Report and Accounts 1999 - The Statutory Basis for the Financial Sector

The Statutory Basis for the Financial Sector

EU Directives

Proposal for an EU directive on access to take up and pursue the business of electronic credit institution
On 24 September 1998 the European Commission submitted a directive proposal in this area. It is directed primarily at issuers of electronic money ^[1]. Towards the end of the year the EU member states reached agreement on the directive proposal, which is expected to be submitted to the European Parliament for second reading during the 1st half of 2000.

Proposal for amendment of directive 85/611/EEC in the field of undertakings for collective investment in transferable securities (UCITS)

Proposal for an EU directive on access to take up and pursue the business of electronic credit institution
In July 1998 the European Commission submitted two separate directive proposals to amend the current directive from 1985. The proposals include such issues as approval, supervision, investment policy and transparency requirements of UCITS offering their shares for sale to the public and whose only objective is to invest in securities. The first proposal focuses on the product offered. The second proposal focuses on the provider. The objective of the "product proposal" is to adapt the existing UCITS directive to the market development by extending its scope to include collective investment institutions investing wholly or partly in other liquid financial assets than securities.

The objective of the second proposal is to strengthen the internal market in the UCITS field by introducing regulation of administration companies in line with the current regulation of other providers of financial services (banks, insurance companies and investment companies). An administration company can thus obtain an EU passport giving it the right to take up business in other member states via establishment or free exchange of services. 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. This provides for an improved market structure, subject to greater competition. The work will continue in 2000.

Proposal for an EU directive on reconstruction and liquidation of credit institutions
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. The directive proposal was subject to reconsideration in 1999 because it is considered to be of significance to the introduction of the internal market and since in the meantime a liquidation convention has been adopted by the EU.

Proposal for an EU directive on reconstruction and liquidation of insurance companies
The directive proposal was first submitted in 1989. These negotiations were likewise suspended in 1993, cf. the above concerning the proposal for a directive on the reconstruction and liquidation of credit institutions. The negotiations concerning this directive proposal were reopened in 1999.

Proposal for an EU directive on distance marketing of financial services
In 1997 the Council and the European Parliament adopted a directive on the protection of consumers in respect of distance contracts. Distance contracts concerning financial services were exempt from this directive. In November 1998 the European Commission submitted a proposal for a directive on distance marketing of financial services. The proposal concerns any contract between a business enterprise and a consumer concerning financial services when such contracts are concluded solely by means of communication technology. The directive proposal gives the customer the opportunity to reverse the contract within a certain period, the length of which depends on the nature of the product. One issue in the negotiations concerning the proposal is whether the directive should provide for minimum regulation, with the opportunity of further regulation in national law, or whether there should be exhaustive regulation, as requested by the European Commission and the European Parliament. This directive proposal is an important element in the creation of a de facto internal market for financial services based on competition between credit institutions throughout the EU. The work continues in 2000.

Acts, etc.

Amendment of the Payment Card Act
The amendment entered into force on 16 April 1999 and lifts the restriction of card issuers' access to charge fees from card recipients wishing to effect payments using payment cards on the Internet, etc. In its consultation response the Nationalbank supported this liberalisation of the Payment Card Act, while stating that the objective should be liberalisation of the area without jeopardising the benefits of the joint infrastructure in the payment systems area in Denmark. The Act contains a provision stipulating that any proposal for revision of Section 20 of the Act is to be submitted to the Folketing (Parliament) by no later than 1 November 2001.

Amendment of the Act on Insurance Companies, the Act on Danish Commercial Banks and Savings Banks, etc., the Mortgage Credit Act and the Act on Investment Companies
These legislative amendments, which entered into force on 1 June 1999, impose minimum capital requirements on holding companies of financial groups and provide for limits to be imposed on the exposures of financial groups. Furthermore, the directors of financial enterprises may now, subject to the supervision of the Danish Financial Supervisory Authority, serve as directors of parent companies if the latter exclusively or primarily hold capital interests in financial enterprises. These amendments restrict the opportunities to leverage the share capital of subsidiaries subject to supervision. The introduction of minimum capital requirements of holding companies can be viewed as the first step towards actual supervision of financial holding companies.

Amendment of the Securities Trading Act
The amendments entered into force on 1 May 1999 and implement provisions concerning the simplification of rules, confidentiality and definition of parties, as well as intra-Group transactions, the Financial Supervisory Authority's access to collect information and a number of amendments concerning rights of pledge/collateral. In addition, Section 31 concerning take-over bids is amended to impose an obligation on the purchaser of a shareholding in a company listed on the Copenhagen Stock Exchange or an authorised marketplace to submit a take-over bid to the other shareholders of the company if the acquisition entails a controlling influence in the form of more than one third of the voting rights.

The Act on Cross-Border Transfer of Money
This Act entered into force on 14 August 1999 and implements the EU directive on the cross-border transfer of money. The Act applies to banks and other business enterprises commercially involved in cross-border transfer of money within the EU or the EEA. The Act contains provisions regulating the rights and obligations in the relationship between the credit institution and its customers before and after the completion of a cross-border payment transfer, as well as in the relationship between the credit institutions if a transfer cannot be made as agreed. The scope of the Act is transfers of amounts of maximum the equivalent of euro 50,000.

Consultation Responses

Concerning proposals for a number of acts regarding the financial sector
The objectives of the bills include to implement a number of recommendations from the Committee on the Financial Sector after the Year 2000.

The bills concern the following acts: The Danish Commercial Banks and Savings Banks Act, the Mortgage Credit Act, the Securities Trading Act, the Act on Insurance Companies, the Act on Investment Companies, the Act on Investment Associations and Special Purpose Associations and the Act on Company Pension Funds.

The main issues of the proposals are follows:

to strengthen the regulation of financial supervision by including supervision of financial groups, i.e. holding companies primarily holding capital interests in other financial companies
access to disseminate customer information internally within a group in connection with outsourcing of tasks
lifting of the limitations of voting rights in the Mortgage Credit Act and as a consequence the introduction of restructuring provisions in the Mortgage Credit Act so that mortgage-credit institutes which are restructured as holding funds can be restructured as limited liability companies in accordance with the encapsulation model
adjustment of the balance principle for mortgage-credit institutes
implementation of the Finality directive
the Nationalbank's access to the records of the Danish Securities Centre in connection with a conflict
segregated accounts with an investment company

In a letter of 11 October 1999 the Nationalbank submitted the following consultation response:
The recent development – not only in Denmark, but also abroad – has shown that financial enterprises are increasingly tending to form more complicated structures such as financial groups across the traditional dividing lines in the financial sector. The main objective of several of the bills submitted is to strengthen the supervision of financial groups.

In principle, the Nationalbank finds that the supervision of a financial group should be independent of the group's specific structure. The Nationalbank therefore endorses the submitted proposals. At the same time, the Nationalbank finds that consideration of the future structure of financial legislation is a natural consequence of the current trends.

The Nationalbank finds it important to eliminate unnecessary barriers to structural adjustments, not least with a view to ensuring a competitive and dynamic market. Furthermore, the Nationalbank finds that as far as possible the same rules should be applied to the entire financial sector.

The lifting of the Act's provision on limitation of voting rights will provide for structural adjustments to the extent deemed necessary by the companies. Furthermore, the proposals align the rules concerning mortgage-credit institutes with the rules applying to other areas of the financial sector.

Against this background the Nationalbank endorses the amendment proposals submitted concerning limitation of voting rights and restructuring provisions in the Mortgage Credit Act.

The Nationalbank considers the balance principle to be of decisive importance to the development of the mortgage-credit sector. Moreover, the existing provisions have clearly proved to be inappropriate in a number of respects.

Against this background the Nationalbank welcomes the proposals since they increase the flexibility of the mortgage-credit sector without significantly increasing the mortgage-credit institutes' risk exposure or weakening the special status of mortgage-credit bonds. At the same time the adjustments provide for the introduction of more appropriate risk measures.

The Nationalbank finds it decisive that the mortgage-credit institutes may not undertake conversion risks, for example by financing callable loans by means of uncallable bonds. The Nationalbank therefore prefers this to be explicitly stated in the Act.

The Nationalbank otherwise endorses the adjustment of the balance principle via a framework act to be followed up by detailed regulation in executive orders. On the one hand, this ensures that ongoing adjustments can be made on the basis of experience and changes in conditions. In this regard the Nationalbank considers the limits stated in the explanatory notes to be appropriate. The Nationalbank also supports the opportunity for mortgage-credit institutes to offer adjustablerate loans subject a maximum limit for the interest payable by the borrower, provided that the mortgage-credit institutes hedge the risk.

On the other hand, the wide statutory framework creates a need for clear and detailed explanatory notes to the bill, to prevent uncertainty concerning future regulation.

The proposals concerning the Securities Trading Act implement directive 98/26/EC on settlement finality in payment and securities settlement systems. The Nationalbank finds it important to implement the proposal as it stands in consideration of the cross-border aspects of Danish payment systems.

The Nationalbank welcomes the provisions of the bill concerning access to the records of a securities centre affected by a labour-market conflict in order to limit the risk of default on significant elements of central-government payments.

The Nationalbank has no further comments on the bills.

Concerning the proposed amendment of a number of financial acts
The amendment proposals are primarily related to financial enterprises' opportunities to hold controlling interests in non-financial enterprises and pertain to more than 10 different acts. The objective of the proposals is to implement the recommendations of the Committee on the Financial Sector after the Year 2000. The amendments can be viewed as an element of the corporate governance debate.

The most significant amendment proposal is that two financial enterprises from the same sector in principle may now jointly hold a controlling interest in a non-financial enterprise. The definition of controlling interest is decided by the Financial Supervisory Authority.

According to the amendment proposal a bank may take up other business than banking activities if:

the bank does not hold direct or indirect controlling interests in the business enterprise in question,
the bank does not operate the business enterprise together with banks, insurance companies, investment companies or mortgage-credit institutes which are parts of the same group as the bank and
the activity is undertaken under the auspices of another company than the bank.

Furthermore, the final bills will include transition provisions in connection with mergers. Two financial enterprises which undertake to merge will be given sufficient time to settle investments subject to the prohibition concerning groups.

In a letter of 19 October 1999 the Nationalbank submitted the following consultation response:
The Nationalbank supports that insurance companies and pension funds be given access, according to the proposals, to hold a controlling interest other than via a financing company, i.e. a limited liability company whose sole objective is to acquire interests in or otherwise invest in one or more business enterprises.

The trend in the financial sector is towards the formation of groups and the erosion of the traditional barriers between segments. In view of this development the Nationalbank finds it natural to consider adjustment of the scope of the limitation concerning a controlling interest from an industry criterion to a group criterion. This reorientation is also in line with several of the other bills which are expected to be submitted in this parliamentary session.

At the same time, the Nationalbank attaches considerable importance to the provisions preventing one financial enterprise to hold a sole controlling interest in a non-financial enterprise, and that a controlling interest can thus only be held by at least two independent financial enterprises.

In principle, the Nationalbank shares the view stated in the report on "The Financial Sector after the Year 2000" to the effect that the primary activity of credit institutions shall be to provide loan capital.

The Nationalbank has no further comments on the proposals submitted.

Concerning a proposal for amendment of the Act on a Guarantee Fund for Depositors and Investors
The bill is intended to solve the outstanding problems in the Act vis-à-vis 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 prevent the guarantee scheme from functioning properly in practice.

The bill widens the options available to the Guarantee Fund. The Guarantee Fund's access to participate in the liquidation of a credit institution in jeopardy will no longer be restricted to providing funds or a guarantee to cover non-subordinate creditors. The proposal enables the Guarantee Fund to e.g. provide unlimited guarantees or to take over a credit institution with a view to tendering in accordance with the requirements set out in EU legislation concerning the valuation of the institution at market price.

In a letter of 26 November 1999 the Nationalbank submitted the following consultation response:
The bill is submitted in order to solve the outstanding problems concerning the Act on a guarantee fund for depositors and investors in relation to the provisions of EU legislation concerning government subsidies.

The bill widens the options available to the Guarantee Fund. The Guarantee Fund's access to participate is no longer limited to providing funds or a guarantee to cover non-subordinate creditors on the liquidation of credit institutions in jeopardy. The bill enables the Guarantee Fund among other things to take over a credit institution in jeopardy with a view to tendering in order to obtain take-over bids for the credit institution ^[2].

The Nationalbank would like to emphasise that the Bank opposes a general bank rescue fund. Such a fund might provide the wrong incentives concerning prudent banking. In this connection the Nationalbank attaches considerable importance to the stipulation in the Act of a maximum limit for participation by the Guarantee Fund, corresponding to the limit in the existing Act. In line with previous consultation responses concerning this Act the Guarantee Fund's access to participate in the liquidation of a credit institution should supplement the existing means to achieve a solution. As in the case of the winding-up of a credit institution, mergers or other restructuring schemes without the participation of the Guarantee Fund must continue to be methods available to overcome solvency problems in a credit institution.

In general, the Nationalbank is concerned that it is up to the Guarantee Fund to decide which measures are to be adopted to overcome a crisis in a credit institution without at the same time stipulating guidelines for such decisions in the act or the explanatory notes to the Act. In this connection the Nationalbank is also concerned that the act does not stipulate a time limit for measures pursuant to Section 2.

The Nationalbank agrees that as stipulated in the proposal for amendment of Section 1, subsection 4, on having to choose between reimbursement of depositors and investors pursuant to subsection 2 and participation in measures in accordance with Section 2 of the bill, the Guarantee Fund should choose the solution which imposes fewest costs on the Guarantee Fund. The explanatory notes to this provision are not entirely clear as it appears from the notes that the Guarantee Fund may opt for another solution than that associated with the lowest costs if this is justified by specific circumstances. The Nationalbank finds that there should be no doubt that the Guarantee Fund must choose the solution associated with the lowest costs and that this should be clearly stated in the explanatory notes.

The proposed veto right for representatives of credit institutions on the Guarantee Fund's Board must be viewed in the light of the importance attached to this provision by the European Commission with regard to the government subsidy issues. Against this background the Nationalbank accepts the proposed veto right.

Furthermore, the Nationalbank emphasises that the Guarantee Fund must have access to the required administrative resources on taking over a credit institution in jeopardy. At present the Nationalbank undertakes a number of administrative tasks on behalf of the Guarantee Fund, in accordance with an agreement. This does not imply that the Nationalbank can make resources available in the event of a possible take-over of a credit institution in jeopardy by the Guarantee Fund. The Nationalbank thus assumes that such resources can be made available under the auspices of the contributing credit institutions since the required staff must have commercial experience.

The Nationalbank has no further comments on the bill.

Concerning a proposal for amendment of the Statistics Denmark Act
The proposal is described in further detail on p. 100.

In a letter of 26 November 1999 the Nationalbank submitted the following consultation response:
Internationalisation in general and the cooperation within the EU in particular have increased the need for a uniform basis for comparison of the economic and financial development in various countries. For this reason work has been intensified in various international fora in recent years to standardise the access to and the content of statistics for these areas. The background to this work is the constant evolution of the requirements made of statistical compilations.

In a global perspective the IMF has focused on increasing the level of information on economic trends in the member countries by setting out rules concerning the key economic indicators to be disseminated and the frequency of such dissemination. This was a consequence of experience from the most recent economic crisis in Southeast Asia. The rules are set out in the Special Data Dissemination Standard (SDDS), which was originally adopted in 1996 and is subject to ongoing revision.

Within the EU the standardisation and collection of economic and financial statistics for the EU member states are undertaken by Eurostat and the ECB. The coordination of economic policy within the EU and the transition to the single currency have gradually imposed more stringent requirements on the reporting by member states of economic and financial statistical information to respectively Eurostat and the ECB.

The Nationalbank finds it imperative that Denmark at all times complies with the international statistical standards. This also applies to financial statistics where a major expansion of the Danish statistics is considered necessary in order to keep up with the development in the area of standards for financial statistics.

As a consequence, Statistics Denmark and the Nationalbank have concluded an agreement according to which the Nationalbank shall be responsible for the work necessary to ensure compliance of the Danish financial statistics with international standards, including the guidelines which have been and will be set out regarding the EU member states' reporting of financial statistics to the ECB. This division of work reflects a similar arrangement between Eurostat and the ECB, as well as arrangements in most other EU member states where financial statistics are the responsibility of the central bank.

A precondition for the agreement with Statistics Denmark and the anticipated expansion of the financial statistics is that the Nationalbank be authorised to collect the required information from the financial sector. This cooperation likewise requires formalised access for Statistics Denmark and the Nationalbank to exchange confidential information in connection with the preparation of statistics. Since the bill will provide the necessary legal basis for the practical cooperation between Statistics Denmark and the Nationalbank the latter fully endorses the proposal.

The Nationalbank was naturally involved in the preparatory work and has no further comments on the specific formulation of the bill.

Footnotes

[1] The directive is described in further detail in the 1998 Annual Report.

[2] The final bill, which was submitted to the Folketing (Parliament) on 3 February 2000 includes no provisions on take-over of a credit institution.

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Version 1.0 April 2000 Nationalbanken.
Published by Danmarks Nationalbank April 2000, http://www.nationalbanken.dk