumulation of risk in the Norwegian economy, and that banks are making use of the flexibility embedded in the guidelines. Finanstilsynet is noting, inter alia, that the residential mortgage survey for the autumn of 2013 showed that 23 pct. of new residential mortgages were granted to borrowers with less than 15 pct. of own funds. This portion was 35 pct. for borrowers under the age of 35 years. 91 pct. of the loans granted to borrowers with less than 15 pct. of own funds were granted to customers estimated to have surplus liquidity, i.e. positive disposable income after the deduction of subsistence costs and all debt-servicing expenses, and approximately 60 pct. were granted to borrowers that furnished additional collateral. Finanstilsynet also stated that it is not proposing amendments to the guidelines or codification of bank lending practices in the form of regulations, although it may become necessary to consider new measures depending on financial developments.

On 6 February 2014, the Ministry of Finance sent a reply letter to Finanstilsynet concerning the guidelines. The Ministry stated that a good debt-servicing capacity and a documented ability and willingness to save may compensate for a somewhat higher leverage ratio, as also evidenced by practices observed under the guidelines. The Ministry also stated the following:

«It is important for the discretionary assessments of banks to pay heed to the ability of the customer to discharge his or her liabilities, based on his or her further loan-servicing capacity. Clause 2 of the guidelines would, when taken in isolation, appear to be somewhat static with regard to this factor. Future ability to service loans must be a permissible consideration when banks perform their specific prudential assessments, cf. Clause 4 of the guidelines.»

The Ministry made it clear that it may be justifiable to grant residential mortgages to borrowers with own funds down to 10 pct. if, for example, borrowers have a satisfactory debt-servicing capacity, have a demonstrated ability to accumulate savings and protect against interest rate increases by binding the interest rate.

The Ministry noted, in its letter of 6 February 2014, that it is important for Finanstilsynet to consider the contents and implementation of the guidelines, as well as the need for codification in the form of regulations, in view of future financial developments. In particular, the Ministry requested an assessment as to how appropriate it is to use a fixed nominal premium of 5 percentage points as a test for how well loan applicants will cope with an interest rate increase. The Ministry is of the understanding that banks will, generally speaking, take the selection of any fixed interest rate option into account for purposes of calculating the interest rate sensitivity of loan applicants.

In addition, the Ministry noted that it is necessary, in order for banks to have flexible guidelines, for the board of directors of each bank to adopt criteria to be used in assessing whether it would be prudent to grant a loan. Such criteria shall be reviewed by Finanstilsynet. Finanstilsynet should ensure that banks do not compete through differences in their practices under the guidelines.

3.3 Insurance and pensions

3.3.1 New solvency rules (Solvency II and Omnibus II)

In April 2009, the European Parliament adopted new solvency rules for insurance companies. The Solvency II Directive (Directive 2009/138/EC) incorporates, inter alia, the Consolidated Life Assurance Directive and the three «generations» of non-life insurance directives. One of the objectives of the new directive is to ensure that insurance companies are subjected to allocation and solvency requirements that better reflect the risks of such companies than do the current EU regulations. Unlike previous EU insurance directives, the Solvency II Directive is predominantly a full harmonisation directive. In other words, member states can neither impose stricter, nor less strict, requirements on companies than those implied by the directive.

Solvency II is organised into three pillars that have much in common with the three pillars of the CRD rules for banks. Pillar I comprises quantitative solvency requirements, including technical provision requirements, solvency capital requirements (SCR) and minimum capital requirements (MCR). In the event of non-compliance with the solvency capital requirements, the supervisory authorities shall require the company to take measures to remedy its solvency status. The licence of the company may be revoked if the company fails to comply with the minimum capital requirement and compliance with such requirement in the near future seems unlikely. Pillar II comprises, inter alia, supervision and monitoring provisions. Pillar II also authorises the introduction of a capital requirement tailored to the risk of each insurance company, as well as the imposition of risk management and internal control requirements on companies. Pillar III comprises provisions intended to improve the scope for disciplining insurance companies, including, inter alia, provisions on the disclosure obligations of insurance companies.

Inception and implementation of the Solvency II Directive have been postponed repeatedly. It has been necessary to amend the directive in several important respects to, inter alia, adapt the rules to the new EU supervision structure, but also because impact studies have demonstrated that a large portion of insurance companies would have found it problematic to meet the requirements laid down in the original directive. The need for new rules on long-term guarantees was particularly evident. An impact study in the spring of 2013 showed that about 60 pct. of EU life insurance companies would not meet the requirements as stipulated at the time. The EU has therefore introduced considerably less strict requirements than originally anticipated. There are, like in the banking sector, major historical, structural and financial differences between insurance companies and insurance markets within the EU.

In the EU, the amendments to the Solvency II rules were made by adoption of the so-called Omnibus II Directive. On 13 November 2013, the Council and the European Parliament agreed, in trilogue negotiations with the Commission, the wording of the Omnibus II Directive. The directive was formally adopted by the European Parliament on 11 March 2014.

It is expected that national authorities will be given a deadline of 31 March 2015 for establishing national rules in accordance with the Solvency II Directive, including the amendments resulting from the Omnibus II Directive. The rules are scheduled to enter into effect on 1 January 2016. However, a clear distinction needs to be made between when the rules are to be implemented and enter into effect, and at what speed they will be applied, i.e. phase-in of the rules over time. It is anticipated that national authorities will, inter alia, be permitted to issue extensive transitional provisions with the effect that the new requirements will not be applied to companies until later, and not be applied in full until after 16 years. It is expected that countries will take the financial situation of the country itself, the solvency situation of its national insurance companies, as well as international competition conditions, into consideration for such purposes.

On 1 March 2012, the Storting approved incorporation of the Solvency II Directive into the EEA Agreement, cf. Recommendation No. 192 (2011–2012) to the Storting and Proposition No. 54 (2011–2012) to the Storting. The Ministry is planning the inclusion of general provisions on a new solvency framework for insurance companies in the new Act on Financial Undertakings and Financial Groups, based on the draft submitted by the Banking Law Commission in the NOU 2011: 8 Green Paper.

The current solvency provisions for insurance companies in Norway are based on, inter alia, the Solvency I Directive, which is focused on the liabilities side of the balance sheet of the companies. In order to ensure more comprehensive regulation, Norwegian insurance companies are also subject to capital adequacy requirements that take the risk on the asset side of the balance sheet into consideration. Fundamentally, it is favourable for insurance companies internationally to also be subjected to solvency rules that take risks of both sides of the balance sheet into account.

The new solvency provisions under Solvency II imply, inter alia, that assets and liabilities shall be valued at so-called fair value, or market value. Future liabilities shall therefore be discounted by using a market yield curve. The yield curve is determined by using observed market rates and by extrapolation to a long-term equilibrium rate, or ultimate forward rate. For Norwegian life insurance companies, which currently discount liabilities by using a fixed discount rate, these amendments may result in the value of liabilities becoming higher or lower than under the current rules, depending on the interest rate level at the time of transition. The amendment also implies that the value of liabilities will fluctuate in future.

The challenges posed by fluctuations in the value of insurance liabilities as the result of discount rate changes have represented one of the main difficulties in the completion of the Solvency II rules within the EU. It has been agreed, in the said trilogue negotiations on the Omnibus II Directive, that national authorities may permit a 16-year phase-in period for the valuation of insurance liabilities, either by phasing in the change in the value of the provisions from Solvency I principles to Solvency II principles, or by phasing in the use of market rates to discount liabilities.

The way ahead in Norway depends on the process in the EU. After Omnibus II has been adopted, supplementary EU rules are to be stipulated at several levels. It is expected that the European Commission will adopt implementation provisions in the form of a regulation. Such regulation will have direct binding legal force in member states and is intended to enter into effect simultaneously with the Solvency II Directive.

Finanstilsynet is charged with preparing draft Norwegian regulations, but must await the final EU rules. The Ministry of Finance intends to circulate such regulations for consultation in the ordinary manner.

3.3.2 Private occupational pension schemes

Ever-increasing life expectancy poses a challenge to all aspects of the pension system. If one wishes to maintain the same level of the annual retirement pension, one will need to either save more per year of work or work for more years, thus retiring at a higher age. The alternative is lower retirement benefits per year. The low interest rate level also poses challenges to the private pension system. Pension providers must each year deliver a guaranteed return on major parts of the assets they manage on behalf of customers. Low interest rates make it challenging to deliver returns in excess of the guaranteed amount without assuming more risk.

The national insurance scheme has undergone a major reform to ensure the financial sustainability of the public pension system and to provide individuals with an incentive to continue working for longer.

Private sector corporations are required to provide their employees with a retirement pension scheme. Retirement pension schemes provided in compliance with such requirement receive preferential tax treatment, compared to other pension savings. From 1 January 2014, a third alternative for such retirement pension schemes was put at the disposal of corporations, in addition to the traditional defined-contribution and defined-benefit schemes. The new product framework combines features from both defined-contribution and defined-benefit schemes. The product framework was adopted on the basis of a proposal from the Ministry of Finance, submitted in Legislative Proposition No. 199 (2012–2013) to the Storting, which was again based on the recommendations of the Banking Law Commission in the NOU 2012: 13 Green Paper and a consultation memorandum dated 7 January 2013 from Finanstilsynet. In connection with the deliberation of the legislative proposal by the Storting, the Standing Committee on Finance and Economic Affairs requested, in Legislative Recommendation No. 35 (2013–2014) to the Storting, the Ministry to examine whether it would be appropriate to propose amendments to the provisions of the Defined-Contribution Pensions Act and the Mandatory Occupational Pensions Act concerning the minimum pension benefit payment period and the pension saving contributions of employees, and to revert, if appropriate, with a legislative proposal covering these issues. The Ministry intends to initially request Finanstilsynet to examine these issues, before reverting to the Storting.

The Banking Law Commission is currently examining whether it would be desirable and practicable to establish a form of defined-benefit retirement pension scheme tailored to the new national insurance scheme, cf. the mandate of 21 March 2013 from the Ministry of Finance to the Banking Law Commission.

Self-employed persons and others that do not meet the minimum requirement as to the number of employees necessary to establish a group defined-contribution pension scheme, may save up to 4 pct. of their income between 1 and 12 times the national insurance base amount (G) in a tax-favoured pension scheme. The Government will examine the various types of pension schemes in context and has, inter alia, signalled in the Sundvolden platform that it will strengthen the individual pension savings (IPS) scheme. The scope of self-employed persons, etc., for making tax-favoured pension savings should be examined in the context of, inter alia, IPS.

3.3.3 Paid-up policies with an investment option

When an employee resigns from a corporation with a defined-benefit retirement pension scheme, he or she is issued with a paid-up policy evidencing his or her accrued pension entitlements. Paid-up policies will also be issued to employees if a corporation terminates its defined-benefit pension scheme.

Under defined-benefit schemes, the pension provider promises a certain return on the pension assets. The authorities stipulate a cap on the guaranteed return. Any return in excess of the guaranteed amount will in normal circumstances be allotted to the policies as profits. For as long as the scheme remains active, i.e. for as long as pension entitlements continue to accrue, pension providers may collect an annual premium to cover the return risk. Once paid-up policies are issued, the scope for collecting annual premiums is replaced by an arrangement under which the pension provider may retain up to 20 pct. of any excess return.

In Legislative Proposition No. 11 (2012–2013) to the Storting, the Ministry of Finance proposed that paid-up policyholders be permitted to waive the return guarantee in exchange for a right to decide for themselves how the pension assets linked to their paid-up policies shall be managed. This is referred to as the investment option arrangement. Requirements are proposed with regard to the information to be disclosed by pension providers in circumstances where such conversion to an investment option is a possibility. The Storting adopted the proposal submitted by the Ministry of Finance, but the rules have yet to enter into effect. One of the reasons for this is a need for clarifying how to deal with paid-up policies when the pension assets linked to these are insufficient to fund the guaranteed pension benefit, cf. the below discussion of step-up plans. On 25 November 2013, the Ministry circulated a proposal from Finanstilsynet for consultation, under which proposal paid-up policies would have to be fully provisioned prior to any conversion to the investment option. The deadline for submitting consultative comments was 17 January 2014, and these comments are currently being examined by the Ministry.

3.3.4 Step-up to new mortality rate schedules

Finanstilsynet has stipulated new minimum requirements as to the assumptions underpinning life expectancy development calculations; so-called mortality rate schedules, in order for these to better reflect the changes in life expectancy. The new requirements will apply from 2014. The new schedules are dynamic, i.e. expected life expectancy developments in coming years are embedded in the schedules.

When life expectancy increases, the retirement pension premiums and provisions need to be increased. The new mortality rate schedules make it clear that life insurers have for a number of years made insufficient provisions for funding the liabilities they have assumed. Companies will be granted a step-up period to accumulate the reserves required to comply with the new requirements. Moreover, Finanstilsynet intends to consent to pension undertakings using customer returns for reserve building, subject, however, to a minimum of 20 percent of annual reserve building taking place by using the assets of the pension undertaking itself. It has been discussed whether pension providers should be permitted to use excess returns on one policy to accumulate reserves on another policy. The Ministry of Finance stated the following in a letter of 27 March 2014 to Finanstilsynet:

«The Ministry of Finance agrees with Finanstilsynet that considerations relating to the balanced apportionment of the costs of step-up to C2013 suggest that consent should not be granted to excess returns on one policy being using to boost the provisions for other policies, and that the minimum contribution of pension undertakings, of 20 percent of the reserve building need, shall be attributed at the policy level. […]

Generally speaking, the reserve building contributions of pension undertakings will, within a given step-up period, be higher if customer returns are allotted to individual policies than if customer returns are allotted across policies («cross subsidisation»). If no change is to be made to the contribution of the pension undertaking, the duration of the step-up period will have to be extended. It has previously been assumed, as mentioned above, that the duration of the step-up plans should not exceed five years. The Ministry of Finance expects Finanstilsynet to adopt step-up plans for each pension undertaking based on using customer returns as specified above (no «cross subsidisation»), with a reasonable reserve building contribution from pension undertakings, cf. the assumption of an equity contribution of no less than 20 pct. outlined by Finanstilsynet in its letter of 8 March 2013.»

This was followed by a letter of 2 April 2014 from Finanstilsynet to all pension undertakings on guidelines for reserve building and the use of returns to cover increased group pension insurance provisions.

Employers with defined-benefit pension schemes for their employees, persons with paid-up policies from group schemes and persons who receive pension benefits from defined-benefit schemes during the step-up period will not receive excess returns until the reserve building has been completed for their policy. However, the guaranteed pensions of employees – their contractual benefits – will not be reduced.

3.4 Securities markets

3.4.1 Benchmark rates

Benchmark rates are used, inter alia, to determine prices and payments under various types of financial contracts. The most frequently used benchmark rates are intended to reflect the interest rates on unsecured loans between banks for different maturities. There is, generally speaking, very limited activity in the markets for such loans, so the benchmark rates are typically determined by way of a panel of banks reporting, on a daily basis, their estimates as to what would have been the price of such loans if the transactions had taken place.

Manipulation or suspected manipulation of such important benchmark rates may have a serious impact on market integrity, and may cause major loss for consumers and investors or disturb the real economy. On 4 February 2014, the European Parliament approved a proposal from the European Commission on new provisions to counter market abuse, which rules include a clear prohibition against the manipulation of benchmark rates, including LIBOR and EURIBOR, and made such manipulation a criminal act by way of including criminal sanctions in the proposal.

NIBOR («Norwegian Interbank Offered Rate») is the corresponding Norwegian benchmark rate. The rules for determining NIBOR are, as with many other «IBOR» benchmark rates internationally, laid down by the financial industry (Finance Norway, as far as Norway is concerned).

Investigations in several countries in the wake of the financial crisis have identified weaknesses in the frameworks for determining benchmark rates, in the form of, inter alia, unclear definitions and procedures, inadequate controls and conflicts of interest, as well as an absence of market anchoring, disclosure and verifiability. Some of the weaknesses are also of relevance to Norway. Much has been done to remedy this over the last year, principally by improvements in self regulation within the industry.

Although significant improvements have been made recently, there is room for additional measures both internationally and in Norway. In August 2013, the Ministry of Finance requested Finanstilsynet to monitor developments in best international practice within this field and to prepare draft public rules on benchmark rate determination by the end of March 2014. The Ministry also requested a report on which types of benchmark rates are needed in the Norwegian market. On 18 September 2013, the European Commission proposed a new regulation on «benchmarking», which will include, inter alia, requirements for determining benchmark rates and other pricing benchmarks for financial instruments and financial contracts. It is assumed that a future regulation will be EEA relevant.

3.4.2 Savings and investment products

Different types of investment products are currently regulated in different ways, depending on, for example, how the products are designed, or which sector provides them. The EU is developing a regulatory framework pertaining to advice on, and distribution of, various savings and investment products; so-called packaged retail investment products (PRIPs). The objective is to bring about harmonised rules for information on, and sales of, savings and investment products. It is intended that these new rules will largely be premised on the principles and provisions of the existing regulatory framework, such as the Insurance Mediation Directive and the so-called Markets in Financial Instruments Directive (MiFID) with regard to good business practice requirements, and the EU securities fund provisions (the UCITS Directive) with regard to disclosure requirements.

The Ministry of Finance is considering amendments to the financial legislation to expand the disclosure obligation of investment firms, banks and insurance companies in relation to advice on, and sales of, alternative savings products and the introduction of a requirement for audio recording of such advice and sales. Alternative savings products are products perceived to be similar to, or meeting consumer needs similar to those met by, financial instruments. Such alternative savings products include defined-contribution products and life insurance with an investment option. Draft amendments to the applicable provisions were circulated for consultation in October 2013. The draft circulated for consultation calls for advice on, and sales of, alternative savings product to be subjected to the same disclosure requirements as currently apply to advice on, and sales of, financial instruments.

3.5 Measures to enhance financial market competition

The economy needs robust financial institutions that compete for customers. Effective competition promotes efficient operations, good resource utilisation and economically profitable capital allocation, as well as prices reflecting the costs and benefits of using and creating financial products and services. Effective competition will also benefit consumers via, for example, lower prices, better products, better information and scope for opting out of using suppliers that fail to meet their personal needs.

The Ministry is committed to facilitating effective competition in the financial market and will also continue to develop financial market regulations with this objective in mind. An important general prerequisite for effective market competition is transparent market places. It should be easy for purchasers of financial services to get an overview of the products offered by different service providers, as well as the applicable prices and other terms. It should be correspondingly easy for sellers to disseminate information about their own products, as well as the applicable prices and other terms, to potential purchasers, without thereby sharing information about future conduct with competitors. The Finansportalen financial service comparison website is a useful tool for creating transparent markets for consumers in their choice of financial service providers.

Disclosure of nominal and effective interest rate details is required when loans are marketed, in order to ensure that information on, for example, loan offers includes relevant details. Detailed rules have been laid down on the calculation of effective interest rates in order to prevent individual service providers from calculating such interest rates as they deem fit. Marketing information needs to be fairly general and brief. Financial institutions are also required to disclose, inter alia, the effective interest rate, which includes fees and other costs, in addition to the nominal interest rate, prior to concluding any agreement for the granting of a loan. The disclosure obligation is then stricter than in a more general marketing context. The Ministry will take an initiative for reviewing the disclosure requirements with a view to making the information even more readily accessible and understandable for consumers. The Ministry will, inter alia, examine how it can be ensured that financial institutions include links to Finansportalen on their websites. Such a link will make it easier for customers to compare prices and other terms.

Technological developments may improve the competition situation in the market. More readily available information may for example make the demand for financial services less dependent on geographical considerations. Finansportalen facilitates comparison of the current prices and other terms of different financial service providers. Information on current prices may be of limited value in choosing service providers, especially for financial services whose prices may change rapidly, for example variable interest rate loans. Information on the prices offered by different service providers over a period of time may be of use to, for example, a customer who is not envisaging frequent changing of service providers in response to ongoing interest rate changes. Finansportalen is currently testing a solution in which historical residential mortgage prices are made available to the public. The Ministry is of the view that such a tool may be well suited for stimulating competition for, inter alia, variable interest rate loans.

It should be simple and inexpensive to change banks, in order to stimulate competition. The Ministry will examine to scope for facilitating easier switching between banks. This will necessitate assessment of new technological solutions and developments in other countries. Relevant measures may include, inter alia, facilitating so-called bank giro number portability, i.e. that a corporation can have one bank giro number for use by its customers to pay for its goods and services, irrespective of what account and bank such corporation chooses to link to the said bank giro number.

For corporations, the bond market represents an alternative to bank loans. Current law implies that issuers and investors do not have access to information about the identity of bondholders. It has been asked whether this strengthens the position of brokers with good access to information through their own systems, and impairs competition. The Norwegian Fund and Asset Management Association and Nordic Trustee have proposed the establishment of Nordic Bond Pricing. The intention is to improve public information on bond market pricing. Moreover, the Ministry is examining a suggestion from the Oslo Stock Exchange, under which the issuer would be able to stipulate a contractual right of access to information about the identity of bondholders, including the potential effect of this on market liquidity and competition.

The supply side of the financial market has changed considerably over time. One such change is that credit undertakings issuing covered bonds have taken over a large part of the residential mortgage market from banks. The intention behind admitting mortgage companies that can issue covered bonds was more efficient and cheaper funding of such lending. Lower costs may benefit loan customers in the form of lower interest rates.

The scope for establishing credit undertakings that issue covered bonds may have affected competition in the residential mortgage market. This results, inter alia, in a larger number of entities in the market that can fund residential mortgages for Norwegian households, but mortgage companies that can issue covered bonds do not market loan offers. Contact with the loan customers of the mortgage companies that can issue covered bonds is handled by the banks that originally granted such loans. The Ministry also intends to examine the links between banks and mortgage companies that issue covered bonds, with a view to establishing the competition implications of such links.

The authorities have a number of tools at their disposal for preventing financial institutions from collaborating in ways that impede competition. The Competition Authority has various powers enabling it to intervene against arrangements that limit market competition. Sector-specific regulation also confers competition-related powers on the Ministry of Finance. Collaboration agreements between financial institutions that do not form part of the same group shall, for example, require the approval of the Ministry of Finance, subject to certain exemptions, cf. Section 2-7 of the Financial Institutions Act. Some types of collaboration may promote enhanced market competition. This will depend on specific assessments in each individual case. Collaboration may, for example, be important for small banks by keeping costs down and adding knowhow, and scope for collaboration may serve to bring more competitors into the market. The Ministry will initiate an evaluation of the regulation of competition matters in the Financial Institutions Act, as well as the principles to which weight has been accorded, to ensure that effective market competition is facilitated to a sufficient extent.

Contact between authorities may strengthen the quality of the initiatives pursued by various authorities to improve competition. Finanstilsynet holds annual meetings with both the Competition Authority and the consumer protection authorities, in addition to contacts whenever needed in specific matters. The Ministry has examined whether it may be appropriate to establish a specific forum for coordinating and exchanging information about the financial market competition situation. The Ministry is of the view that further expansion of such cooperation in the form of a competition policy forum between the said bodies may result in more effective promotion of competition and contribute to good contact and exchange of information between public bodies with potentially overlapping responsibilities.

3.6 Consumer protection

3.6.1 Consumer considerations in financial market regulation

Consumers need stronger legal protection in the financial market than do professional customers. The activities of Finanstilsynet, which supervises financial undertakings, are organised to promote statutory and regulatory compliance. Finanstilsynet is required to focus on consumer rights and consumer interests in its supervision. Supervision can be complex because, inter alia, new products and multiple products are marketed to consumers, and because marketing is often more personal and «tailored» to each consumer or group of consumers.

Norwegian authorities have attached considerable weight to consumer considerations in drafting financial markets regulations. One important task for the authorities in protecting consumer interests is to ensure the robustness of financial undertakings. This is important for the economy as a whole, but also out of consideration for consumers who hold claims in the financial market, whether in the form of bank deposits, insurance claims, pension savings, fund units or other securities investments.

Consumer protection is reflected in, inter alia, the Financial Contracts Act, which confers rights on consumers that cannot be contracted out of to the detriment of the consumer. The Financial Contracts Act contains a number of detailed provisions on contracts for various financial services, and regulates various issues. The Act includes provisions on, inter alia, what information the financial institution shall disclose to its customer, the right of the customer to terminate contracts, limitations in the right of the financial institution to terminate contracts, the obligation of the financial institution to notify the customer of any changes before these enter into effect, the obligation of the financial institution to advise the customer against conclusion of certain contracts, and limitations in the right of the financial institution to refuse to conclude contracts.

There is a clear legal distinction between the statutory provisions governing the relationship between a financial institution and a customer, which are found in the Financial Contracts Act, and the statutory provisions governing the activities and organisation of financial institutions in general. Although the latter statutory provisions are not designed to give consumers specific rights, such provisions are of major importance to consumers. It is, for example, in the interest of consumers for the legal framework to prevent banks and insurance companies from exposing the funds of their customers to risks that are not wanted by such customers, as well as from organising their activities in such a way that their own financial interests are in conflict with the interests of their customers. In order for consumer interests to be attended to in a good manner, it is necessary to take such interests into consideration when the authorities, for example, introduce measures to prevent financial instability, define capital requirements for financial undertakings, and establish bank deposit guarantee schemes.

3.6.2 Access to information

Finansportalen is a public, web-based information solution that gathers and compares financial service information for consumers, created at the initiative of the Ministry of Children, Equality and Social Inclusion and the Ministry of Finance. The portal provides an overview of banking, investment and insurance services. The portal enables consumers to monitor the market and to compare prices and services. Finansportalen also provides a simple system for changing banks and a solution that makes it easy to compare offers from different non-life insurance providers. Finansportalen can therefore serve as an effective tool for consumers in choosing a financial service provider. Increased awareness and use of Finansportalen on the part of consumers may have a positive impact on competition between banks.

Consumers may, as an alternative to contacting banks and other financial institutions themselves, get assistance with obtaining and evaluating offers for the provision of financial services from, for example, credit intermediaries or financial advisers. Credit intermediaries and financial advisers are not governed by the same regulatory framework. Credit intermediation is classified as a financial activity and is governed by the Financial Institutions Act. A credit intermediary shall serve as an impartial intermediary between the financial institution and the customer, and attend to the interests of both parties. He or she may also, on certain conditions, be remunerated by both parties. A financial adviser assists the customer in his or her dealings with the financial institution, and can only accept payment from the customer, not from the financial institution. Financial advisers are governed by the Financial Contracts Act.

The Financial Contracts Act also includes provisions on financial agents. A financial agent acts on behalf of the financial institution, and is its assistant. The financial agent shall make the customer aware of this. A financial agent cannot receive remuneration for its services from the customer; only from the financial institution with which he or she has an agency agreement.

Upon the conclusion of loan agreements, a financial institution shall comply with the obligations laid down in the Financial Institutions Act, the Financial Contracts Act, the Anti-Money Laundering Act, etc. These include, inter alia, providing the customer with information about the agreement and the obligations assumed by the customer. Special disclosure obligations apply in relation to consumers. Banks will, in addition to their statutory obligations, make a commercial assessment as to which agreements they wish to conclude, and banks will not normally be under any obligation to conclude agreements. It is important to be aware that persons or corporations that assist with obtaining and evaluating offers for the provision of financial services, such as credit intermediaries and financial advisers, need to be paid for the services they provide. Hence, there is a cost to them acting as intermediaries between the customer and the financial institution, and the customer must weigh the benefits involved against such cost.

3.6.3 New EU provisions on payment services

The EU is in the process of revising the Payment Services Directive, based on a directive proposal of 24 July 2013 from the European Commission. The purpose of the new Payment Services Directive is to modernise the regulatory framework in line with market developments, encourage innovation and promote more secure technical payment solutions. Other objectives are expanding consumer choice and reducing the costs of using payment services. The directive addresses a number of important issues. Key issues that merit mention are the regulation of third party payment service providers («TPPs»), the reach of provisions governing telecom operators that process payment transactions, the scope of payees for charging payors for the use of various payment instruments («surcharging»), and the scope of national authorities for limiting the liability of consumers for card misuse in case of gross negligence.

The main rule with regard to card misuse, under both the current directive and the directive proposal, is that the customer is liable for any loss, without limitation, if the customer has acted fraudulently or with gross negligence. However, the current directive includes an exemption authorising national authorities to limit the liability of customers, even in cases of gross negligence on the part of the customer. The Norwegian regulatory framework makes use of such exemption, with the liability for loss being limited to NOK 12,000. The said exemption is not included in the directive proposal, on the grounds that the Commission is aiming for further harmonisation of the EU payment services market. The current exemption was originally included in the Payment Services Directive at the behest of Norway and the member states Sweden and Denmark, with the support of Germany and the UK.

The European Commission proposal for a new Payment Services Directive has been circulated for consultation in Norway, and the Ministry of Finance is following up on this. On 14 January this year, the Minister of Finance sent a letter to the European Parliament in which she called for the continuation of the current exemption, which authorises capping of the liability of consumers for card misuse.

Norway has also taken the initiative for a joint statement from the EFTA member states to relevant EU bodies, raising key issues relating to the Payment Services Directive and outlining the positions of the EFTA member states on these.

3.6.4 The Norwegian Financial Services Complaints Board and dispute resolution

The Norwegian Financial Services Complaints Board is a non-judicial dispute resolution body, which was established in 2010 by the Norwegian Consumer Council, the Confederation of Norwegian Enterprise, Finance Norway, the Association of Norwegian Finance Houses and the Norwegian Fund and Asset Management Association. The Norwegian Financial Services Complaints Board was created by combining the former Insurance Complaints Bureau (Insurance Complaints Board) and Banking Complaints Board. The Norwegian Financial Services Complaints Board organises four professional boards to hear disputes between financial undertakings and their customers.

Against the background of a request from the Storting to the Government in 2012, cf. the discussion in Chapter 4 of Report No. 30 (2012–2013) to the Storting; the Financial Markets Report 2012, amendments have been made to the contractual framework governing the activities of the Norwegian Financial Services Complaints Board:

• Firstly, the governing documents of the Norwegian Financial Services Complaints Board now stipulate that the chair and deputy chair of each professional board shall be highly qualified lawyers who are neutral in relation to the contracting parties and the industries and interest groups represented by the contracting parties. The professional boards are being expanded. Previously, each professional board comprised five members: one independent chair, two members from the customer side and two members who represented financial undertakings. Following the amendments, each professional board comprises seven members, since the deputy chair shall attend all hearings alongside the chair, and since each professional board shall include one ordinary, independent member who is a qualified lawyer, and who meets the same independence requirements as the chair and the deputy chair. The three independent members shall be appointed by a unanimous resolution of the executive committee of the Norwegian Financial Services Complaints Board.

• Secondly, it becomes easier to submit well-structured complaints to the Norwegian Financial Services Complaints Board. The Norwegian Financial Services Complaints Board shall implement measures to achieve this, and intends to, inter alia, provide thorough guidance on the Internet as to how a complaint should be submitted, whilst also facilitating the use of appropriate electronic solutions for the submission of complaints. The complainant will still receive guidance from the secretariat of the Norwegian Financial Services Complaints Board as to the structuring of a complaint.

• Thirdly, financial undertakings shall ensure that a clear distinction is made between internal complaints procedures and a neutral complaints body like the Norwegian Financial Services Complaints Board when financial undertakings communicate with their customers. Financial undertakings should provide clear information about the Norwegian Financial Services Complaints Board, and should forward complaints to the Board if these are of such a nature as to merit deliberation by an independent body.

The Ministry of Justice and Public Security has recently, in a letter of 14 March 2014 to the Norwegian Financial Services Complaints Board, approved the overall contractual framework governing the Norwegian Financial Services Complaints Board under the Financial Contracts Act and the Insurance Contracts Act. The approval confers certain rights on customers of undertakings affiliated with the Board: The customer is entitled to have disputes heard by one of the professional boards, the case cannot be brought before the courts of justice as long as it is pending before a professional board, and a case that has been heard on its merits by a professional board can be brought directly before the District Court without first having been deliberated by the Conciliation Court. The Ministry of Justice and Public Security has previously evaluated and approved the contractual frameworks governing the Banking Complaints Board and the Insurance Complaints Board.

The Norwegian Financial Services Complaints Board has long been a well-functioning and effective dispute resolution body, but there has nonetheless been scope for improvement. The amendments now made will enhance the integrity and expertise of the Norwegian Financial Services Complaints Board, contribute to improving the processing of cases and make it easier to submit complaints. This serves to strengthen the position of consumers in the financial market.

The Storting has adopted new statutory provisions on the board hearing of disputes between financial undertakings and their customers, cf. Legislative Recommendation No. 116 (2013–2014) to the Storting and Legislative Proposition No. 188 (2012–2013) to the Storting. Firstly, the new statutory provisions authorise the King to lay down regulations requiring financial undertakings to be affiliated with a complaints board governed by a contractual framework approved pursuant to the Financial Contracts Act or the Insurance Contracts Act, for example the Norwegian Financial Services Complaints Board. Secondly, financial undertakings shall, if they fail to comply with the conclusions of a complaints board in a dispute with a consumer, cover any necessary legal costs incurred by both themselves and the opposite party in judicial proceedings before the court of first instance in the same dispute between the same parties. This will apply correspondingly to proceedings before the court above if the financial undertaking is the appellant. The new provisions eliminate the financial risk to consumers when instituting legal proceedings if financial undertakings fail to comply with board conclusions that are in favour of the customer, and have a disciplining effect on financial undertakings. This makes the resolution of disputes with financial undertakings even more secure and simple for consumers. The provisions are based on drafts and initiatives from the Banking Law Commission and the Norwegian Financial Crisis Commission, cf. the NOU 2011: 8 and NOU 2011: 1 Green Papers, respectively.

The Ministry of Children, Equality and Social Inclusion is preparing new provisions on consumer disputes in general. A government-appointed commission has, in the NOU 2010: 11 Green Paper on the Board Hearing of Consumer Disputes, proposed changes to non-judicial dispute resolution arrangements in Norway. The proposal calls for boards to qualify for government approval if they meet certain requirements, including, inter alia, requirements as to the organisation of the board, requirements as to its composition, and formal requirements as to its chair. Moreover, the commission has proposed authorisation for decisions made by government-approved boards to be accorded legal effect and enforceability, provided, however, that the contracting parties behind each board shall decide whether to accord legal effect and enforceability. The commission has proposed procedural provisions for such boards, including, inter alia, provisions on adversarial proceedings (i.e. a right for the parties to argue their case and to be informed of the arguments invoked by the opposite party), on neutrality and on the structuring and publication of board decisions. The follow-up of the NOU 2010: 11 Green Paper will largely run in parallel with an ongoing process relating to new EU provisions. Under new EU provisions; Directive 2013/11/EU on Alternative Dispute Resolution for Consumer Disputes and Regulation No. 524/2013 on Online Dispute Resolution for Consumer Disputes, all EU member states shall offer non-judicial dispute resolution in all types of consumer cases, and the members of the dispute resolution bodies shall meet requirements with regard to expertise and integrity. A supervisory body shall supervise the dispute resolution bodies, and the dispute resolution bodies shall report to the supervisory body on, inter alia, the number of complaints, processing times, outcomes and efficiency. The supervisory body shall, based on the reported details, assess whether the dispute resolution bodies meet the requirements under the directive and request any outstanding matters to be remedied. If such matters have not been remedied by the stipulated deadline, the approval of the relevant dispute resolution body shall be revoked. If new EU provisions are incorporated into the EEA Agreement, amendments to Norwegian law will be required. Such amendments include, inter alia, the requirement for a supervisory body to supervise the dispute resolution bodies.

3.6.5 Investment advice

Investment advice is a personal recommendation to a customer, at the initiative of the customer or the investment firm, concerning one or more transactions in certain financial instruments. Investment advice is a service requiring a licence, and is subject to extensive requirements laid down in the Securities Trading Act and the Securities Trading Regulations. One important requirement is that any investment firm providing investment advice shall organise its activities in such a way that the risk of conflicts of interest between the firm and its customers is minimised. This implies, inter alia, that the salaries of investment advisers shall not be directly linked to what product the customer invests in, or to whether or not the customer chooses to invest. Moreover, the investment firm can only accept remuneration from other parties than the customer (for example product providers) if such remuneration serves to improve the quality of the investment advice and does not detract from the obligation of the firm to attend to the interests of the customer in the best possible manner. Finanstilsynet may revoke the licence to provide investment advice in case of serious regulatory violations.

3.7 Ownership limits

Government consent is required for individual persons or corporations to acquire so-called significant ownership stakes of financial institutions. In this context, a significant ownership stake is an ownership stake representing 10 percent or more of the assets or votes of the relevant financial institution, or otherwise offering scope for exerting considerable influence over the management and activities of such institution.

It is established and entrenched practice that no single natural or legal person is permitted to hold more than 25 percent of the shares of a bank. This limit is introduced to, inter alia, ensure the independence of the institution and to prevent private banker activities. There are special exceptions premised on special circumstances, for example a group context, the owner being a body of a cooperative nature, or the licensed activities in question being very narrow in scope. In the legislative history of the Financial Institutions Act, the reasoning behind the regulatory framework is explained, inter alia, as follows (Proposition No. 50 (2002–2003) to the Odelsting, p. 16):

«[The Ministry is of the view] that the regulatory framework should safeguard the independence of financial institutions in relation to other businesses and owners that might conceivably use their influence to favour themselves, their business associates or their private associates through underpriced loans, guarantees, etc. Control of, for example, a major financial group provides considerable influence over other businesses. Consequently, one should still seek to prevent non-financial owners from exerting undue influence over other businesses through major ownership stakes in Norwegian financial institutions, since such stakes may pave the way for arrangements motivated by extraneous considerations. Furthermore, one must still seek to prevent non-financial owners from using their positions to obtain favours (for example cheap credit, including credit that would otherwise not have been granted because of excessive risk) for themselves, their business associates or their private associates. Such conflicts of interest also provide incentives for imposing especially strict conditions on customers that are, for example, engaged in competition with such major owner’s own business. Attaching weight to non-commercial considerations may also impair the position of other customers of the relevant financial institution, as well as the profitability of such financial institution, and hence also the other owners. In a worst case scenario, others will have to contribute funding to the financial institution in a rescue operation. Moreover, economic loss may be incurred if capital is not allocated to the most viable projects.»

There has been a broad consensus on this in the Storting, and the Ministry will maintain the practice under which individual persons are not permitted to hold more than 25 percent of the shares of a bank.

3.8 Outsourcing

There is an increasing tendency within the financial industry for financial institutions to use contractors to perform tasks and functions that were previously performed by financial institutions themselves; so-called business outsourcing. The use of contractors varies considerably between financial institutions. Tasks that are commonly outsourced include those relating to personnel and administrative functions, accounting and asset management, actuarial services, etc., whilst for example small pension funds may in many cases outsource the predominant part of their activities – apart from overall coordination – to third parties. Conversely, specialised tasks may also be outsourced, for example if a bank or other financial institution contracts a debt-collection agency to perform the enforcement of overdue or defaulted loans. The outsourcing of tasks by financial institutions has not previously been subject to general statutory regulation in Norway, although rules have been introduced in certain areas, for example the provisions in Section 2-9 of the Financial Institutions Act and special rules on the outsourcing of activities by investment firms. Limitations on the outsourcing of tasks will normally also be laid down in the licence issued for the various activities engaged in by financial institutions. The main rule is that core tasks, i.e. tasks that form a necessary and integrated part of the activities for which the institution has been granted a licence shall not be outsourced. Outsourcing raises a number of key issues relating to, inter alia, the supervision of outsourced activities, the protection of personal data, the safeguarding of ICT systems and other financial infrastructure, emergency preparedness, as well as the secure and appropriate handling of incidents. New outsourcing provisions have been considered by, inter alia, the Banking Law Commission in the NOU 2011: 8 Green Paper. The Ministry is currently drafting a proposal for new outsourcing provisions in the Financial Institutions Act and the Financial Supervision Act. The proposed statutory provisions will include rules on what tasks can be outsourced by financial institutions and how, as well as rules specifically authorising Finanstilsynet to monitor outsourcing and to take measures against financial institutions that are outsourcing in a manner deemed inappropriate or unlawful by Finanstilsynet.

3.9 Financial reporting

3.9.1 Accounting

A new consolidated Accounting Directive, replacing the previous accounting directives, was adopted by the EU on 26 June 2013. The main purposes of the new directive are:

1. simplification and reduction of administrative burdens, especially for small companies;

2. clearer and more comparable financial statements, especially for companies in respect of which such considerations are of key importance as the result of developments towards ever-increasing cross-border activities and a larger number of external stakeholders;

3. protection of important user needs via dissemination of necessary accounting details to users; as well as

4. transparent payments to governments from companies with activities in the extractive industry or the logging of primary forests; so-called country-by-country reporting.

The directive requires companies governed by the Accounting Directive that are classified as «large» under the threshold values of such directive, and that have activities in the extractive industry and/or within forestry in primary forests, to prepare a separate report on payments to governments. The same obligation applies to listed companies that are engaged in such activities. The country-by-country reporting provisions of the directive have already been enacted in Norway with individual national adaptations; see Item 4.1.5 below.

It is intended for the new directive to be incorporated into national legislation no later than July 2015. The Ministry intends to appoint a legislative committee to examine potential amendments to the Accounting Act, including any amendments necessary to incorporate the Accounting Directive into Norwegian law.

3.9.2 Auditing

On 30 November 2011, the European Commission proposed amendments to the Statutory Audit Directive and a new regulation on the statutory audit of public-interest entities (including, inter alia, banks, insurance companies and listed companies). On 17 December 2013, the Council and the European Parliament reached political agreement on new EU provisions. It is expected that final EU provisions will be formally adopted in the spring of 2014. The main purposes of the amendments to the directive and the introduction of the new regulation are:

1. to increase audit quality;

2. to strengthen competition between audit firms by, inter alia, removing barriers to entry for small and medium-sized audit firms;

3. to introduce clearer and stricter independence requirements for auditors;

4. to strengthen the supervision of auditors and audit firms;

5. to ensure that audit services can increasingly be provided on a cross-border basis within the EU through, inter alia, the emergence of truly pan-European audit firms;

6. to reduce burdens for small and medium-sized companies.

The proposal is EEA relevant. The Ministry intends to appoint a legislative committee to examine potential amendments to the Auditing Act, including any amendments necessary to incorporate the Statutory Audit Directive into Norwegian law.

3.10 The new EU supervisory system

On 1 January 2011, the EU established a new supervisory system intended to strengthen supervision of the entire European financial sector and to improve the basis for financial stability. The new supervisory system adopts a two-track approach. Macro-prudential supervision is left to a European Systemic Risk Board (ESRB) with responsibility for monitoring systemic risk in the European financial market as a whole, whilst micro-prudential supervision is conducted by three supervisory authorities, for the banking sector (EBA), the insurance and pensions sector (EIOPA) and the securities sector (ESMA), respectively.

The micro-prudential supervisory authorities are to advise the Commission and national supervisory authorities, draft proposals for supplementary regulatory provisions in their sectors, promote harmonised supervisory practices within the EU/EEA and, to some extent, supervise individual institutions. The micro-prudential supervisory authorities have decision-making powers in certain situations: 1) in case of violation of relevant EU provisions; 2) in emergencies; and 3) in case of dispute between national supervisory authorities. Such decisions may be binding on national supervisory authorities or apply directly to private parties in the EU member states. Moreover, the micro-prudential supervisory authorities have in separate legislative acts been granted direct supervisory powers in relation to certain types of undertakings.

The inclusion in the EEA Agreement of legislative acts granting decision-making powers to an EU body represents a challenge in terms of both the two-pillar structure of the EEA Agreement and the stipulations in the Norwegian Constitution on the prerequisites for the transfer of executive powers. Norwegian authorities are currently involved in discussions, alongside Iceland and Liechtenstein, with the EU on potential models for inclusion of the supervision provisions in the EEA Agreement, taking into consideration, inter alia, the Norwegian Constitution and the two-pillar structure of the EEA Agreement. Until a solution is found in this regard, new legislative acts within the financial market area that grant such powers to micro-prudential supervisory authorities in the EU are not included in the EEA Agreement. The EEA/EFTA states and the EU agree that quickly finding a solution is now a matter of pressing importance.

Unlike the micro-prudential supervisory authorities, the ESRB cannot make binding decisions, although it may make recommendations to member states. Consequently, inclusion in the EEA Agreement of the regulation establishing ESRB does not pose the same challenge in terms of the Norwegian Constitution and the two-pillar approach.

Pending a formal affiliation via the EEA Agreement, Finanstilsynet participates as an observer in the micro-prudential supervisory authorities on an informal basis. Norges Bank and Finanstilsynet also participate on an informal basis as observers in the ESRB «Technical Advisory Committee».