Waselius & Wist

The Finnish Financial Supervisory Authority’s (FFSA) recommendation on remuneration principles in the financial sector is mainly based on the European Commission’s recommendation on remuneration policies in the financial services sector of 30 April 2009. It intends to ensure, inter alia, that remuneration mechanisms within entities supervised by the FFSA do not include features that increase risk taking or diminish the stability of such entities or even the whole financial markets.

It is suggested that financial institutions establish and maintain remuneration policies that cover the whole personnel of the financial institution in question. The recommendation should, nevertheless, be applied in particular when remunerating the Managing Director and such other persons whose actions have a material impact on the risk exposure of the financial institution. Remuneration policies should be consistent with sound and effective risk management and should not induce excessive risk taking. Further, they should be in line with the business strategy, objectives, values and long term interests of the financial institution, and be consistent with the principles relating to the protection of clients and investors.

The recommendation includes guidelines as to striking an appropriate balance between the fixed and variable elements of pay. Further, it is recommended, inter alia, that the payment of the major part of any substantial bonuses or other variable components of remuneration should be deferred by at least three years and that the financial institution should have the ability to withdraw bonuses that are paid after the realization of a relevant risk factor. As to performance measurement, performance related remuneration should be based on an overall assessment reflecting individual performance as well as the performance of both the relevant business unit and the entire financial institution with due consideration of all the risks. Also, performance should be assessed against a multi-year framework and the payment of bonuses should recognize the relevant business cycle of the financial institution. It is further recommended, inter alia, that significant financial institutions would set up their own remuneration committees, independent control over the effectiveness and implementation of remuneration policies would be established and that relevant details of remuneration policies would be disclosed in a transparent manner.

For further information, please contact Ms. Tarja Wist or Mr. Lauri Peltola at tarja.wist@ww.fi or lauri.peltola@ww.fi.

The Ministry of Justice in Finland has recently completed its proposal for implementation in Finland of the European Directive (2009/44/EC) amending Directives 98/26/EC and 2002/47/EC on settlement finality in payment and securities settlement systems and financial collateral arrangements, respectively. The Directive is intended to be implemented through amendments to, inter alia, the Finnish Act on Certain Terms Relating to Securities and Currency Trade and Clearing Systems (the “Netting Act”) and the Act on Financial Collateral (the “Financial Collateral Act”).

Due to increased cross-border activity amongst settlement systems and the need for further certainty in respect of the night-time settlement of securities transactions, a number of more or less technical amendments in line with the European initiative are being proposed to the Netting Act. In practice, these amendments include the broadening of the definition of settlement systems in the Netting Act, which, going forward will encompass besides entities operating such settlement systems and the participants thereto, also other equivalent parties. Moreover, under the current Netting Act, obligations that have been entered into the settlement system on same day as the insolvency proceedings of a participant are commenced can be netted during the same day, provided that the entity operating the settlement system was not aware or should not have been aware of the commencement of insolvency proceedings at the time the obligations were netted. Such same day netting under the Netting Act is now proposed to be extended also to the night-time settlement of obligations.

As regards financial collateral arrangements, the proposed amendments to the Financial Collateral Act intend to extend the protection of the Act to cover also the use of new types of collateral in the relevant marketplaces, such as loan receivables and credit claims. It is intended that, for the purposes of the Financial Collateral Act, such new types of collateral would cover loans granted mainly by credit institutions, electronic money institutions and entities provided for in Article 4 of the European Directive on the taking up and pursuit of the business of credit institutions (2006/48/EC) (i.e. in Finland, Teollisen yhteistyön rahasto Oy and the Finnish Export Credit Agency, Finnvera Oyj).

The proposed legislation in respect of financial collateral arrangements is intended to enter into force on 30 December 2010, whereas amendments to the Netting Act shall enter into force some three months later.