The Statutory Basis for the Financial Sector
EU directives
Directive 2000/46/EC on the taking up, pursuit and prudential
supervision of the business of electronic money institutions
In 1998 the European Commission submitted a directive proposal in this area. The directive was finally adopted on 18
September 2000 and must be implemented by 27 April 2002. The directive is directed primarily at issuers of electronic
money and aims at coordination and harmonisation of the member states' legislation on the pursuit and supervision of the
business of electronic money institutions. This entails that such institutions will be subject to financial supervision and to
the rules on the "EU passport", i.e. the free right of establishment, free exchange of services and mutual recognition of
supervision. Issuers of electronic money will be subject to simple and more lenient capital requirements, but also to
more restrictive placement rules than credit institutions. The background is the different balance-sheet structure of such
institutions whereby the liabilities consist of unredeemed electronic money. Very liquid placement of assets is an
equivalent requirement. According to the proposal a member state may stipulate more lenient requirements for small
national systems, but such systems will not be subject to the rules on the "EU passport". See also the proposal for
implementation in Danish legislation on p. 155.
Directive 2000/31/EC on electronic commerce
On 8 June 2000 a directive regulating certain legal aspects of electronic commerce was finally adopted. The directive
must be implemented by 17 January 2002. Its objective is to contribute to ensuring a well-functioning internal market.
The directive is based on the "principle of country of origin", whereby enterprises acting as providers of goods and
services are subject to home country regulation supervision. This principle will facilitate business enterprises'
opportunities for cross-border sales and marketing activities. However, the principle may be subject to exemption with
reference to consumer protection.
Proposal for a directive on reconstruction and liquidation of credit
institutions (Winding up)
The directive proposal was first submitted in 1985. Progress on the directive proposal has been difficult in view of the
aspects related to bankruptcy law. The negotiations were suspended in 1993. In 1999, the proposal was subject to
reconsideration. The EU member states then reached agreement on the proposal at the meeting of the ECOFIN
Council on 8 May 2000. The directive is applicable to credit institutions and their branches established in another
member state than that of the credit institution's head office. The underlying principle of the directive is that credit
institutions are reconstructed/liquidated subject to the principle of unity and universality in the reconstruction/liquidation.
This grants exclusive competence to the authorities of the home country. Decisions made by authorities in the home
country must be recognised by the other member states. These decisions have immediate legal enforceability. The
objective is to ensure uniform treatment of any rights vested in the creditors of the credit institution under reconstruction
or liquidation, irrespective of whether the creditors are residents of the home country of the credit institution, or the host
country. Furthermore, the directive will also ensure that these measures can be enforced vis-à-vis a credit institution's
branches in other member states under the regulations of the home country, unless otherwise stipulated in the directive.
Proposal for a directive on amendment of directive 91/308/EC on
money laundering
At the meeting of the ECOFIN Council on 30 November 2000 agreement was reached on a joint position concerning
the proposal for a directive to amend the money-laundering directive. The directive contains provisions to expand its
scope as well as to update the directive, against the background of experience of its application hitherto. The definition
of crimes related to money laundering is extended and the definition of natural or legal persons is expanded to include
accountants, attorneys, real-estate agents, etc.
Proposal for amendment of directive 85/611/EEC in the field of
undertakings for collective investment in transferable securities
(UCITS)
In July 1998 the European Commission submitted two separate directive proposals to amend the current directive from
1985. The first proposal focuses on the product offered, while the second proposal focuses on the provider. The
objective of the product proposal is to extend the scope of the directive to include institutions investing in money-market
instruments, bank deposits, shares in other non-harmonised investment institutions and standardised futures and options
traded in regulated markets, as well as OTC instruments. The proposal provides for the composition of the asset
portfolio to resemble a stock or bond index. Investment associations covered by this proposal will thus also gain the
right to provide their products in all EU/EEA member states (the European passport). The objective of the second
proposal (the administration company proposal) is to introduce regulation of administration companies granting such
companies access to operate in other member states by establishment or by free exchange of services (the European
passport). The current restrictions on the activities of the administration companies are to be relaxed to allow the
administration companies to undertake individual portfolio management and other accessory activities. Finally, simplified
prospectuses are introduced. Political agreement on the first amendment proposal (the product directive) was reached
at the meeting of the ECOFIN Council in October 2000. At the meeting it was agreed to adopt the two proposals
simultaneously. The Swedish presidency will submit the second amendment proposal to the ECOFIN Council in March
2001 with a view to adoption of a joint position on both proposals at a later stage in the first half of 2001.
Proposal for a directive on distance marketing of financial services
In 1997 the ECOFIN Council and the European Parliament adopted a directive on the protection of consumers in
respect of distance selling. Distance selling concerning financial services were exempt from this directive. A directive has
been under way for several years. The objective of this directive is to enhance transparency vis-à-vis the consumer, and
the right to reverse any distant contract concerning financial services. A central issue is disagreement in the European
Commission and the member states on whether the directive should provide for minimum regulation or harmonisation.
The European Commission maintains its view that it should be a harmonisation directive. This position should be viewed
against the background of the ample opportunities to market financial services across national borders. The European
Commission finds that great variation in the regulation of marketing of financial services in the various member states will
create problems for business enterprises and act as a barrier to the internal market. The work continues in 2001.
ACTS, etc.
The Act on Danish Commercial Banks and Savings Banks
In May 2000 the Folketing (Parliament) adopted a number of amendments to the Act on Danish Commercial Banks
and Savings Banks with effect from 1 June 2000. The objective was to accommodate some of the recommendations of
the Committee on the Financial Sector after the Year 2000. The amendments are as follows:
- A requirement for approval by the Danish Financial Supervisory Authority of major shareholders in holding
companies.
- Separation of financial enterprises into sub-groups under a holding company as required by the Financial
Supervisory Authority.
- Divestment by the holding company of capital interests in financial enterprises as required by the Financial
Supervisory Authority.
- A requirement for fit and proper management of holding companies.
- Dissemination of customer data to the parent company of a bank with a view to the group's risk management,
and the prohibition of the parent company from using such information for marketing or advisory purposes
vis-à-vis customers.
- Expansion of the regulations on intra-group transactions, including a requirement for reversal of intra-group
transactions and return of any services provided if the transaction is estimated not to be in compliance with
market terms as stated in the Executive Order of the Financial Supervisory Authority on intra-group transactions.
- A requirement for tax-related assets to be deducted from liable capital.
- More lenient rules on the access of financial enterprises to hold a controlling interest in non-financial enterprises.
The Securities Trading Act
This Act was amended twice in 2000. In the spring the Folketing (Parliament) adopted amendments with three
central elements: adjustment of regulations on financial groups, accountability vis-à-vis authorised marketplaces
and the implementation of directive 98/26/EC of 19 May 1998 on settlement finality in payment and securities
settlement systems. The objective of the directive is to establish a common legal framework so as to reduce the
systemic risk of payment and settlement systems by ensuring the finality of a payment request which can be
carried out automatically by the system even in the event of insolvency, and by ensuring that collateral provided
to the system is not affected by liquidation or suspension of payments. In addition, it is possible to choose the
national law to be applied to the system. A registration and notification procedure is introduced whereby systems
approved/registered in one member state are notified to the Commission. A consequential innovation for
Denmark is the introduction of a registration scheme for payment systems. As a consequence, the regulations on
netting and provision of collateral apply solely to such systems, as well as payment system activities by Danmarks
Nationalbank and by securities clearing houses approved by the Danish Financial Supervisory Authority.
In December the Folketing (Parliament) adopted amendments of which the principal elements are listed below:
- Membership of a stock exchange or a central securities depository for entities from a non-EU/EEA member state
shall be subject to approval by the Danish Financial Supervisory Authority.
- The regulations on insider trading and price manipulation are extended to include trading concerning securities
accepted for listing on the stock exchange and authorised marketplaces in non-EU/EEA member states.
- Expansion of the access for clearing houses and clearing participants to establish right of pledge/collateral to
include settlement in payment systems.
The Mortgage Credit Act
This Act was adopted in the spring of 2000 and introduced regulations on holding companies, cf. above
concerning the Act on Danish Commercial Banks and Savings Banks. It also abolished the limitations of
voting rights in the articles of association of mortgage-credit limited-liability companies for other
shareholders than the fund or the institute. Modelled on the Act on Danish Commercial Banks and Savings
Banks, this Act furthermore introduces restructuring provisions, so that mortgage-credit institutes which
are structured as holding funds can be restructured as limited liability companies in accordance with the
"encapsulation model". This Act also updates the balance principle by introducing more flexible provisions
on issue of mortgage-credit bonds.
The Act on a Guarantee Fund for Depositors and Investors
In May 2000 the Folketing (Parliament) adopted a bill to amend the Act on a Guarantee Fund for
Depositors and Investors. The amendments are intended to solve the outstanding problems in the Act in
relation to the provisions of EU legislation on government subsidies. The government subsidy issue, and
thereby the requirements concerning notification to and approval by the European Commission of the
Guarantee Fund's contribution to the winding up of a credit institution, prevented the guarantee scheme
from functioning appropriately in connection with liquidation. These amendments establish a number of
special procedures to be observed by the Guarantee Fund in order to prevent a situation which might lead
to considerations concerning government subsidies. According to the explanatory notes to the Act the
government subsidy issue, according to the European Commission, can be avoided if:
- A tender procedure approved by the European Commission is established.
- The Guarantee Fund has unrestricted scope for business decisions.
- The sector representatives on the Board of the Guarantee Fund may veto the Guarantee Fund's financial
assistance on the winding up of the credit institution.
It also appears from the explanatory notes that in connection with the tender procedure the Guarantee
Fund will be able to provide an unlimited guarantee in relation to the commitments of the credit institution
in jeopardy until winding up and transfer have taken place. This guarantee will prevent a "run" on a credit
institution in jeopardy which is expected to continue to operate during the winding up period.
Consultation responses
Concerning proposal for an Act on Financial Enterprises
The proposal is described in further detail on p. 63.
On 5 January 2001 Danmarks Nationalbank submitted the following consultation response:
On the basis of the greater integration of the financial markets, including the formation of financial
conglomerates, it has been deemed necessary to implement a new structure for the financial supervisory
acts. The aim is to ensure that similar financial products are treated in the same way and to introduce a
number of measures to simplify and modernise this area. The restructuring of the financial supervisory acts
is the response to the recommendation to this effect in Report no. 1376 entitled "The Financial Sector after
the Year 2000" by the Committee on the Financial Sector after the Year 2000 of the Ministry of
Economic Affairs.
The bill compiles the supervisory provisions and other statutory areas. In general, Danmarks Nationalbank
endorses this legislation initiative and finds that the preparation of a joint act will simplify the structure of
the provisions and be the first step towards ensuring that similar financial products are treated in the same
way to a higher degree within the various financial areas.
Danmarks Nationalbank has noted that the special characteristics of the various financial sectors are
preserved in the sector-specific acts, but that there are plans subsequently to review the remaining
elements of the financial acts with a view to achieving an even more uniform structure and further
simplification of e.g. the provisions on establishment of financial enterprises, permission to carry on
financial activities, solvency, mergers, etc.
Danmarks Nationalbank finds that this is a unique opportunity to create a more forward-looking and
pertinent legal basis for the financial sector. This should take place on the basis of careful preparation
within a reasonable time frame.
In connection with the compilation a number of provisions are adjusted or updated.
In connection with the compiling of the provisions on good practice in Chapter 2 a new provision is
introduced whereby the Danish Financial Supervisory Authority may stipulate rules on good practice
within different areas of activity. In the explanatory notes to the bill it is emphasised that the guidelines must
be issued in close cooperation with trade and consumer organisations. In this connection it must be
ensured that regulations to the same effect are not issued by several public authorities.
Chapter 4 on management rules generally constitutes a compilation of the existing rules, while maintaining
the sector-specific provisions. These rules account for almost one third of the act, and modernisation and
simplification of the rules may therefore be considered. Such rules are also unique to Denmark, and are the
result of proliferation over many years. There may be cases of dual regulation after the introduction of "fit
and proper" provisions based on the directives.
The accounting provisions in Chapter 6 are to the highest possible degree formulated to accord with
parallel provisions in the concurrent annual accounts bill. This provides for uniform accounting policies and
rules for companies in the financial sector and other companies. In more technical terms, the provisions are
amended from transaction-based accounts to value-based accounts. As a result, the actual evaluation of
assets and liabilities (fair-value principle) will play a more important role.
Danmarks Nationalbank endorses the general introduction of the new accounting policies in line with
international development, with a view to national and international harmonisation of accounting provisions.
The provisions on presentation of accounts applying to Danish financial enterprises should be updated on a
continuous basis to correspond to European accounting standards for equivalent enterprises. However, it
must be emphasised that in certain important respects the international provisions are less advanced than
the proposed Danish provisions.
At the same time, all the implications of the new provisions must be identified. Danmarks Nationalbank
therefore endorses postponement of the entry into force until the work of the proposed committee is
completed, including in particular the implications of the fair-value principle for the level of provisions in
connection with lending, including incentives for provisions to be made.
Danmarks Nationalbank also supports the abolishment of the dual auditor system. In this connection it is
significant that the proposal is recommended by the Danish Financial Supervisory Authority and that there
is not considered to be any need to introduce other provisions to ensure the independence of auditors.
Danmarks Nationalbank has no further comments on the bill.
Concerning proposal for an Act on Electronic Money
Institutions
The bill is intended to implement directive 2000/46/EC of the European Parliament and of the Council of
18 September 2000 on the taking-up, pursuit of and prudential supervision of the business of electronic
money institutions. The directive is described in further detail on p. 148. In contrast to the directive, the bill
proposes that the maximum limit for issue of electronic money by electronic money institutions shall be
euro 300. This should be viewed against the background that electronic money must be regarded as an
electronic substitute for coins and banknotes stored on an electronic device and normally used for
electronic payments of limited amounts. Furthermore, the proposal applies a lower limit to amounts to be
exempted from the scope of the directive. The bill is based on the current rules on issuers of prepaid cards
in the Act on Savings Institutions and Issuers of Prepaid Cards. This entails that the bill does not introduce
provisions on supervision in an area not already subject to regulation.
On 1 December 2000 Danmarks Nationalbank submitted the following consultation response:
This bill implements directive 2000/46/EC of the European Parliament and of the Council of 18
September 2000 on the taking-up, pursuit and prudential supervision of the business of electronic money
institutions.
The directive is intended to harmonise the provisions on the taking-up, pursuit and prudential supervision
of the business of electronic money institutions, providing for the granting of a single licence recognised
throughout the Community, in compliance with the principle of home country prudential supervision.
In connection with regulation of electronic money institutions, Danmarks Nationalbank finds it important to
ensure that the elements of financial legislation are necessary and sufficient as regards the supply of
electronic money and the management of the associated risks.
In this connection the maximum limit stipulated in Section 3 of the bill of euro 300 for amounts stored in
the electronic devices is confusing, since this limit is not stipulated in the directive. The limit would apply
only to Danish electronic money institutions, whereas no limits would apply to electronic money institutions
licensed in other EU member states as regards cross-border activities.
Furthermore, Danmarks Nationalbank notes that Section 1, subsection 5 of the bill applies lower limits to
amounts to be exempted than stated in the directive.
Danmarks Nationalbank has no further comments on the bill.
Concerning proposal for amendment of the Act on Danish
Commercial Banks and Savings Banks, etc., the Mortgage
Credit Act and the Act on Investment Companies
The two central elements of the bills are the access to use internal models and the specification that
subordinate capital is not included in the calculation of a bank's capital solvency. Under the CAD II
directive of 1998 the authorities may implement legislation allowing financial institutions to use internal
models to calculate the capital adequacy requirement for exposure to market risk. The background to this
amendment is that certain institutions have developed sophisticated Value-at-Risk (VaR) models for more
accurate measurement of market risks in comparison to the current standard method today available to the
institutions. The option to use internal models gives the banks a stronger incentive to develop risk
management models.
On 29 November 2000 Danmarks Nationalbank submitted the following consultation response:
Danmarks Nationalbank endorses the granting of access for financial institutions to use internal models – in
accordance with the CAD II directive – in their calculation of weighted items exposed to market risk. This
enhances the incentives for financial institutions to apply good risk management models. Danmarks
Nationalbank finds it important to emphasise that the bill adheres to the spirit of the CAD II directive in
that the level of capital adequacy level is not affected.
Furthermore, Danmarks Nationalbank welcomes the specification of the concept of insolvency whereby
future issue of subordinate capital are not included the compilation of solvency. This is in accordance with
the recommendation most recently stated in the report entitled "The Financial Sector after the Year 2000".
Concerning proposal for amendment of the Act on Taxation of
Pension Yields
This proposal is described in further detail on p. 62.
On 10 November 2000 Danmarks Nationalbank submitted the following consultation response:
In a letter of 1 November 2000 the Ministry of Economic Affairs submitted the bill to amend the Act on
Insurance Activities, the Labour Market Supplementary Pension Fund Act, the Act on the Employees'
Capital Pension Fund and the Occupational Safety Act to Danmarks Nationalbank for consultation. The
bill should be viewed in conjunction with the bill to amend the Act on Taxation of Pension Yields, the
Capital Gains Act and the Corporate Tax Act. Danmarks Nationalbank's comments apply to the entire
legislative package.
Danmarks Nationalbank welcomes the fact that the package seeks to simplify the taxation of pension
yields by introducing a uniform tax and providing for more unrestricted planning of investment policies by
pension institutions. The expected expansion of the prudential supervision by the Danish Financial
Supervisory Authority of the total balance-sheet structure of the pension institutions and their risk
management is seen as an important supplement to the less restricted investment opportunities.
In this connection special attention should be drawn to the considerable risk assumed by the pension
institutions on providing nominal after-tax interest-rate guarantees, and also to how this risk is hedged.
Concerning proposal to amend the Securities Trading Act
The proposal is described in further detail on p. 151f.
On 1 September Danmarks Nationalbank submitted the following consultation response:
The bill provides for the acceptance of a member from a non-EU/EEA member state to a stock exchange
or a central securities depository, subject to approval by the Danish Financial Supervisory Authority.
Danmarks Nationalbank endorses extended access to stock exchanges and central securities depositories
in order to ensure free competition and an efficient market.
In connection with the implementation of the investment services directive and Stock Exchange Reform II
in 1995, providing for remote membership of the Copenhagen Stock Exchange for EU institutions, this
development was welcomed, but it was emphasised that a "level playing field" should be ensured. It was
especially emphasised that the institutions should be subject to joint European regulations on capital
adequacy, and that they should observe the current rules for trading in the marketplace and that sanctions
could be imposed in the event of non-compliance.
These considerations will in particular also apply to third-country members.
In addition it must be ensured in particular that provisions on insider trading and price manipulation are in
force and enforceable in the relevant countries prior to membership of the Copenhagen Stock Exchange.
In accordance with the principle of reciprocity Danish institutions must also be granted access to a stock
exchange or a central securities depository in the relevant country.
Furthermore, Danmarks Nationalbank endorses the extension of the prohibitions on insider trading and
price manipulation to include securities accepted for listing or trading on stock exchanges, or which are
traded in another regulated marketplace outside the EU/EEA. In view of the greater internationalisation
and the rapid technological progress "national borders" no longer apply in the fight against insider trading
and price manipulation, since the securities market is regarded as a global market. There is thus a need for
"global" provisions against abuse of insider knowledge and price manipulation, in order to enhance
confidence in the market.
Furthermore, Danmarks Nationalbank welcomes the bill's provisions to grant access to use the right of
pledge/collateral in connection with settlement in registered payment systems and Danmarks
Nationalbank's own systems. This will contribute to reducing the systemic risks in the systems, to the
benefit of financial stability.
Danmarks Nationalbank has no further comments on the bill.
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