Corporate governance safeguards the supervised entity’s operations, capital adequacy and the security of the client’s money and insured benefits
Problems in the operability of governance are often revealed as shortcomings in activities, including the way how procedures, obligations and capital adequacy are taken care of.
The FIN-FSA intervenes in failures identified in the course of supervision, and will impose administrative sanctions, where warranted. In 2022, the FIN-FSA imposed three penalty payments, two administrative fines and issued two public warnings. The sanctions were concerned with failures and delays in reporting as well as failures related to anti-money laundering and counter-terrorist financing obligations.
In recent years, the FIN-FSA has also appointed authorised representatives to supervise the operations of an authorised supervised entity in circumstances where there has been evidence of incompetence, carelessness or misconduct in the management of its affairs.1 The FIN-FSA has also withdrawn authorisation in a situation where the preconditions for authorisation were not ultimately met.
Societal significance emphasises the importance of good governance
Risk management is always an integral part of the operations of organisations and firms. Many entities supervised by the FIN-FSA have a key function in society, which emphasises the significance of effective governance and steering: it ensures the reliability and responsibility of operations. The capital adequacy of supervised entities is also an important factor for the stability of the entire financial sector.
The expertise of senior management and other key personnel is a key prerequisite for good governance. Internal weaknesses expose financial sector entities, for example, to the adverse impacts of market fluctuations.
Effective governance ensures, for example, compliance with procedures guaranteeing client rights as well as regulations with societal and global significance – such as anti-money laundering and counter-terrorist financing regulations.
The assessment and management of risks are some of the most important areas of expertise and responsibilities of executive management in the financial sector. In the review year, the FIN-FSA conducted several thematic reviews, identifying areas of development in the operability of governance and in risk management. Supervisory actions concerning governance are taken to protect assets or insured benefits. In addition, the interests of the entities involved and their societal reliability require action when operations fail to meet the established standards.
Effective governance ensures that client assets and insured benefits are safe
The FIN-FSA’s mandate is based on section 1 of the Act on the Financial Supervisory Authority: “We ensure financial stability, confidence in the financial markets as well as customer and investor protection and the protection of the insured”. This mandate also requires careful assessment and inspection of supervised entities’ governance and control systems. The importance of effective governance is highlighted further in a rapidly evolving operating environment. If necessary, the supervisor takes actions to ensure the appropriateness of governance or even to terminate operations.
In 2020, the FIN-FSA appointed an authorised representative to supervise the activities of Elo Mutual Pension Insurance Company, as the supervisor found evidence of incompetence or carelessness in the management of its affairs that endangered the management of the firm’s solvency and the pursuit of its mission as part of the employee pension system. In June 2022, the FIN-FSA considered that Elo had taken extensive and significant measures to develop its corporate governance, and decided to terminate the supervision by authorised representative.
In 2021, the FIN-FSA appointed an attorney for the investment firm Privanet Securities Ltd due to several shortcomings in its operations. The firm failed to correct these shortcomings during the term of supervision by the authorised representative, and therefore the FIN-FSA ultimately decided to withdraw its authorisation.
During the review year, the FIN-FSA reported the findings of a thematic review, showing room for development in the operation of the boards of directors of banks under the FIN-FSA’s direct supervision. It is important that the board of directors participates in the resourcing and assessment of the effectiveness of the independent control functions, such as risk management, compliance and internal audit. In addition, it is the board of directors’ duty to constructively question the proposals brought to it by executive management as well as documentation concerning risk appetite.
Good governance also establishes the procedures for customer protection. The thematic reviews of investment funds and investment advice conducted in the review year found that the asset valuation processes of UCITS and non-UCITS funds were mainly at a moderate level, but there was room for development in processes, guidelines and documentation concerning costs and charges. The FIN-FSA’s findings required six firms to take actions which will be monitored by the FIN-FSA. The FIN-FSA also requires that other management companies and alternative investment fund managers review the findings and views raised by the FIN-FSA in the supervision letter and take the requisite steps. The FIN-FSA reports on the findings and conclusions to the European Securities and Markets Authority.
Regulation of sustainable finance also has an impact on risk management
New regulation of, among other things, sustainable finance imposes new requirements on institutions regarding informing clients and management of risks.
The European Central Bank (ECB) published the results of the climate stress test carried out in the summer. The situation has improved from 2022, but despite the development, banks must continue to improve the identification and management of climate and environmental risks. In autumn 2022, the ECB set the end of 2024 as the deadline for banks to meet the supervisory expectations concerning climate and environmental risks.
At the end of the review year, the European Insurance and Occupational Pensions Authority (EIOPA) published the results of a climate stress test on institutions for occupational retirement provision (IORPs). In the first climate stress test for the sector, EIOPA assessed the resilience of occupational pension institutions to a climate change scenario, and the results showed they are materially exposed to transition risks. The stress test also included occupational pension institutions from Finland. Climate stress was assessed as having a slightly lower than average impact on their assets.
The FIN-FSA reminded management companies and authorised alternative investment fund managers that they must consider sustainability risks in their operations and that they must have adequate resources and expertise to consider sustainability risks in their activities and in the investment funds’ investment operations.
Risk-based approach to commensurate prevention of money laundering and terrorist financing actions requires effective governance
In 2022, the FIN-FSA communicated on several occasions about the importance of risk management, such that anti-money laundering measures do not unnecessarily restrict the availability of basic banking services.
Banks must have appropriate procedures in place to identify, assess and understand the risks of money laundering and financing of terrorism to which they are exposed and take actions that are commensurate with these risks. It is important for banks to prepare a long-term risk appetite statement, whose extent and level of detail of content should be commensurate with the bank’s size and the nature and extent of its activities. It is also crucial to ensure that the planning of operations and decision-making reflect the risk appetite defined by the bank, also in practice.
The purpose of the emphasis on risk assessment and management actions is to strike a balance between the avoidance and management of risks and, on the other hand, equal preconditions to economic activity in society and the availability of basic utility services.
In an effective governance system
These together ensure that the supervised entity’s operations and key figures meet regulatory requirements, and that, for example, insured benefits and client assets are secured.
1 In accordance with section 29 of the Act on the Financial Supervisory Authority (878/2008), the Financial Supervisory Authority may appoint an authorised representative to supervise the activities of an authorised supervised entity if there is evidence of incompetence, carelessness or misconduct in the management of its affairs.