Director General’s review

The year under review 2023 continued a series of exceptional years. Russia’s war of aggression against Ukraine continued and also affected financial markets.

Cyber risks have increased and preparedness for them must be constantly strengthened. At the Financial Supervisory Authority (FIN-FSA), we enhanced monitoring of cyber security as well as the integrity of payment systems during 2023, even though no significant cyber incidents were detected in the Finnish financial sector in this period.

Changes in the operating environment required a flexible response

The sharp increase in inflation and interest rates during the year raised concerns about higher credit and investment risks, particularly in the real estate sector. At the same time, the rapid rise in interest rates significantly increased banks’ interest margins and therefore their profits.

In spring 2023, the difficulties of a few medium-sized US banks triggered market turbulence, the effects of which also extended to Europe. As a result, we focused bank supervision on the availability and price of liquidity and financing. High inflation, increased energy costs and a rapid rise in loan interest rates, in turn, reduced the funds available to companies and consumers and weakened debtors’ ability to pay their debts. In this situation, we directed supervision and analysed the effects of inflation and rising interest rates particularly with regard to the credit risks of banks and the investment risks of capital market participants and insurance companies.

During the year under review, we tested the stress resilience of banks through the joint stress tests of European supervisors, which are repeated every couple of years. In addition, in cooperation with the Bank of Finland, we carried out a comprehensive assessment of banks’ capital needs in a severe stress scenario. Based on this assessment, we increased the systemic risk buffer for all credit institutions, thus ensuring, in line with our mission, the banks’ ability to survive even in very difficult situations.

A fall in household indebtedness, in turn, has reduced vulnerabilities in the economy. The recommendation on the debt-service-to-income (DSTI) ratio, which came into force at the beginning of 2023, and the new restrictions on housing and housing company loans, which came into force in July 2023, will help mitigate the risks associated with excessive indebtedness. As a result, in December, we restored the non-first home buyers’ maximum LTC ratio, i.e. housing loan cap, to its baseline level.

Changes in the operating environment require the supervisor to be flexible and able to prioritise tasks and target supervisory measures according to the current risk situation.

Good governance secures operations, especially in challenging conditions

When corporate governance systems function properly, potential operational challenges are usually easier to identify. In an uncertain operating environment and in the face of long-term changes, the importance of the reliability of supervised entities’ governance and information quality increases. It is important that organisations are able to react to changes and potential problems in a timely manner.

Our mandate is to ensure confidence in the financial markets. As part of European financial market supervision, we have paid special attention to, among other things, management of climate and environmental risks and a risk-based approach to anti-money laundering supervision. Supervised entities must have up-to-date and effective practices to manage these risks, but the availability of banking services, for example, must not deteriorate unreasonably as a result of due diligence requirements.

Higher interest rates brought real estate risks to the surface last year and this situation does not seem to be changing this year. This underlines, among other things, the importance of continuous evaluation of real estate funds in the capital market. At the same time, it highlights the responsibility of company boards to ensure that they are adequately informed about the situation of funds and that risk management tools are in good order.

Wash trades are one example of the unfortunate phenomena evident in the period under review. A record number of reports of suspected market abuse reached the supervisor’s desk, and the number of requests for investigations we made to the police increased from the previous year. However, from the statistics it is not possible to draw a direct conclusion about the increase in the number of abuses; the increased number of investigations is partly explained by the development of the investigation process. Prevention of abuses requires supervised entities to have in place good practices and systems as well as functional and effective corporate governance.

New tasks and increasing regulation added to supervisory responsibilities

During 2023, enforcement of financial sector participants’ compliance with sanctions and other consumer credit providers were transferred to our supervision.

Increasing regulation adds to our supervisory responsibilities. The year under review saw the entry into effect of the DORA Regulation, aimed at ensuring digital operational resilience, the ESAP Regulation, creating a single point of access to information mandatorily reported and disclosed by companies, and supervision of ESG risks and disclosure requirements.

The objectives of all these reforms are to be welcomed: strengthening the protection of non-professional investors, promoting consumers’ and companies’ access to and utilisation of financial information, and strengthening the digital resilience of the financial sector. The preparation and application of new regulation in practice is challenging for the legislator and financial sector participants as well as for the supervisor. New and increasing regulation also compels the supervisor to renew its own operating practices, develop its expertise and maintain good communication with supervised entities and other stakeholders.

Coming years will continue to require us to be proactive and predictable

The field of supervision is constantly expanding and becoming more complex. In order to be able to succeed properly in our demanding task we must continuously maintain and develop the competence of personnel and attend to their wellbeing and coping capacity. In addition, as an employer, we must be able to attract new talent to our ranks to replace those who are retiring.

With our new strategy, we changed our operations and way of thinking this year, particularly in terms of transparency and leadership. We implemented the FIN-FSA’s vision of predictability by telling more about our activities, for example by publishing our thematic review and inspection plans and arranging supervised entity events. We developed an internal leadership system and delegation of decision-making and gained new efficiency in everyday activities as well as more opportunities to prioritise and focus on what is essential. All of this has required us to get used to a new way of working. This work will continue in the coming years. Our goal is clear: to enable work to be done effectively in a way that increases employees’ opportunities to influence their own work.

I would like to thank all FIN-FSA personnel for the past year.

Helsinki, 6 March 2024

Tero Kurenmaa