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KREDITTILSYNET’S ANNUAL REPORT 2002

Organisation chart

THE BOARD Finn Hvistendahl Chairman

DIRECTOR GENERAL Bjørn Skogstad Aamo

STAFF Chief Legal Adviser Marius Ryel Head of Information Kjetil Karsrud International Coordinator Nina Moss Senior Legal Adviser Rune Grundekjøn Executive Secretary Signe Sørensen

ADMINISTRATION DEPARTMENT FINANCE AND CAPITAL MARKETS DEPARTMENT ACCOUNTING AND Deputy Director General INSURANCE DEPARTMENT Deputy Director General AUDITING DEPARTMENT Gun Margareth Moy Deputy Director General Eirik Bunæs Deputy Director General Sven-Henning Kjelsrud Anne Merethe Bellamy

STRATEGY AND FINANCE LICENSING, LAWS AND REGULATIONS SECURITIES MARKETS REGULATORY ISSUES Ass. Director General Head of Unit Head of Unit Ass. Director General Nils Johan Korsvik Kjell Arne Aasgaarden Eystein Kleven Tore Johan Berg

RECORDS DIVISION ACCOUNTING REGULATIONS Head of Records Else M. Skarheim SUPERVISION OF AUDITORS OFF-SITE SUPERVISION MARKET CONDUCT AND EXTERNAL ACCOUNTANTS IT (internal) AND ANALYSIS Head of Unit Special Adviser Head of IT Head of Unit Geir Holen Steinar Nyhus Per Sverre Frederichsen Emil R. Steffensen IT SUPERVISION PERSONNEL AND ORGANISATION Special Adviser Head of Human Resources Frank Robert Berg Bjørn Drevlo ON-SITE INSPECTIONS ESTATE AGENCIES AND BROKERS, Head of Unit DEBT COLLECTION FIRMS Per Jostein Brekke Head of Unit Wilhelm Mohn Grøstad

INSURANCE- AND PENSION-SPECIFIC ISSUES Head of Unit Hanne Myre

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Contents

Organisation chart

Contents 1

Preface 2

Functions and objectives 4

Important events in 2002 5

Organisational set-up and resource use 8

Key figures and data on supervisory activities 14

Reports from supervised sectors • Securities market 16 • Banking, finance and insurance 24 • Auditing 40 • External accounting services 44 • Estate agency 46 • Debt collection 50 • Other measures 54

Kredittilsynet’s international activities 56

Why regulate and supervise the financial system? 61

Kredittilsynet is responsible for the supervision of banks, finance companies, mortgage companies, insurance companies, pension funds, investment firms, securities fund management and market conduct in the securities market, stock exchanges and authorised market places, settlement centres and securities registers, estate agencies, debt collection agencies, external accountants and auditors.

«Kredittilsynet shall ensure that the institutions it supervises operate in an appropriate and proper manner in accordance with law and provisions issued pursuant to law and with the intentions underlying the establishment of the institution, its purpose and articles of association.» (Financial Supervision Act, section 3)

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Preface

2002 was the third successive year of falling share valu- ant to Kredittilsynet’s revised strategy that was adopted es. The fall affected several of Kredittilsynet’s areas of by its Board in November 2002. supervision, especially life insurance and securities management. The Accounting Law Commission is due to present recommendations in 2003 on how EU’s implementation Alongside poor corporate financial profits, the fall is due of international accounting standards should be enforced to waning public confidence in many listed companies, in by Norwegian authorities. The issue of auditors’ independ- the first instance in the United States. The boards and ence was the starting point for Kredittilsynet’s broad- management teams of the companies in question had based thematic inspections of the major auditing com- failed to provide correct and complete financial informa- panies in 2002. The inspections revealed a need to clarify tion, and auditors had been insufficiently critical and and improve the rules governing the counselling services independent. offered by the investigated auditors. Kredittilsynet will in the spring of 2003 give its recommendation on how this Many investors had entered the share market with unre- work should be taken forward. alistic expectations, and the pendulum now seems to have swung in the opposite direction. Properly function- Experience and analysis show that long-term investment ing, confidence-inspiring securities markets are essential in shares can be profitable. This said, ordinary investors for savers, firms and for capital supply and economic need good information about the risks they face if they growth alike. are to be in a position to make well-informed choices. This was the backdrop to Kredittilsynet’s proposal for It is primarily up to firms and the business sector itself to new information-disclosure requirements for vendors of restore confidence by practising sound principles of cor- units in securities funds to the consumer. porate governance and management and by ensuring correct and complete information disclosure. The share market slump has had limited direct effects on Norwegian banks. Investment firms and management Improving the quality of accounts and ensuring auditors’ companies have in general also managed satisfactorily independence is central to the strategy put forward by although their revenues are significantly reduced. the EU to secure confidence in, and to develop, a single European financial market. These goals are also import- 2 Annual_ENGpdf.qxd 30.06.03 16:32 Side 3

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Although most Norwegian life insurance companies terms of liquidity, financial strength and the quality of reduced their shareholdings prior to the slump in their banking. Hence there is little reason to fear a September-October, the fall in the share market means repeat in 2003 of the generalised banking crisis experi- they are unable to give their policyholders more than the enced at the start of the 1990s. A number of banks will, guaranteed return. Moreover, life insurance companies’ however, need close monitoring by Kredittilsynet in the buffer capital was very low at the start of 2003. With period ahead. low shareholdings and low interest rates in the medium term, it will be difficult to build up buffer capital via Kredittilsynet conducted a comprehensive review of its operations in the years immediately ahead. Hence life strategy in 2002. The revised strategy gives some emphasis insurance companies and their policyholders will benefit to explaining why regulation and supervision is needed little from a market recovery. If life insurance companies for the financial market to fill its role and contribute to are to play an active role in any increase in private pen- economic growth and development. It also gives added sion saving, a critical review of the current rules will be focus to institutions, markets and users of financial needed. The Banking Law Commission’s proposal is a services. New tasks will emerge and existing ones will valuable contribution to a new framework for the expand in several areas. Kredittilsynet will maintain a Norwegian life insurance industry. transparent and predictable supervisory regime and will act efficiently and soundly in the best interest of the Via its inspections and other channels, Kredittilsynet has businesses and individuals who are the end users of in recent years warned small and medium-size banks financial institutions’ services. against excessive growth in lending, especially to the commercial sector. Developments have shown that the warnings were well-founded. Many banks are experien- Oslo, 22 January 2003 cing a marked increase in losses on loans to the commer- cial sector. Several need to review and improve their credit processes in light of the Finance Credit affair. A number of banks should also improve their liquidity and liquidity- risk management. This said, the great majority of Norwegian banks are now in a sound position. The larg- Finn Hvistendahl Bjørn Skogstad Aamo est Norwegian banks in particular are well placed in Chairman of the Board Director General 3 Annual_ENGpdf.qxd 30.06.03 16:32 Side 4

KREDITTILSYNET’S ANNUAL REPORT 2002

Functions and objectives

Kredittilsynet will strive to ensure that financial institutions and markets function securely and efficiently in the best interest of society and users of financial services, and that service providers are afforded an appropriate framework for their operations.

Kredittilsynet is an independent government agency that orderly market conditions and to instil confidence that builds on laws and decisions emanating from the financial contracts will be honoured and services per- Parliament (Stortinget), the Government and the Ministry formed as intended. In addition to its preventative work, of Finance and on international standards for financial Kredittilsynet maintains a preparedness for dealing with supervision and regulation. concrete problems that may arise. Kredittilsynet’s premi- se is that Norwegian enterprises must be afforded com- Through its supervision of enterprises and markets, petitive conditions which all in all are in line with those Kredittilsynet strives to promote financial stability and enjoyed by institutions in other EEA countries.

Kredittilsynet will apply the following approach to attain its overarching goals:

Institutions Users of financial services Kredittilsynet’s premise is that responsibility for busi- Kredittilsynet will in its dealings with institutions, ness operations rests with the board and management markets and market places promote the interests of of the institutions themselves. Kredittilsynet will work users of financial services. Kredittilsynet will contribute to promote satisfactory capital strength, risk awareness, to rules and arrangements that ensure that users management and control in institutions under its receive correct information – in the first instance from supervision. Through its administration and effective the institutions themselves – about the institutions, enforcement of the rules, Kredittilsynet will strive to their products and the associated risks. ensure that institutions and other market actors comply with laws, rules and ethical norms. Institutions of major significance for financial stability and for users are given priority for supervision purposes.

Markets and market places Kredittilsynet’s performance of its Kredittilsynet will work for efficient and effective activity competition and price formation in securities markets Kredittilsynet intends to be an effective, flexible and and other markets under its supervision. Settlement independent body featuring high competence and and payment systems and the financial infrastructure good service. It will emphasise transparency and pre- in general must function in an appropriate and satis- dictability in its activities, good communication with factory manner. Markets and market places need to supervised institutions and the general public, and be open and transparent, and market practitioners good collaboration with other authorities and industry must exhibit good conduct. associations.

(Excerpts from Kredittilsynet’s revised strategy, adopted by the Board on 21 November 2002.)

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Important events in 2002

Structural changes and licensing Regulatory framework

Gjensidige NOR Group converts to public limited Kredittilsynet proposes clarification on counselling company status services provided by auditors’ collaborating enter- Upon Kredittilsynet’s recommendation, the Ministry of prises Finance authorised the conversion of Union Bank of Kredittilsynet proposed closer definition of counselling Norway and the life insurance company Gjensidige NOR services that can be provided to audit clients by instituti- Spareforsikring into public limited liability companies. All ons with whom the auditor has established a cooperation shares in the two companies are owned by a new holding agreement. The Ministry of Finance issued pertinent company, Gjensidige NOR ASA. After the conversion the regulations in line with Kredittilsynet’s recommendation. non-life insurance company was linked to the Gjensidige NOR Group via a strategic cooperation agreement. Study of the impact on banks of proposed new capital requirements Vesta Forsikring sold off by Nordea Group On 1 October 2002 the Basel Committee presented a Vesta Forsikring AS was a non-life insurance company Quantitative Impact Study to gauge the impact that the and the parent company in the Norwegian Vesta Group proposed new capital standards will have on banks. More which in turn was a part of the Nordea Group. Nordea than 200 banks from over 40 countries are participating applied for permission to split its insurance business into in the study including from Norway – Den norske Bank, two subgroups, one for non-life insurance and one for Nordea Bank Norway, Union Bank of Norway and Fokus life insurance, with a view to selling off the non-life Bank. insurance business. Kredittilsynet advised the Ministry of Finance to grant the application, and the sale and reorg- Savings banks can be converted to limited liability anisation went ahead. companies In 2002 the Parliament (Stortinget) passed amendments DnB Holding acquires Skandia Asset Management to the Financial Institutions Act that enable savings Upon Kredittilsynet’s recommendation, the Ministry of banks to convert to private limited companies or public Finance gave DnB Holding ASA the go-ahead to acquire limited companies. Savings banks will now be freer to all shares in Skandia Financial Holding’s Aktiebolag along choose the organisation form best suited to bringing in with the latter’s subsidiaries. Kredittilsynet has approved fresh capital. The act has come into force. the organisation of asset management business in the DnB Group. The acquisition made DnB the fourth largest New act on securities registers – VPS monopoly asset manager in the Nordic area. removed The new Act on Registration of Financial Instruments Norwegian Central Securities Depository converted (the Securities Registry Act), passed in July 2002, went from private foundation to limited liability company into force on 1 January 2003. Under the act, responsibili- The new Securities Registry Act required the Central ty for assessing rules and commercial conditions for Securities Depository to convert from a private founda- securities registers rests with Kredittilsynet. The tion to a public limited liability company and to apply for Norwegian Central Securities Depository’s (VPS) statutory a licence under the provisions of the act. Kredittilsynet monopoly on operating a rights register for financial advised the Ministry of Finance in the autumn of 2002 to instruments was removed and replaced by a general grant the institution a licence under the new legislation. licensing requirement which opens the way for compet- ing businesses. Steep increase in property transactions – greater concentration Complaints board established for debt collection The banks have acquired steadily growing prominence in cases the estate agency industry over the past ten years, and As a result of a law amendment in December 2002, a are at the forefront of the chain formation process that complaints board for debt collection cases will be estab- is a marked feature of the industry. The banks’ share of lished on 1 April 2003 by agreement between the the total market has now passed the 40 per cent mark in Norwegian Association of Debt Collectors and the terms of transaction numbers. Consumer Council. The board will deal with consumer complaints against debt collection agencies that operate on the basis of a licence from Kredittilsynet. Kredittilsynet will have access to the board’s decisions and be empowered to order agencies to join the scheme. 5 Annual_ENGpdf.qxd 30.06.03 16:32 Side 6

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New regulations proposed on ownership restriction Supervision and administration and owner control in financial institutions Kredittilsynet supports the main features of the model Kredittilsynet follows up EDB Business Partner ASA for new regulations on ownership restriction and owner Since the critical shutdown at EDB Fellesdata and EDB control that were proposed by the Selvig Committee in Teamco in August 2001 and Kredittilsynet’s subsequent January 2002. The committee recommends a Norwegian comments, EDB Business Partner ASA have taken a num- system that builds on the same principles as pertinent EU ber of steps to improve operating quality. Even so, several directives. Kredittilsynet views the committee’s recom- shutdowns occurred in 2002 that affected banks, above mendation as a good basis for a new set of rules. all associated with major systems upgrading in the spring Kredittilsynet asked the Ministry of Finance to contem- and autumn of 2002. Kredittilsynet inspected EDB plate further delegation to Kredittilsynet in this area. Fellesdata’s operating units several times via client banks, and will intensify this effort ahead. Internal audit requirement for financial industry passed Finance Credit collapse causes heavy bank losses Amendments to Kredittilsynet’s internal control regulati- Prompted by media coverage, Kredittilsynet asked banks ons were passed entailing that internal auditing will be in October for updated information on and an assess- required at all institutions with assets under manage- ment of their exposure to the Finance Credit system. ment for own and clients’ account in excess of NOK 10 When the system collapsed and the top managers were billion. The same applies to market places, settlement arrested in November, the banks’ exposure totalled NOK houses and securities registers. The amendments are 1.4 billion, most of which will have to be written off. designed to further strengthen institutions’ internal control. No losses expected for ordinary debt collection Kredittilsynet proposes amendments to Securities clients as a result of the Finance Credit affair Funds Act The company’s involvement in ordinary debt collection After changes were made to Council Directive 85/611 EEC activity was minimal. Hence any loss of client assets (UCITS), Kredittilsynet recommended amendments to the traceable to monetary claims collected by Finance Credit Securities Funds Act. One such change will enable manage- Norge AS on behalf of creditors will probably be covered ment companies to offer individual portfolio manage- by the statutory security that the company had furnished ment services in addition to managing their own funds, in order to carry on its business. and to offer investment counselling and safekeeping and management of fund units. Rules on “simplified prospec- Nordlandsbanken in trouble tuses” are also proposed, requiring management compan- In consequence of the problems faced by Nordlands- ies to prepare a simplified version of the full prospectus. banken after losses on loans to the Finance Credit system, In addition changes are proposed to the Securities Funds DnB, at the invitation of the management board of Act in respect of the products offered. Nordlandsbanken, made an offer to buy all the shares in the bank. DnB aims to create North Norway’s largest Proposal to extend information requirement bank by merging Nordlandsbanken’s and Den norske Kredittilsynet drafted regulations on management com- Bank’s operations in the northernmost counties. A local panies’ information requirement when marketing units in move to retain the bank’s North Norwegian ownership securities funds and subsequent reporting. The regulati- failed. By 16 January 2003 DnB had received acceptances ons are principally designed to make it easy for unit hold- which, together with the shares DnB already owned, ers to compare the merits of saving in securities funds added up to 90.32 per cent of Nordlandsbanken’s total with the merits of other savings mediums, and to ensure shares. DnB applied for a licence on this basis. that purchasers of securities fund units are informed of the risk that saving in funds entails compared with other Strong criticism levelled at Nesset Sparebank saving options. In its comments after inspecting Nesset Sparebank, Kredittilsynet criticised the bank’s management board Kredittilsynet recommends simplifications in and administration for the way they dealt with a loan to connection with the action plan for “A simpler Norsk Trelastimport AS, and for repeated breaches of the Norway” rules governing large exposures. The supervisory board Kredittilsynet suggested several simplifications for inclu- was asked to consider the management board’s position. sion in the Government’s action plan “A simpler Norway”. The management board stepped down shortly after Among them are simplified procedures for approving and Kredittilsynet’s comments were forwarded, and a new amending articles of association in the banking, financial board was appointed on 23 October. and insurance sphere, removal of the reporting require- ment for employees’ own trading in securities and simpli- Samspar Norge’s licence withdrawn fied reporting of security lodged for estate agents, debt In 1995 Samspar Norge was exempted from the Financial collection agencies and auditors. Institutions Act’s licensing requirements on the basis that it would receive deposits exclusively from members of the 6 Annual_ENGpdf.qxd 30.06.03 16:32 Side 7

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Pentecostal church. In the autumn of 2002, upon Life insurance companies exempt from Insurance Kredittilsynet’s advice, the Ministry of Finance withdrew Activity Act Samspar Norge’s exemption from the general rules of the KLP Insurance was exempted from the Insurance Activity Financial Institutions Act. The background to the ministry’s Act to allow it to practise premium equalisation with a decision was that Samspar Norge operated in conflict with view to achieving gender and age neutrality. In the the terms of the exemption. Samspar Norge is now being autumn of 2002 the Ministry of Finance granted wound up. Storebrand Livsforsikring AS, Vital Forsikring ASA and Gjensidige NOR Spareforsikring ASA temporary exemption Thematic inspection of liquidity risk from the above act subject to specific conditions. Pension In the autumn of 2002 a liquidity survey was conducted products based on this exemption were held by the social in the eleven largest banks. The survey showed that com- partners to be counter to the main agreement between pliance with international standards for management the worker and employer unions. After approaches from and control varies from bank to bank. The largest banks Kredittilsynet, Storebrand adjusted a product to bring it have improved their liquidity risk management in recent into line with the terms of the exemption given by the years. Management and control are now increasingly Ministry. based on a framework designed to ensure a diversified funding structure. Kredittilsynet’s calculations showed a Investment funds closely monitored substantial spread in liquidity risk among the eleven The market situation over the year, featuring falling largest banks. activity levels, substantially affected investment fund results. Supervision of these institutions focused to Liquidity survey December 2002 a greater extent than normal on financial circumstances, In December 2002 Kredittilsynet conducted a liquidity especially capital adequacy and liquidity. Institutions survey among a selection of banks. The survey revealed were in general quick to reduce costs in order to comp- that some banks had substantial liquidity problems. The ensate for revenue shortfalls. Capital strength was, with majority nonetheless reported that they would not be some exceptions, satisfactory. facing liquidity problems in the short and medium term. The survey shows that the banks need to improve their management of liquidity risk since the market now appe- International cooperation ars to a greater degree to differentiate between strong and weak banks. Kredittilsynet attends more than 100 meetings in EU/EEA bodies Kredittilsynet establishes cooperation agreement The EU continues work on its ambitious plan to develop a with the Norwegian Institute of Public Accountants single European financial market that will include Kredittilsynet established cooperation with the Norway and the other EEA EFTA countries. Work on pre- Norwegian Institute of Public Accountants on quality paring and overseeing the common body of rules, especi- control of accountants. The cooperation entails that all ally in the securities field, is gathering pace. practising accountants will be quality controlled at least Kredittilsynet attended 103 meetings under EU/EEA aus- once every five years. This meets EU recommendations on pices in 2002 compared with 69 in 2001. public oversight of accountants. EU supervisory agencies reorganised Thematic inspections of the largest auditing With a view to accelerating the introduction of common companies rules, the EU has introduced a supervisory model for the Kredittilsynet conducted thematic inspections of the lar- securities area based on the Lamfalussy Report. Starting gest auditing companies. Inspections focused on auditors’ out from directives adopted by the European Council and counselling services – and collaborating companies’ the European Parliament, the Commission in conjunction counselling – provided to audit clients. Inspections reve- with the European Securities Committee will adopt sup- aled a need to clarify and improve the rules governing plementary rules to the directives. The Committee of counselling activity that can be offered by the auditors in European Securities Regulators (CESR) is to prepare question. In the spring of 2003 Kredittilsynet will recom- detailed guidelines and standards for practising and mend how this work should move forward. monitoring compliance with the rules. The European Council has decided to introduce a similar model in the Insurance companies show poor results banking and insurance fields. As previously, life insurance companies’ were affected by a negative stock market trend. Due to their impaired risk- Nordic cooperation still expanding bearing capacity the companies continued to reduce Both the desire to promote uniform enforcement of rules their shareholdings. Bondholdings rose in 2002, in the and the need for strong supervision of Nordic financial first instance bonds held to maturity. conglomerates have spurred growing collaboration between the Nordic regulatory authorities. The number of Nordic meetings rose from 16 in 2000 to 38 in 2001 and to 45 in 2002. 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Organisational set-up and resource use Kredittilsynet is headed by a board of five members. Members and alternates are appointed by the King for a period of four years. The current period started on 1 March 2002 and a new board chairman, three new board members and new alternates were appointed. The preceding period started on 30 January 1998.

Board of Directors

Kredittilsynet’s Board was as Mr Erling Steigum, professor, board Alternates: Mr Johan Arnt Mettevoll, follows up to 1 March 2002: member special adviser, and Mr Stein Tore Mr Erling Selvig, professor and dr. Ms Nina Mår Tapper, court-of-appe- Næprud, adviser juris, chairman als judge, board member Mr Asbjørn Rødseth, professor, depu- Mr Johan Arnt Mettevoll, special ty chair Ms Marianne Berg, district court adviser, took over as employee repre- Ms Eli Aas, advocate, board member judge, first alternate sentative from Ms Kjersti T. Mr Kolbjørn Almlid, divisional direc- Mr Lasse Ekeberg, divisional director, Trøbråten, special adviser, as from 18 tor, board member second alternate August 2002. Mr Jon Reiersen, senior Ms Hilde Myrberg, advocate, board adviser, took over as employee repre- member Mr Henning Strand, director at sentative from Mr Johan Arnt Norges Bank, has attended as obser- Mettevoll, special adviser, on the Ms Lisbet Hjort, director, first alter- ver. Mr Thorvald Grung Moe, special same date. nate adviser, has been his alternate. Mr Lasse Ekeberg, divisional director, Ms Liv Karin Methi, adviser, took second alternate Two members elected by and from over as alternate for Mr Stein Tore among the employees supplement Næprud, adviser, as from 1 As from 1 March 2002 the board when administrative mat- November 2002. Kredittilsynet’s Board has ters are dealt with. In 2002 the been as follows: employee representatives were: Eleven ordinary board meetings were Mr Finn Hvistendahl, chartered engi- held in 2002. The board dealt with neer, chairman Ms Kjersti T. Trøbråten, special adviser 63 administrative matters and 69 Mr Endre Skjørestad, advocate, Ms Ellen Jakobsen, adviser matters related to institutional deputy chair supervision. The board received a Ms Eli Aas, advocate, board member further 91 matters of an informatio- nal nature.

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Kredittilsynet’s Back row from the left: Sven-Henning Kjelsrud (director, Finance and Insurance Dept.), Marius Ryel (chief legal advi- management team ser), Eirik Bunæs (director, Capital Markets Dept.), Kjetil Karsrud (Head of Information). Front row from the left: Anne Merethe Bellamy (director, Accounting and Auditing Dept.), Bjørn Skogstad Aamo (Director General, Kredittilsynet), Gun Margareth Moy (director, Administration Dept.)

Kredittilsynet’s Board

Back row from the left: Endre Skjørestad (deputy chair), Johan Arnt Mettevoll (employee representative), Marianne Berg (first alternate), Ellen Jakobsen (employee representative). Front row from the left: Erling Steigum (board member), Eli Aas (board member), Finn Hvistendahl (chair- man), Nina Mår Tapper (board member), Thorvald Grung Moe (alternate for Henning Strand, observer from Norges Bank). Henning Strand and Lasse Ekeberg (second alternate) were absent when the photograph was taken.

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Prioritised tasks in 2002 internal compared with eight in ment offering jobs that spur personal Kredittilsynet’s supervisory activities 2001. Applicants totalled 314 com- development. Moreover, Kredittilsynet are based on statutory tasks, signals pared with 449 in 2001. is now more successful than just a given by the Ministry of Finance few years ago at retaining staff who (including the annual letter of allo- At the end of 2002 Kredittilsynet have gained long supervisory experi- cation) and Kredittilsynet’s strategy had 176 permanent staff compared ence and high expertise during their document. Kredittilsynet’s prioritised with 165 at the end of 2001. The career with Kredittilsynet. A far grea- tasks in 2002 were: staff increase is partly due to a sub- ter number of recent graduates stay stantially slower turnover rate, 5.6 on and develop their skills with • Credit risk and financial strength per cent compared with 11 per cent Kredittilsynet than was the case prior • Supervision of market risk and buf- in 2001, and partly to recruitment of to 1995. These factors are all essential fer capital additional financial expertise in the to Kredittilsynet’s ability to perform a • Supervision of Norwegian and areas of on-site inspection and mathe- high-quality supervisory role. Nordic financial conglomerates matical modelling. Forty-seven per • Supervision of stock exchanges, cent of the permanent staff are authorised market places and other female. Eighty-two per cent hold a securities market infrastructure university degree or the equivalent. • Monitoring standards of conduct in the securities market Since 1995 Kredittilsynet has syste- • Good administration – simplifying matically sought to attract staff with regulations specialised competence and solid • Reform of life and pensions insur- experience from financial markets, to ance retain staff with high competence • Risk and vulnerability in the ICT and long supervisory experience, and field to attract, retain and develop recent • Anti-money laundering measures, graduates. To this end managerial/ and uncovering financial crime specialist positions have been set up • Prudential safeguards and prepared- for staff with specialised competen- Chart 1: ness ce; a wage policy has been introdu- STAFF EDUCATIONAL BACKGROUND AS OF • Development of risk-based supervi- ced to permit the recruitment of 31 DECEMBER 2002 sion staff from industries with pay levels • Strategy and organisation develop- appreciably higher than government ment institutions are normally able to offer; and systems have been develo- Law 23 per cent ped to provide recent graduates with Business administration 17 per cent Administration, staff and a predictable salary trend in the ini- No higher education 18 per cent organisation development tial years after joining Kredittilsynet. Economics 13 per cent Kredittilsynet’s Director General is A flexible personnel policy enabling Other higher education 10 per cent appointed by the King in council for staff to combine professional and Business economics / Bachelor's degree 9 per cent a six-year term. Mr Bjørn Skogstad family responsibilities is of key signi- Aamo was appointed for a new six- ficance. Auditors 5 per cent year term in February 1999 with Actuaries 5 per cent

effect from April 1999. Kredittilsynet has very largely succe- 5 % eded in this endeavour. Whereas in 5 % 23 % As from 1 October 2002 the Director 1995 24 staff members had solid 9 % General’s salary was NOK 875,000 experience from industries under per annum, and the Chairman of the supervision, by the end of 2002 the Board’s fee in 2002 was NOK figure had reached 42. The fact that 150,000. staff recruited from high-salary sec- 10 % tors are willing to accept a lower Seventeen vacancies were advertised salary to join Kredittilsynet, and to 17 % in 2002 compared with 35 in 2001. stay there for some time, implies 13 % Five of the advertised positions were recognition of a high-quality environ-

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Table 1: CASE DOCUMENTS HANDLED BY KREDITTILSYNET 1993–2002 Sector 1993 1995 1997 1999 2000 2001 2002 Administration/support staff 834 556 480 594 686 1116 850 Finance and insurance 7,187 7,020 8,141 6,497 7,098 6,696 6,947 Securities 1,872 2,920 3,850 3,798 4,908 6,833 7,911 Estate agency and debt collection 2,744 4,188 3,910 3,489 4,625 5,347 6,285 Accounting and auditing* 3,360 4,981 4,356 11,101 10,346 9,482 9,567 Total 15,997 19,665 20,737 25,479 27,663 29,474 31,560 * The increase as of 1999 is due to Kredittilsynet taking over the supervision of external accountants.

(It should be noted that documents in the financial and securities area are of substantially greater complexity and scope than in the other areas.)

Finances Expenditure Kredittilsynet’s budget forms part of received an additional NOK 2.2 million the government budget and is esta- in refunds of maternity and sickness blished by the Parliament benefits. Aggregate disposable reve- (Stortinget). The budget for 2002 nues accordingly came to NOK 127.5 totalled NOK 125.3 million including million. The agency’s expenditure funds of NOK 2.1 million carried totalled NOK 123.6 million, an forward from 2001. Kredittilsynet increase of 10.9 per cent from 2001.

Table 2: KREDITTILSYNET’S EXPENDITURE 2000–2002 Type of expenditure 2000 2001 2002 Salaries bill 64,975 73,774 85,604 Of which: Salaries and social costs (full-time and temporary positions) 63,060 71,727 83,037 Stand-ins / Substitutes 1,207 1,436 1,899 Other emoluments (directors, consultants etc. / other fees)) 708 611 668 Goods and services 40,572 37,657 37,976 Of which: Operating expenses 21,298 15,846 15,960 Information 2,718 4,081 2,256 Service travel and meetings 3,398 3,712 3,989 Inspections and other supervision 3,868 3,679 3,520 Organisation development, leadership and compentence development 3,134 4,258 4,127 IT expenditure 6,156 6,081 8,124

Total expenses 105,547 111,431 123,580 Figures in whole thousands of kroner

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Revenues of the supervision, and the expenses outlays. The levy proposed by Under section 9 of the Financial are therefore payable in arrears. The Kredittilsynet was approved by the Supervision Act, Kredittilsynet’s total amount levied for 2000 was Ministry of Finance on 16 May 2001, expenses are covered by the institu- NOK 108.05 million. The amount which was earlier than in previous tions under its supervision at the levied was smaller than actual years. Supervised entities liable to start of the financial year. The expenses because the levy is based pay the amount levied for 2001 Parliament (Stortinget) therefore on the budget appropriation, any number 8,952 compared with 8,402 adopts a revenue appropriation equal amount carried forward from the in 2000. The apportionment of the to the expenditure appropriation. The previous year is deducted and part of levy among the various categories of act requires the expenses to be the expenses are covered by the supervised entities is shown in Table 3. apportioned among the various insti- National Insurance Fund through tutional groups based on the extent refunds of maternity and sickpay

Table 3: TOTAL LEVY DISTRIBUTED ON SUPERVISED GROUPS Supervised group Percentage of total levy in 2000 Percentage of total levy in 2001 Banks 27.13 27.43 Insurance 25.71 25.54 Pension funds 4.80 4.30 Finance companies / Mortgage companies 3.71 3.79 Auditing firms / Auditors 5.04 4.98 External accountants 6.87 6.78 Securities market 15.98 16.62 Estate agencies 4.67 4.48 Debt collection 2.00 2.09 Holding companies 2.98 2.87 Miscellaneous 1.11 1.12 Total 100.00 100.00

Table 4: DISTRIBUTION OF EXPENDITURE 1997–2001 – IN PER CENT OF TOTAL Supervised category Calculation base Per cent of calculation base

1997 2000 2001 Credit institutions Totalt assets 0.0030 0.0024 0.0022 Insurance Premium income 0.0324 0.0432 0.0421 Investment firms Income from investment and ancillary services 0.1563 0.1551 0.1787 Management companies Total assets 0.0027 0.0028 0.0034 for securities funds Estate agencies Commission earnings 0.2477 0.1736 0.1547 Debt collection Debt collection income 0.2121 0.1674 0.1551 Auditors Turnover 0.1923 0.2147 0.1873

Table 4 shows the size of the levy in insignificant, and shows a falling increase in expenses from 1997 to per cent of the calculation base for tendency in terms of the calculation 2000 was 34.4 per cent, and from various groups of supervised entities base. This applies even though 1997 to 2001 41.9 per cent. for the years 1997, 2000 and 2001. Kredittilsynet’s expenses have incre- The burden represented by the levy is ased substantially. The nominal

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Information and communication

Kredittilsynet views information and in 2001 were further developed in rities etc. All visits to Kredittilsynet communication as a strategic instru- 2002. A steadily increasing share of in 2002 were recorded. Eighty-seven ment of supervision, especially with Kredittilsynet’s documents is publish- per cent of visitors were from a view to preventing breaches of ed on its web pages. In 2002 a basis Oslo/Akershus and south-east rules and standards. The information was laid for English language pages Norway as a whole. Visitors totalled effort is directed in the first instance on the website. 1,635 persons, with the following at the institutions and sectors under geographical breakdown: 1,382 from supervision, and is based on the Steps were taken to ensure that Oslo/Akershus, 42 from elsewhere in principles guiding the central Kredittilsynet adheres to the guide- south-east Norway, 61 from south government information policy. lines for use of both official forms of and west Norway, 21 from Trøndelag, Kredittilsynet attaches importance to Norwegian. In the second half of 5 from North Norway and 124 from contact with sectors under supervisi- 2002 five out of six circulars and 28 abroad. Although institutions visited on, and holds regular meetings with per cent of press releases were in the by Kredittilsynet’s officers in connect- industry associations. Similar meet- nynorsk form. ion with on-site inspections are dis- ings are held with collaborating persed across the entire country, public authorities. Regular contact Twenty circulars were issued in 2002 most of them are located in the Oslo meetings are held with the Office of compared with 35 in 2001, and 41 and south-eastern region. the Consumer Ombudsman and the press releases compared with 36 in Kredittilsynet therefore notes with Consumer Council. 2001. One press conference was satisfaction the Government’s wish held. to retain the supervisory authority in Information and communication is Oslo where the bulk of the country’s an aspect of Kredittilsynet’s strategy. Kredittilsynet has wide-ranging con- financial institutions are located. In 2002 a new communication strat- tacts. Each year Kredittilsynet’s This is of major significance for egy was drawn up and adopted. management and other staff meet Kredittilsynet’s ability to carry out with a large number of representati- efficient and effective supervision in The second generation website and ves of supervised institutions, indus- contact with the institutions’ users. intranet solution that were launched try associations, collaborating autho-

Chart 2: VISITORS TO KREDITTILSYNET

Oslo/Akershus 84 per cent South-east Norway 3 per cent South and west Norway 4 per cent Trøndelag 1 per cent North Norway 0 per cent From abroad 8 per cent

8 % 1 % 4 % 3 %

84 %

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Key figures and data on supervisory activities

Table 5: PRINCIPAL SUPERVISED ENTITIES AS AT 31 DECEMBER 1997–2002 1997 1998 1999 2000 2001 2002 Banks and financial institutions Savings banks 133 133 131 130 129 129 Commercial banks 13 13 13 13 15 16 Postbanken 11–––– Foreign branches of Norwegian banks 12 12 12 12 10 10 Norwegian branches of foreign banks 668988 Finance companies 38 34 35 35 35 33 Foreign branches of Norwegian finance companies ––––22 Norwegian branches of foreign finance companies 11 12 13 18 21 21 Mortgage companies 8 9 9 11 10 10 Norwegian branches of foreign mortgage companies 0 0 1 1 1 1 Insurance Life insurance companies 10 109887 Unit Linked companies 666686 Non-life insurance companies 53 52 51 52 53 52 Local marine insurance associations 18 15 15 14 14 14 Local fire insurance associations 39 38 22 21 20 20 EEA branches and foreign companies’ general agents 13 17 21 29 29 29 Insurance brokers 40 41 41 44 49 50 Private pension funds 136 144 132 130 122 120 Municipal pension funds 104 96 84 80 70 65 Pension schemes 29 28 26 30 29 29 Holding companies Holding companies 11 11 12 13 12 13 Securities market Investment firms 55 70 88 93 93 92 Management companies for securities funds 23 26 27 29 28 24 Clearing houses 111112 The Norwegian Central Securities Depository 111111 Stock exchanges ––––12 Authorised market places –––––2 Estate agency Estate agencies 381 407 428 479 507 528 Lawyers’ practices incl. estate agencies 944 898 928 961 1,016 1,018 Cooperative building associations – – – 77 67 55 Debt collection Debt collection agencies 123 122 117 115 113 113 Debt purchase businesses –––––8 Auditors Auditors 4,058 4,303 4,454 4,640 4,824 5,006 Auditing firms 468 493 489 507 514 507 External accounting services External accountants – – 6,961 5,544 5,856 6,201 External accounting firms – – 2,325 2,138 2,377 2,415

The Banks’ Payment and Central Clearing House (BBS AS) and EDB Business Partner ASA are not under direct supervision of Kredittilsynet, but are relevant for Kredittilsynet’s supervisory activity as providers of technical solutions to Norwegian financial institutions.

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Table 6: NUMBER OF ON-SITE INSPECTIONS BY TYPE OF INSTITUTION 1997–2002 1997 1998 1999 2000 2001 2002 Banks/finance1 40 47 43 42 51 552 Holding companies1 000022 Insurance1 14 17 12 17 12 162 Insurance brokers 2 24364 Pension funds 8 7 13 12 5 8 Investment firms1 19 25 23 25 20 20 Other institutions in the securities market 11 12 14 2 10 9 (incl. management companies for securities funds)1 Estate agencies 23 27 68 62 60 71 Debt collection agencies 10 147656 Auditors 123 82 128 80 73 32 Data processing centres 2 13012 External accountants / External accounting firms3 ––47147 62 41

Table 7: CASES HANDLED AFTER THE DELEGATION FROM THE MINISTRY OF FINANCE 1997–2002 1997 1998 1999 2000 2001 2002 Cases pursuant to Savings Banks Act (No. 1 of 24 May 1961) 38 45 45 48 28 50 Cases pursuant to Commercial Banks Act (No. 2 of 24 May 1961) 30 28 45 29 13 12 Cases pursuant to Financial Institutions Act (No. 40 of 10 June 1988) 46 94 81 69 64 59 Cases pursuant to Insurance Activity Act (No. 39 of 10 June 1988) 113 95 74 37 37 36 Cases pursuant to Tax Act, delegated by Ministry of Health and Social Affairs, under rules on occupational pensions – 3 3 19 1 – Cases pursuant to the Guarantee Schemes Act (Act No. 75 of 6 December 1996) – ––20–

1 IT supervision in banks, insurance and the securities market are included under the categories Banks/finance (4), Holding companies (2), Insurance (2), Investment firms and Other institutions in the securities market (6). 2 Of which three on-site inspections in banks and one in insurance were conducted by the Swedish supervisory authority (Finansinspektionen), with participants from Kredittilsynet. 3 Kredittilsynet took over the authorisation scheme for external accounting services in January 1999.

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Securities market

The overarching aim of regulation and supervision is to ensure that the securities market functions well as a source of capital for business and industry and for investment operations. Alongside licensed institutions, super- vision also covers compliance with general regulations of market conduct.

Supervision encompasses companies authorised to carry on activity under the Securities Trading Act, Securities Funds Act, Central Securities Depository Act and Stock Exchange Act. Important areas of supervision are market players’ financial position and operations and their compliance with regulations governing their activities.

Kredittilsynet is also assigned consultative and administrative tasks, including information tasks.

Investment firms

Supervision Kredittilsynet conducted 20 on-site ness. Cases were brought to light The market situation over the year, inspections of investment firms in where deficient control systems had featuring falling activity levels, had a 2002. As in previous years the focus resulted in unfair consideration of substantial impact on institutions’ was on whether investment firms the interests of some clients at the results. Supervision consequently had prepared and put in place suffi- expense of others. Attention was focused on financial aspects to a cient systems and routines to carry drawn to these circumstances, and in greater degree than normal, especi- out proper internal control. Alongside one case an order to rectify the cir- ally capital adequacy and liquidity. the regular on-site inspections, a cumstance was issued. Institutions were generally quick to number of ad hoc investigations reduce costs to make up for some of were carried out to check instituti- At the end of 2002, 92 investment the revenue shortfall. Capital ratios ons’ compliance with good business firms were licensed to provide one or were, with some exceptions, satis- practice and with requirements as to more investment services. factory. the organisation of their busi- Investment firms vary widely in size

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and organisational set-up. They are inspection and for analyses of the substantially over the year, it proved monitored largely on the basis of securities market. necessary to impose an extraordinary data contained in capital adequacy reporting requirement. reports and quarterly returns submit- Due to impaired results among Coordinated supervision was carried ted to Kredittilsynet. The data are investment firms, priority was given out at one sizeable investment firm processed and systematised in to monitoring their financial in 2002 with a focus on IT-related Kredittilsynet’s in-house reports strength (net capital base) in 2002. issues. which are an important tool for In some cases, including small firms selecting and prioritising firms for whose earning capacity weakened

Table 8: INVESTMENTS FIRMS 2000 2001 2002 Licensed firms 93 93 92 New licences 20 15 5 Handed-in licences 14 14 6 Revoked licences 1 1 0 Firms licensed only to market financial instruments 18 13 13 Firms licensed only for asset management 6 9 9 Firms licensed both for asset management and marketing of financial instruments 18 18 19 Firms licensed for all investment services listed in the Securities Trading Act section 1–2 6 12 9

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Chart 3: SHARE ISSUES (VOLUME) AT OSLO BØRS

50,000 45,000 43,587 40,000 35,000 30,000 28,494 25,000 21,501 20,000

NOK Million 14,413 15,000 12,494 12,898 11,399 7,632 9,029 10,000 6,674 5,639 5,000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Source: Oslo Børs

Legislation and administration Kredittilsynet believes it is funda- Calls have been made for investment mentally detrimental for require- firms’ discretionary asset manage- ments imposed on persons with ment operations to be organised in responsibility for the management such a way as to ensure more ratio- of, and for dealing in, securities to nal and flexible use of expertise in be less than those imposed on other the field of investment decisions, staff. especially in conglomerates. Respond- ing to these calls, Kredittilsynet Kredittilsynet also proposed the abo- drafted in 2002 a regulation on lition of provisions requiring em- outsourcing by investment firms. The ployees’ own-account trading to be regulation is essentially based on a reported to Kredittilsynet. The main similar regulation for management rationale was that it would be more companies for securities funds. in line with the principles underlying internal control for institutions to Kredittilsynet also drafted a regulati- monitor their employees’ own- on on issuing requirements in con- account trading. It would also simplify nection with investment firms’ trad- institutions’ task of reporting to ing in quoted warrants that does not Kredittilsynet. involve a clearing house.

In 2002 Kredittilsynet drafted an amendment to the Securities Trading Act Chapter 2a on employees’ own- account trading in financial instru- ments. The amendment was promp- ted by the outcome of a major case dealt with by the prosecuting autho- rity in 2001. Based on that case,

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Management companies for securities funds

Supervision company in 2002 with a focus on IT- institution. Regulatory amendments At the end of 2002 24 management related issues. of this nature will help to ensure companies were in operation, a marg- concentration and more effective inal reduction on the 2001 figure. utilisation of investment expertise. The number of securities funds rose Legislation and administration from about 390 to 419 in the same Alongside its ongoing administrative Marketing of foreign securi- period. tasks, Kredittilsynet worked on the ties funds following regulatory amendments in A regulation on marketing of foreign Seven on-site inspections were per- 2001: securities funds went into force on 8 formed at management companies July 2002. Kredittilsynet drafted the for securities funds in 2002. Members of management regulations as early as end-2001. boards UCITS funds, i.e. funds approved for One institution was revealed to have The amendment to the Securities marketing in the EEA, can continue systematically placed orders in illi- Funds Act that was passed in June to be marketed in Norway subject to quid shares with the result that the 2001 imposed new requirements notification to Kredittilsynet and price used to compute the value of both on management companies and registration of the fund in question. the share portfolio was higher than mutual funds. Under special transiti- Registration is also required for it would otherwise have been. Based onal provisions, management com- marketing via investment funds. on an overall assessment, panies were given until 1 March Under the new regulations, other Kredittilsynet concluded that there 2002 to meet requirements on funds can only be marketed subject was no reasonable grounds to sus- management boards. Kredittilsynet to special authorisation. pect that the provision on dishonest tested the fitness and propriety of price manipulation had been viola- board members as required by the Derivatives regulations ted. The management company was new provisions. On 8 July 2002 the Ministry of however ordered to rectify its order- Finance established new regulations placing routines. New articles of association on securities funds’ trading in deriva- for mutual funds tives. The regulations, which are In light of highly volatile share mark- Kredittilsynet prepared new standard- based on a proposal drafted by ets in the second half of 2001 and ised articles of association for secur- Kredittilsynet, widen securities funds’ the financial crisis at Kværner the ities funds following the introduction right to invest in derivatives, and lay same autumn, Kredittilsynet continu- of new requirements for the articles a basis for trading in unlisted deriva- ed its effort to ensure that manage- of such funds. Management com- tives provided they are cleared by a ment companies are adequately pre- panies were given until 1 August clearing house or transacted with a pared to tackle a suspension of 2002 to meet the new requirements. qualified counterparty. The regulati- pricing and redemption of units in New articles of association for some on also entitles securities funds to securities funds in situations in 400 securities funds, drawn up by hedge foreign exchange risk by which it is difficult to calculate management companies on the basis means of derivatives. prices. of the standardised articles, were approved by Kredittilsynet. Information disclosure Management companies submit Kredittilsynet drafted a proposal for returns to Kredittilsynet on a quar- Outsourcing regulation on management compani- terly basis. Off-site supervision spe- A regulation on outsourcing by es’ information requirement in con- cifically focuses on management management companies for securi- nection with the sale of mutual fund companies’ compliance with the ties funds went into force on 8 July units and the reporting of such sales. investment limits contained in the 2002. The regulation, based on The main aim of the regulation is to Securities Funds Act. In Kredittilsyn- Kredittilsynet’s proposal, regulates make it simple for unit holders to et’s experience the limits are adhered management companies’ right to compare saving in a securities fund to, although reporting reveals that outsource specific tasks, among with saving in other instruments, some companies are in breach. them asset management, to another and to ensure that they receive the Kredittilsynet will give continued institution, assuming that the latter information they need on the risk priority to this work ahead. institution has the requisite authori- involved in saving in mutual funds sations. Outsourcing presupposes compared with other saving options. Coordinated supervision was carried that Kredittilsynet is notified of any out at one sizeable management outsourcing agreement with another

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Capital requirements Differentiated management offer individual portfolio manage- The Securities Funds Act requires fees and loans ment services in addition to manag- management companies to maintain The Securities Funds Act was amended ing their own funds, and for manage- a capital base equivalent to at least in 2001 to allow management com- ment companies to offer investment EUR 125,000. Kredittilsynet drafted a panies to differentiate management counselling along with custody and regulation on the calculation of, and fees. The amendment entails that management of fund units. The other requirements for, start-up capital management commission charged on proposes rules on “simplified pro- and capital base. The draft is intended investments in one and the same spectuses” requiring management to conform the requirements for fund can vary based on the size of companies to prepare a simplified start-up capital and capital base to the investment. Moreover, securities version of the complete prospectus, the latest amendments to relevant funds can, subject to furnishing and proposes amendments to the EU directives. satisfactory security, engage in the Securities Funds Act in respect of the lending of financial instruments. This products offered. Nominee registration will enable funds revenues to be Concurrent with the passage of the increased by charging a fee for loans new act on registration of financial of financial instruments. Regulations instruments (Securities Registry Act) drafted by Kredittilsynet as a result in July 2002, the Securities Funds of these amendments were adopted Act was amended to permit the regis- by the Ministry of Finance on 6 tration of nominees in management January 2003. companies’ unit holder registers. Based on amendments to Council Kredittilsynet has drafted a regulati- Directive 89/611/EEC (UCITS), on on the registration of nominees in Kredittilsynet prepared two submissi- management companies’ unit holder ons proposing changes to the registers. Securities Funds Act. One opens the way for management companies to

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Securities market infrastructure

Kredittilsynet supervises the Central The Securities Registry Act also The electricity market was affected Securities Depository (VPS), Oslo requires the Central Securities by high prices towards the end of Børs, NOS Clearing ASA (formerly the Depository to convert from a “self- 2002. This was due to an unusually Norwegian Futures and Options owned” institution into a public limit- dry summer and autumn combined Clearing House), Nord Pool ASA (for- ed company and to apply for a licence with low temperatures in the Nordic merly the Nordic Electric Clearing under the provisions of the act. area towards year-end. Electricity House ASA) and IMAREX Kredittilsynet recommended the derivatives contracts with delivery in (International Maritime Exchange Ministry of Finance to approve the January-April 2003 were traded on AS). Kredittilsynet conducted on-site registry’s licence application. the Nordic power exchange, Nord inspections at Nord Pool ASA and Pool ASA, at historically very high Oslo Børs in 2002. The market for securities and other prices. This is assumed to be related financial instruments is subject to primarily to low reservoir levels in The Parliament (Stortinget) passed continual technological and structu- the Nordic hydroelectricity system, an act on the registration of finan- ral change. Development of rules, resulting in a significant reduction in cial instruments in July 2002. In products and systems is therefore a the system’s energy content in the force as from 1 January 2003, the process of mutual adjustment. winter of 2002–2003. new act removes the Norwegian Dependence on a robust infrastruct- Central Securities Depository’s (VPS) ure is growing steadily. Shutdowns Prices in the electricity derivatives legal monopoly on registering financial or faults at crucial infrastructural market were also highly volatile instruments. It requires Kredittilsynet institutions can have grave conse- towards the end of 2002, resulting in to assess rules and commercial terms quences. In its capacity as financial substantial value transfers between for securities registries. Partly in regulator, Kredittilsynet wishes to the clearing members of Nord Pool conjunction with the Central see the risk of serious problems Clearing ASA. Given Kredittilsynet’s Securities Depository, Kredittilsynet reduced to a minimum. responsibility for supervision of Nord drafted regulations to the Securities Pool ASA and Nord Pool Clearing Registry Act which were duly for- Kredittilsynet’s priority in 2002 was ASA, Kredittilsynet needed to keep a warded to the Ministry of Finance. to supervise institutions’ use of close watch on developments in the Kredittilsynet is empowered to lay information technology, with the electricity market. down regulations pursuant to some focus on security and vulnerability. IT of the provisions of the above act. inspections were conducted at the These regulations have been drawn six key institutions in the securities up and are expected to be ready in market infrastructure. time for the commencement of the act.

Supervision of compliance with the general rules of conduct in the Securities Trading Act

Supervision in this field is designed along with special notification rules insofar as the conduct provisions are to ensure enforcement of the general for primary insiders and rules requir- applicable, in the markets for freight rules of conduct contained in the ing disclosure of sizeable share and power derivatives. Kredittilsynet Securities Trading Act. At centre- acquisitions. Hence a wide circle of aims to show potential lawbreakers stage are the rules on unlawful insid- supervised entities is involved: invest- that contravention incurs risk. Other er trading and price manipulation. ors, issuers and their partners, includ- measures that are presumed to have Kredittilsynet also oversees compli- ing investment firms. The object is to a preventive effect in relation to ance with provisions on confidential- bring to light and prosecute unlawful criminal acts will also be applied. ity and prohibition of counselling conduct in the securities market and,

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Supervisory tasks and resources

Chart 4: TURNOVER AND NUMBER OF TRADES AT OSLO BØRS

12,000 Transactions per day 800 Market value (NOK billion) 677 700 638 10,000 583 556 600 503 8,000 500 414 389 6,000 400

289 NOK billion 245 300 4,000 207 200 126 Average no. of transactions per day 2,000 100 0,076 9,634 3,373 778 3,294 5,280 2,269 1 1,576 1,324 1,218 9,026 0 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Source: Oslo Børs

The majority of cases dealt with in Kredittilsynet investigated several ence in the market. Also worrying is 2002 were referred to Kredittilsynet cases of suspected price manipulati- the fact that this is an area where by Oslo Børs. According to the agree- on. It is crucial in such cases to the risk of discovery is perceived to ment between Oslo Børs and prove whether or not parties have be slight. Kredittilsynet proposed Kredittilsynet, only a low level of colluded, or whether a person’s con- changes to the Securities Trading Act suspicion is required to justify referral duct was motivated by a desire to that empower the agency to compel to Kredittilsynet. In 2002 Kredit- influence the price of a security. One websites to hand over IP addresses. tilsynet investigated a number of case referred to ØKOKRIM involved Kredittilsynet also provided input to cases where breaches of the insider an investment firm broker who, in a new act on electronic communicat- trading provisions were suspected. It Kredittilsynet’s view, sought dishon- ion in regard to storing and logging is important to ascertain who are estly to influence the price of a communicated data. behind the transactions in question. warrant by placing orders in underly- In the case of heavily traded securi- ing shares. This was done in such a Following Kredittilsynet’s approach ties, a large number of transactions way as to influence the price quoted to Nord Pool ASA on possible mani- are investigated, which is time-con- by the warrant’s market-maker. By pulation of the power market around suming. In addition, steps must be this means the investment firm’s cli- Easter time in 2002, a major investi- taken to ascertain what information ents acquired the warrant at a lower gation was initiated, conducted pri- was held by the persons involved at price, or sold it at a higher price marily by Nord Pool ASA. The investi- the time they carried out the trans- than would otherwise have been gation was prompted by indications actions. One case that Kredittilsynet possible. that someone had sought to influen- referred to ØKOKRIM4 involved a ce the price of electricity in the broker who, in Kredittilsynet’s view, Kredittilsynet noted several instances financial market by dishonestly passed price-sensitive information to where the Internet was used to spread influencing spot market prices. a client. The broker in question is misleading or incorrect information Although the investigation brought also suspected of inciting clients to of significance for securities prices. no irregularities to light, its thorough- trade in the same securities, i.e. Kredittilsynet takes a serious view of ness provided valuable experience in without passing the above informat- such behaviour, which could be studying and reporting on the power ion to these clients. highly damaging for the issuing derivatives market. It also revealed, companies involved and for confid- among other things, formal barriers

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to the submission of relevant data years since a number of cases that 2002, Kredittilsynet will confine from the Finnish system operator. were backlogged at the start of 2002 referrals to the prosecuting authority Since Finnish players are an impor- also had to be dealt with. Kredit- to repeated or gross breaches. tant segment of the market, the tilsynet noted that some cases receiv- Kredittilsynet referred one case to issue will be discussed further with ed from Oslo Børs were not of a the prosecuting authority in 2002. the Finnish authorities. serious nature, or did not involve breaches of the notification require- In 2002, as previously, work progres- Where Kredittilsynet finds reasonable ment. Fourteen cases against issuing sed on further developing the colla- ground to suspect a breach of the companies and individuals resulted boration between Kredittilsynet, Oslo rules of conduct contained in the in fines. Two cases were decided by Børs and ØKOKRIM. Joint seminars Securities Trading Act, the matter is court judgment, both resulting in were organised for staff of the three normally referred to the prosecuting acquittal. One has been appealed by institutions to this end. Kredittilsynet authority for further action. ØKOKRIM. also collaborated fruitfully with Nord Pool in the period. The aim of the In 2002 three cases of suspected In 2002 ØKOKRIM brought charges collaborations is to improve the unlawful insider dealing and/or bre- in three cases of unlawful insider overall efficiency of market surveil- aches of confidentiality, and two trading and market manipulation lance. Topics discussed included rou- cases of price manipulation, were that were referred to it by tines, priorities and legal issues. referred to ØKOKRIM. Twenty-seven Kredittilsynet. One conviction and breaches of the securities trading one fine were handed down for price notification requirement were report- manipulation. ed to the police over the year. A total of 326 notification cases were Over the year Kredittilsynet investi- forwarded by Oslo Børs compared gated several cases of breaches of with 536 in 2001. The decline from the disclosure requirements in 2001 was essentially due to a reduct- respect of large share holdings. ion in the number of incoming cases. Based on the legislative history of Despite this, Kredittilsynet dealt with the existing Securities Trading Act, more cases in 2002 than in preceding and on a Supreme Court judgment of

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Banking, finance and insurance

Supervision of banking, finance and insurance is intended to ensure satisfactory financial strength, risk awareness, management and control of institutions. It comprises on-site and off-site supervision, in addition to which Kredittilsynet is assigned administrative and consultative tasks as well as responsibility for drafting regulations. Off-site supervision and analysis

Off-site supervision and analysis financial institutions’ results and 2002 than in 2001. The impairment entails overseeing financial instituti- financial strength are published on is partly due to lower earnings as a ons’ compliance with statutory Kredittilsynet’s website, and quarter- result of the stock market trend, but requirements – including those related ly press releases illuminate the main also to higher loan losses. Several to capital adequacy, liquidity and trends. In its macroeconomic surveil- small banks recorded accounting large commitments. In conjunction lance Kredittilsynet monitors deve- shortfalls. Overall core capital ade- with Statistics Norway and Norges lopments in the Norwegian and quacy remained stable compared Bank, Kredittilsynet allocates sub- international economy that may with 2001, partly thanks to reduced stantial resources on maintaining affect stability in the financial mark- lending growth at many banks. Loss and refining systems used by credit ets. Confidential biannual reports are provisions rose markedly in 2002. institutions and insurance companies communicated to the Ministry of Even so, Norwegian banks’ aggregate to report data to the three authorities. Finance and Norges Bank. As from loss provisions remained low in 2003 Kredittilsynet will each year terms of outstanding loans. Off-site supervision of credit institut- publish a summary of the state of ions and insurance companies invol- the Norwegian financial industry. The Results in the insurance field were ves overseeing and analysing their reader is referred to the report entit- weak, as in 2001, mainly as a result profitability, financial strength and led The Financial Market in Norway of the decline in equity markets. Life risk. Analyses of topical problems are 2002: Risk Outlook. insurance companies’ buffer capital prepared on both a regular and ad was further reduced from the level hoc basis. Quarterly reports on The banks reported poorer results in at the start of the year. Both life and

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non-life insurance companies sub- same time as activity levels in parts es as collateral. Although this type of stantially reduced their sharehold- of the Norwegian economy have fal- lending is relatively limited in ings to bring risk exposure into line len. 2002 saw a marked increase in Norway, it is a fairly significant item with their risk-bearing capacity. loan defaults and loan losses. Both for some banks. As in 2001, Several years of weak technical defaults and loan losses nonetheless Kredittilsynet investigated banks’ results in the non-life insurance remained at a low level in relation to exposure to, and their assessments business led to sizeable premium the total loan volume for the banks of risk associated with loans to, increases as from 2000. The premium as a whole. Off-site analysis of the selected sectors. Loans to commerci- increases have helped to improve trend in profitability, liquidity and al properties were included. The technical results in recent years, and financial strength in individual insti- results of these surveys are described the improvement in technical tutions provides important input for in the report entitled The Financial accounts continued in 2002. Even so, selecting institutions for on-site Market in Norway 2002: Risk Outlook. weak financial revenues brought inspection. Off-site supervision in 2002 also poor profit performances for non-life prioritised large exposures and insurance companies as a whole. Off-site supervision included a num- changes in banks’ funding and liquid- ber of investigations of banks’ credit ity. To this end, improved reporting In 2002, as in 2001, off-site supervi- risk. In the home loan survey, banks of maturities on banks’ funding and sion of banks and other credit insti- were asked to report on various investments was introduced. An ana- tutions focused on the trend in aspects of loans secured on housing lysis of banks’ counterparty exposures, defaults, losses and financial property, including loan-to-value including their exposures in foreign strength. A number of small and ratios and collateral security. Banks exchange transactions, was carried medium-size banks have incurred were also asked to give an account out in conjunction with Norges Bank. rising credit risk after several years of their credit practices and the of substantial lending growth, at the extent of their lending with securiti-

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Considerable attention was given to financial industry of the internatio- monitoring insurance companies. On nal economic downturn and the several occasions life insurance com- weak share markets. Continued panies were asked to submit special attention was given to the disparate reports on their risk exposure and trends in various sections of the buffer capital. Stress tests were Norwegian economy and the signifi- employed on a continual basis to cance of this for banks’ credit risk. assess their vulnerability to further Activity in the competitively exposed share market falls, and to possible sector weakened appreciably, while falls in the fixed income market. The growth in credit to households, stress test results were then employ- including home loans and consumer ed in on-site inspections or were dis- loans, continued to grow strongly. cussed at other meetings with the Macroeconomic surveillance pays companies involved. Weak share special attention to the credit mark- markets also affected the perform- et, housing market and the market ance of mixed financial groups for commercial properties. which dominate the Norwegian financial market. Their financial situ- ation was monitored via a combinat- ion of off-site supervision and on-site inspections.

Kredittilsynet’s macroeconomic sur- veillance in 2002 focused on the consequences for the Norwegian

International seminar on the Nordic banking crises Norwegian Boom-Bust Cycle and Banking Crisis Revisited, while Lars On 11 and 12 September 2002 Kredittilsynet hosted an internatio- Jonung of the European Commission analysed banking and currency nal seminar on financial crises. The background to the seminar was crises in the Nordic countries in a historical perspective. the far-reaching banking crises in Norway, Sweden and Finland in the early 1990s (Denmark and Iceland averted problems on a similar Claes Norgren, Director General at Finansinspektionen, the Swedish scale). The past 15–20 years have seen financial crises in a number Financial Supervisory Authority, assessed possible consequences for of countries. financial stability of the new capital standards currently in prepara- tion. Carl-Johan Granvik at Nordea compared banks’ risk manage- Finn Hvistendahl, Chairman of the Board of Kredittilsynet, opened ment and control around 1990 and today, while Ernest Napier from the seminar and outlined its background and purpose. He pointed Standard & Poor’s in New York gave an assessment of new financial out that the social costs of financial crises are difficult to compute products and techniques in his presentation entitled Trends in Credit and are often too high to put a figure on. In his presentation entit- Risk Management: Can Systemic Banking Crises Be Avoided? The semi- led The Nordic Banking Crises from an International Perspective, Stefan nar concluded with a panel debate and closing remarks by Ingves from the IMF gave an overview of international experiences Kredittilsynet’s Director General, Bjørn Skogstad Aamo. He recalled with crises, while representatives appointed by the Nordic supervis- the importance of keeping the collective memory fresh, and of ors described experiences from the respective Nordic countries. recognising that any new crisis will not necessarily be a repeat of Professor Erling Steigum of the Norwegian School of Management the last one. Visit Kredittilsynet’s website at www.kredittilsynet.no BI analysed the Norwegian crisis in a presentation entitled The to see the presentations and a summary of the seminar.

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On-site inspection

A main aim of on-site inspections in due to bad banking in combination exemplified by the increasing use the financial industry is to see to it with a weaker economic climate. made of stress tests. Kredittilsynet’s that institutions have the requisite Small savings banks’ credit expertise calculations confirm a substantial financial strength, and that their on the corporate client front is a cri- spread of liquidity risk among the management and control systems tical area. eleven largest banks. ensure satisfactory risk management and internal control. As part of the ongoing supervisory December 2002 saw a new liquidity collaboration on banks’ credit opera- survey of 19 banks which either had Eighty-five inspections were carried tions, the largest banks’ use of credit large outstanding commitments with out in 2001 at banks, finance com- risk models was surveyed in the the Finance Credit system or had panies, life and non-life insurance spring of 2002. EDB Fellesdata AS, a reported negative results in the companies, pension funds and insur- data processing centre, was also course of the year. The survey shows ance brokers. Kredittilsynet was clo- assessed since its risk classification that several banks’ liquidity risk at sely involved in the Nordic supervi- system is employed by the majority end-2002 was by no means insub- sory collaboration on Nordea and If of smaller banks. Although credit risk stantial. This calls for close attention Skadeförsäkring, and participated in management models used by the from the management boards invol- four inspections under the auspices three largest banks are relatively ved and rigorous monitoring by of Sweden’s Finansinspektionen. advanced, they are still being deve- Kredittilsynet. loped on a continual basis. The Banking medium-size banks are also actively Banks’ market risk Forty-seven inspections were carried working to improve their internal Only a minority of banks have invest- out at commercial and savings banks classification models. In general, ed more than 3 per cent of their in 2002. however, there appears to be room total assets in shares, and none has for improvement among the majority exceeded the maximum limit of 4 Banks’ credit risk of smaller and medium-size banks per cent. The declining share market The three largest banks’ systems for when it comes to making active use in the second and third quarter of measuring credit risk show that of risk classification systems as a 2002 nonetheless contributed heavi- portfolio quality deteriorated tool for lending, pricing and portfolio ly to the negative results recorded by somewhat over the year. As a step in monitoring. a number of banks in some quarters. monitoring credit risk, some Moreover, in some cases poor follow- medium-size banks’ corporate port- Banks’ liquidity risk up of loans secured on shares necessi- folios were tested against Norges In the autumn of 2002 a liquidity tated substantial loss provisioning. Bank’s new model for analysing loss survey was carried out which includ- likelihood. The analyses indicate that ed the eleven largest banks in Individual cases most of the tested banks have assum- Norway. The object was to obtain a Based on initiatives from its control ed a somewhat higher risk profile more systematic overview of the committee and media coverage, than the average for the private sec- banks’ practice as regards manage- Nesset Sparebank was inspected at tor at the national and local level. ment and control of liquidity risk, the end of July 2002. Kredittilsynet’s Moreover, they appear unable to and an overview of the trend in the ensuing comments were highly criti- apply sufficiently differentiated risk banks’ actual level of risk. The survey cal of the bank’s management board pricing. In addition to their gradually formed part of the ongoing supervi- and administration for the way they increasing credit risk, some banks sion of the banking sector, and will handled a loan to Norsk Trelast- incurred further losses in the wake provide a platform for the introduct- import AS and for repeated instances of the collapse of the Finance Credit ion of risk-based supervision. While of non-compliance with the rules system in November 2002. the survey shows variations in the governing large exposures. The extent to which the banks meet savings bank’s supervisory board was Inspections in 2002 confirmed that a international standards of manage- accordingly asked to consider replac- number of small savings banks have ment and control, the largest ing the management board or mem- increased their credit risk recently Norwegian banks have improved bers of it. due to a heavier focus on the corpor- their management of liquidity risk in ate segment. The higher level of risk recent years. Management and con- Shortly after Kredittilsynet commu- may represent a substantive threat trol are now increasingly based on nicated its comments the manage- to some banks’ independence. parameters designed to ensure a ment board stepped down and was However, increased losses are also diversified funding structure. This is replaced by a new board appointed on 23 October 2002. 27 Annual_ENGpdf.qxd 30.06.03 16:32 Side 28

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Enebakk Sparebank incurred serious Nordlandsbanken’s largest loan com- Reinsurance liquidity problems in December 2002, mitments by Den norske Bank (DnB) The price of reinsurance was expect- and the bank’s management board and an independent audit company ed to rise in the wake of the terrorist acknowledged that the best option revealed a need for substantially high- attacks on 11 September 2001. This was to collaborate with Lillestrøm er loss provisioning, and consequently did not happen immediately, but Sparebank to bring about an orderly a greater need to strengthen the became increasingly apparent in the liquidation. In compliance with the bank’s equity capital. On 20 course of 2002. Some Norwegian Savings Bank Act, Kredittilsynet December, in response to an invitati- companies have thus far been shield- appointed a liquidation committee. on from Nordlandsbanken’s board, ed against premium increases by DnB ASA offered to take over the long-term contracts and special Based on the information available bank. DnB wishes to create North- agreements, although instances have to Kredittilsynet at the end of 2002, Norway’s largest bank by uniting the occurred where companies have substantial losses are expected at two banks’ operations in the nor- been compelled to accept a signific- banks exposed to the Finance Credit thernmost counties. A local initiative ant increase in own-account exposure. system. The latter’s owners were to retain Nordlandsbanken as an Since this automatically entails high- reported to ØKOKRIM on 15 independent bank failed. (See also er provisions, it may have conse- November. The involved banks’ over- page 32.) quences for their capital adequacy. all exposure totalled NOK 1.4 billion. Prompted by media coverage, Finance companies and mort- Life insurance companies and Kredittilsynet had as early as in gage companies pension funds October asked for up-to-date details Four inspections at finance compani- Five life insurance companies and from banks that were known to be es and mortgage companies in 2002 eight pension funds were inspected exposed to the Finance Credit sys- called into question their credit risk in 2002. On-site inspection at life tem. Commitments with companies assessment and loss provisioning insurance companies and pension in the Finance Credit system had practices, and their accounting for funds focuses on their compliance been called into question beforehand residual value guarantees in connect- with the asset management regulati- during ordinary inspections at ion with leasing. Moreover, criticism ons. Amended asset management Nordlandsbanken ASA, Bank 1 Oslo was levelled at the companies’ coop- regulations effective from 1 October and Sparebanken Øst. Following the eration agreements with agents and 2001 impose stricter requirements on arrest of the company’s owners on suppliers. institutions’ management boards in 16 November 2002, the banks in terms of managing and monitoring question were asked to give an Non-life insurance companies market risk, including an obligation account of their internal routines Nine non-life insurance companies to conduct stress tests and to assess and procedures. They are being clo- were inspected in 2002. In the case the ability to withstand value falls. sely monitored by Kredittilsynet (See of non-marine insurance the general also page 51.) impression was that technical results Life insurance companies and pensi- had improved partly due to very on funds have outsourced much of After the collapse of the Finance large premium increases over the their asset management business to Credit system Nordlandsbanken indi- past couple of years. However, the investment firms engaged in discreti- cated that it would incur a loss of improvement is offset by reduced onary management. As in 2001, NOK 300 million on its commitment. financial returns due to share market ensuring that companies operate As a result of this loss the bank soon developments. The companies made under an updated management agree- had difficulty renewing its CDs and substantial cuts in their share port- ment which clearly describes the term deposits. In order to strengthen folios, and took losses. management mandate and reporting its financial position the bank’s requirements was an important con- management board decided to issue The picture was more nuanced in the cern. A further key concern was to new share capital worth NOK 300 case of marine insurance. Prices are assess whether sufficient expertise million. However, a number of large fixed in an international competitive remained in the company after out- shareholders indicated to the bank market, and although the trend has sourcing for the management board ahead of the extraordinary general been on the upgrade for two years, to properly discharge its asset man- meeting that it should seek a struct- premiums were in general not at a agement responsibilities. ural solution rather than issue new profitable level. This, combined with share capital. 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provisioning until ordered to do so by Kredittilsynet appears to be a general problem.

A number of pension funds fail to prepare estimates for underwriting provisions on a quarterly or biannual basis. As a result any need for fresh equity capital only becomes clear at year-end.

Many pension funds have had poor internal control routines, both in relation to compliance with laws and regulations and in terms of manag- ing and monitoring their own risk exposures. The internal control regu- lation was made applicable to pensi- on funds as from 1 October 2001. It is expected to prove an important tool for improving pension funds’ management and control systems in due course.

Insurance brokers Four insurance brokerages were inspected in 2002. The inspections brought to light weak financial posi- tions and failure to bring security furnished up to date in relation to the number of brokers. One insuran- ce brokerage’s registration was dele- ted in 2002, partly for non-compli- ance with an order issued after an earlier inspection. A further broker- age was warned of possible superviso- ry sanctions after breaching sections 9 and 10 of the brokerage regulati- ons by mediating private insurances to an insurer outside the European Economic Area. However, after further consideration Kredittilsynet concluded that deleting this brokerage’s regi- stration was an excessive response to the breach committed.

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IT supervision

Banking and insurance Data processing institutions warning, Kredittilsynet asked for Operational risk associated with the One IT inspection was carried out at emphasis to be given to the risk use and operation of IT systems the Banks’ Payment and Central aspect in the further treatment of represents a substantial risk factor Clearing House in 2002. In its com- the case. for Norwegian financial institutions. ments Kredittilsynet pointed to the As a step in refining the supervisory absence of an integrated change Payments Systems Act – col- effort, it was decided in 2002 to management system and expected laboration with Norges Bank employ CobiT – an international this to be installed as soon as practi- The Payments Systems Act (No. 95 of standard for control and audit of IT cable. 17 December 1999) assigns Norges business – as the platform for Bank responsibility for licensing and Kredittilsynet’s IT supervision. It was Kredittilsynet’s comments from its IT supervision of interbank systems, and also decided to try out a standard- inspection of EDB Fellesdata AS and Kredittilsynet responsibility for ised electronic solution designed to EDB Teamco AS in 2001 were publish- supervision of systems for money make better use of data on events ed in 2002. The key features of these transfer services and securities clear- and problems as a basis for methodo- comments were contained in a letter ing systems. These systems interlock, logy development and risk and vulner- to 114 savings and commercial banks requiring clarification of responsibili- ability analyses. that were affected by a shutdown in ties and work sharing between August 2001. Similarly, steps were Norges Bank and Kredittilsynet. To Nine ICT inspections were carried out taken in 2002 to check compliance this end the two institutions have in 2002. The inspections covered with orders issued via Gjensidige formalised an agreement defining institutions’ own IT activities and NOR Bank AS. Moreover, separate system limits and a regime for coop- outsourced segments. They included follow-up meetings related to eration and task sharing. The agree- an overall IT inspection of the Internet bank operating problems ment also describes relevant warning Internet bank solution at Nordea were held in April and May 2002. and information routines in the banks in conjunction with the other The agreed measures will be follow- event of insolvencies or suspension Nordic supervisory authorities. ed up in 2003. of system participants.

Based on its monitoring and investi- On 31 October the Norwegian In 2003 a formal collaboration will gations in the field of card security, Competition Authority announced a be established on IT inspections at Kredittilsynet formally took up this possible intervention against an supervised institutions that are also matter with the banking industry agreement between the Norwegian licensed by Norges Bank as clearing represented by the Savings Banks Financial Services Association, the banks. Monitoring these institutions’ Association and the Norwegian Savings Banks Association and the compliance with the obligation Financial Services Association. Banks’ Payment and Central Clearing under the Payment Systems Act to Meetings were held with these asso- House which commits the banks to notify Norges Bank will be integrated ciations and other interested parties. utilising the latter institution for col- into IT supervision and coordinated The associations wish to continue lection of card transactions from the with the ongoing supervisory effort their dialogue with the banks in retail sector. In the view of the in the course of 2003. order to arrive at relevant measures Norwegian Competition Authority for reducing risk in this field. the agreement restricts market com- petition. Organisation, technical February 2002 saw the publication solutions and operation related to of a risk and vulnerability analysis of the EFTPOS system in Norway have a the financial IT structure and use of bearing on vulnerability and operati- Internet bank services in Norway. The onal risk. Kredittilsynet regards the report was presented to several insti- solutions established in this area as tutions and interest organisations to satisfactory, and does not want to increase awareness of risk associated see standardisation and risk aspects with areas identified as vulnerable. affected in the event of changes in The report is available at Kredittil- established solutions. In its submissi- synet’s website at www.kredittilsy- on regarding the Norwegian net.no. Competition Authority’s intervention

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Nordic supervisory collaboration Nordea If Skadeförsäkring Holding Since 2000 the Nordic supervisory Group authorities have operated a coopera- The agreement between tion agreement on supervision of the Finansinspektionen (the Swedish Nordea Group. The regime comprises Financial Supervisory Authority) and a coordinating supervisory team plus Kredittilsynet on supervision of If subteams for assessment of total Skadeförsäkring Holding AB was risk, capital allocation, insurance and revised in March 2002, and also sign- accounts. A team to assess the ed by Försäkringsinspektionen (the Group’s liquidity management was Finnish Insurance Supervisory set up in 2002. In the spring of 2002 Authority) after Sampo’s former non- the risk team presented to the super- life insurance business was taken visory team a document reviewing over by If Holding as from 1 January overall risk evaluation practice within 2002. The agreement entitles the Nordea Group. The document Kredittilsynet to attend important was thereafter considered by the meetings that Finansinspektionen heads of the four Nordic supervisory holds with If and to take part in on- bodies at the meeting of Nordic site inspections. supervisors in Bergen in June 2002, and by Nordea’s Group management Kredittilsynet assisted Finansinspek- later the same month. Nordea gave tionen’s preparation of a “Total Risk its comments to the document in a Assessment” of If, which took into letter of 25 August 2002. account the Sampo transaction. The risk assessment was published in Three group-wide inspections were January 2002, and Kredittilsynet, conducted in 2002 in the fields of together with credit risk, management and control, Försäkringsinspektionen, also carried and liquidity management. out an updated risk assessment of Kredittilsynet was present at the the If Group for the first half of inspections. Altogether the supervi- 2002. Moreover, Kredittilsynet parti- sory team and the risk team met 11 cipated, under Finansinspektionen’s times, the liquidity team four times. auspices, in an inspection of If Skadeförsäkring AB’s premium- setting, discounts and monitoring of claims payments. Kredittilsynet also attended two meetings with If on annual and interim financial state- ments.

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Licensing and regulatory compliance

Banking/finance the conversion the non-life insuran- and documentary credits financing, ce company has been linked to the mainly to clients of United Parcel Changes in the structure of Gjensidige NOR Group by a strategic Service Inc. (UPS) and Fritz the Nordea Group, including cooperation agreement. The former Companies Norway AS. The company the Vesta Group Union Bank of Norway is now a is also planning to expand its busi- In its submission to the Ministry of public limited company regulated by ness to other Nordic countries in the Finance, Kredittilsynet advised the the Commercial Banks Act. The bank longer term. ministry to approve the Nordea is nonetheless entitled to use the Group’s application for permission to term “sparebank” (savings bank) in Application to merge reorganise its insurance business. its name, and is a member of the Finansbanken ASA and Vesta Forsikring AS, a non-life insur- Savings Banks’ Guarantee Fund. This Storebrand Bank AS ance company, was the parent com- will remain the case so long as the Since 1999, when Storebrand ASA pany in the Norwegian Vesta Group, savings bank foundation (Stiftelsen was granted a licence to acquire the which is in turn part of the Nordea Gjensidige NOR Sparebank) owns 10 shares of Finansbanken ASA, the Group. Permission was sought to per cent or more of Gjensidige NOR company has been provisionally aut- organise the insurance business in ASA’s share capital. horised to retain Storebrand Bank AS two sub-groups, one for non-life and and Finansbanken within the same one for life insurance, ahead of the Den norske Bank’s takeover group. In November 2002 planned sale of the non-life arm. The of Nordlandsbanken ASA Kredittilsynet received an application reorganisation went ahead, and the In response to an invitation from the to merge the two companies, and in two insurance groups established a Board of Nordlandsbanken ASA, Den January 2003 Kredittilsynet advised comprehensive set of cooperation norske Bank (DnB) offered to take the Ministry of Finance to approve agreements. over the bank. By 16 January 2003 the merger. DnB had received acceptances which, Nordea Bank Norway was also com- together with the shares already DnB Holding ASA – prehensively reorganised. held by DnB, came to 90.32 per cent acquisition of Skandia’s Kredittilsynet approved the sale of of the bank’s shares. On this basis discretionary asset the bank’s subsidiaries, Nordea DnB applied on 21 January 2003 to management business Management ASA and Nordea the Ministry of Finance for a licence Upon Kredittilsynet’s advice, the Fondene AS, to the Swedish compa- to purchase Nordlandsbanken’s sha- Ministry of Finance authorised DnB ny Nordea Asset Management AB, res. (See also page 28.) Holding ASA to acquire all shares of and the spinoff and sale of the bank’s Skandia Financial Holdings securities business to the Swedish Verdibanken ASA Aktiebolag and its subsidiaries. The company Nordea Securities AB. All The Ministry of Finance authorised companies provide discretionary the companies remain wholly-owned Verdibanken ASA to carry on banking asset management services under subsidiaries within the Nordea Group. operations in the segments stated in the name “Skandia Asset Manage- the bank’s application. The authori- ment”. As required for authorisation, Gjensidige NOR Group – sation was in line with Kredittilsynet approved the organisat- conversion to public limited Kredittilsynet’s recommendation. ion of discretionary asset manage- companies Payment of share capital of NOK 50 ment business in the DnB Group. The Upon Kredittilsynet’s advice, the million was required, along with a approval covers the merger of Ministry of Finance authorised Union share subscription premium bringing Skandia’s asset management business Bank of Norway and the life insuran- total equity to NOK 85 million. Due in Norway with equivalent business ce company Gjensidige NOR to the bank’s risk profile, in the Norwegian section of the DnB Spareforsikring to convert to public Kredittilsynet will consider imposing Group. limited companies. All shares in both a capital adequacy requirement companies are owned by the new above the statutory minimum. Capital Merchant Bank ASA holding company Gjensidige NOR Kredittilsynet advised the Ministry of ASA. Prior to the conversion the UPS Capital Nordic AS Finance to turn down Capital savings bank and the life insurance Kredittilsynet authorised UPS Capital Partners’ application for authorisati- company, together with the non-life Nordic AS to establish a finance on to act as a commercial bank for insurance company Gjensidige NOR company and to carry on financing Capital Merchant Bank ASA. Forsikring, created a group with a operations. The company will offer Although in some doubt, Kredittil- common management board. Since financial factoring, stock financing synet recommended rejecting the

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application on the basis that the The background to the ministry’s intended business did not qualify as decision was that Samspar Norge commercial banking. Kredittilsynet’s operated in conflict with the terms alternative recommendation was to of the exemption. The Ministry stres- grant the application on specific sed that the contributors had not conditions, including a capital ratio been informed that their contributi- of 16 per cent based on assessments ons were not secured; that the asso- of the bank’s risk profile. ciation received contributions from persons who were not members of Financial and operational the Pentecostal church; and that it leasing had failed to comply with its own In connection with a specific exemp- statutes. Withdrawal of the licence tion, Kredittilsynet considered the was also based on a desire to protect definition of what is to be regarded contributors against risk of further as leasing business subject to a loss. Samspar is now being wound up. licensing requirement under the Financial Institutions Act (No. 40 of 10 June 1988). The issue involved “car administration with financing” which has clear-cut features in com- mon with ordinary car-hire. After reviewing international definitions of operational and financial leasing, Kredittilsynet concluded that the type of car financing operated by the company did not qualify as business subject to licensing. The Ministry of Finance agreed with Kredittilsynet, and the company handed in its licence. Samspar Norge – withdrawal of exemption by Ministry of Finance In 1995 Samspar Norge was exemp- ted from the financial institutions act’s licensing requirements on the basis that it would receive deposits exclusively from members of the Pentecostal church. In the autumn of 2002 the Ministry of Finance with- drew Samspar Norge’s exemption upon Kredittilsynet’s recommendation.

At the end of 2000 Samspar had a negative equity capital of NOK 3.3 million. By the end of 2001 the figu- re was a negative NOK 23.2 million. A major reason for the large deficit in 2001 was that the association had placed a substantial portion of its capital in equity funds, which led to heavy losses for the contributors.

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Insurance Pension Funds’ financial Problems for life insurance Guarantee schemes in the strength companies as a result of insurance sector Due to the developments in the falling securities prices Kredittilsynet acts as secretariat to securities market, a number of pensi- Some Norwegian life insurance com- the Non-Life Insurance Companies’ on funds fell short of the Insurance panies faced problems in meeting Guarantee Scheme and the Credit Activity Act’s capital requirements in the minimum capital and solvency Insurance Companies’ Guarantee the third quarter of 2002. The major- margin requirements in the summer Scheme. The latter scheme was inac- ity of pension funds sought permis- and autumn of 2002 due to the tive in 2002. The Non-Life Insurance sion to raise capital in the form of weak securities market. Both traditi- Companies’ Guarantee Scheme met core capital and subordinated debt. onal life insurance companies and twice in the course of the year to Kredittilsynet also received applicati- companies offering unit-linked life consider claims on the scheme from ons for temporary exemption from insurance were affected. Upon the policyholders in Star Forsikring AS the capital requirements. So far only advice of Kredittilsynet, the Ministry which had been placed under public short-term exemptions – lasting up of Finance granted three life insur- administration. In a ruling delivered to three months – have been grant- ance companies exemption from the on 20 March 2002 the Supreme ed. Since the pension fund regulati- solvency and capital adequacy Court established that interest ons confine exemption to special requirements. claims accruing after a claim against cases, a condition for exemption was an insurer falls due also have priority that the sponsoring undertaking Occupational injury insurance under the earlier Insurance Activity inject the requisite capital in the Recent years’ large premium increas- Act, Section 11–5. In light of this near future. Exemption was also es in the occupational injury insu- ruling the policyholder in question granted to pension funds that pre- rance sector are now starting to bear claimed payment of interest from sented a plan to sell shares or to fruit for non-life insurance compani- the scheme. The issue of payment by reclassify the portfolio by other es. Figures for the six largest compan- the scheme was not addressed by means in order to meet the capital ies offering occupational injury insu- the court. The guarantee scheme has adequacy requirement. rance show an aggregate technical itself previously covered the actual result for own account of NOK 18 damage and interest up to the due Articles of association million in 2001 compared with an date, but resolved not to cover the Kredittilsynet revised the standard accumulated technical deficit of remaining interest segment of the articles of association for private about NOK 1.3 billion in the period claim against the insurer. The guar- pension funds and municipal pension 1997–2000. For the six companies antee scheme’s decision has been funds in 2001. The background for combined, the gross claims ratio for appealed to the Ministry of Finance. the revision was the addition of 2001 was estimated at 120 per cent, notification rules to the pension in other words just over half the Bluewater Insurance ASA / fund regulations, new pension legis- 1998–1999 level. In 2001 the six Zürich Holding Norge AS lation for the private sector and largest companies’ share of the Kredittilsynet authorised Bluewater changes in the collective bargaining occupational injury insurance market Insurance ASA to acquire 100 per agreement in the municipal sector. was 94 per cent in terms of gross cent of Zürich Holding Norge AS’s All pension funds were instructed to premium. shares ahead of a merger of the two submit revised articles in 2002. companies. It also authorised a Under the notification rules, pension The above figures are taken from a reduction of Zürich Holding Norge funds only receive a response from report on a sectoral account for AS’s share capital and a merger of Kredittilsynet if their articles of occupational injury insurance as of Zürich Protector Forsikring AS with association are not accepted. end-2001 which was prepared by Zürich Holding Norge AS prior to the Kredittilsynet with assistance from acquisition. the technical calculating committee for non-life insurance. The report was published by Kredittilsynet in September 2002.

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ForbrukerForsikring AS In line with Kredittilsynet’s recom- mendation, the Ministry of Finance issued a licence to Forbruker- Forsikring AS to carry on insurance. The company will offer legal aid insurance to purchasers of goods priced at NOK 2,000 and upwards. This type of insurance is uncommon in Norway. Kredittilsynet recommend- ed imposing a condition requiring the company upon start-up to have capital exceeding the minimum requirement contained in the Insurance Activity Act Section 7–3. The company has yet to commence operations. Corporate fine imposed on Halden Kommunale Pensjonskasse by ØKOKRIM An inspection at Halden Kommunale Pensjonskasse (a municipal pension fund) in June 2001 brought to light large losses on the share portfolio and deficit for 2000 of almost NOK 80 million. Central provisions of the rules governing pension funds had been breached; for example its assets had not been invested in an appropriate and satisfactory manner. The board of directors was asked to consider its position, and thereafter stepped down. The matter was refer- red to ØKOKRIM which on 20 December 2002 handed down a cor- porate fine of NOK 100,000.

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Regulatory amendments

Banking/finance of importance in the EU context. Like valuation of losses on loans, guaran- the new Basel Accord, the new capi- tees etc. It brings Norwegian rules New rules proposed for cal- tal adequacy directive will take into line with international account- culating capital adequacy effect at the end of 2006. ing standards (IAS 39) and clarifies The Basel Committee on Banking the concept of loss on an individual Supervision has drafted new guideli- On 18 November 2002 the European basis and on a group basis. It also nes for computing banks’ capital Commission published a working brings terminology into line with adequacy. Since 1999 the committee document on revision of the current general accounting legislation and has completed two rounds of consul- capital adequacy rules for credit IAS 39. The proposed regulation was tation in which Kredittilsynet and institutions and investment firms. circulated for comment in July 2002, Norges Bank have issued joint com- The document, which is based on the with a deadline for comments set at ments. A third and final consultation European Commission’s draft new 2 October 2002, and is currently document is expected in the spring/ capital adequacy directive and being considered by the Ministry of summer of 2003 ahead of the adopt- reflects the Commission’s current Finance. Kredittilsynet advised the ion of the new Basel Capital Accord thinking, was circulated for com- Ministry of Finance not to implement by the Basel Committee at the end ment. the loss regulation until 1 January of 2003. The new guidelines for 2004. computing capital adequacy will take The current round of consultation effect at the end of 2006. was initiated by the European Act on e-money institutions Commission in order to obtain an With a view to implementation in On 1 October 2002 the Basel early assessment of the draft capital Norway of Directive 2000/46/EC on Committee presented a scheme for adequacy directive ahead of publica- electronic money institutions (the ascertaining the impact of the new tion of the third and final consultati- e-money directive), Kredittilsynet guidelines on capital requirements. on document in the spring/summer forwarded a submission to the The study, known as the third of 2003. The working document Ministry of Finance containing a pro- Quantitative Impact Study, or QIS3, identifies issues specific to the EU posal for an act concerning issuers of highlights the minimum require- which the European Commission electronic money. The Ministry there- ments proposed under Pillar I of the considers should be taken into after tabled an e-money bill (Ot. prp. revised Capital Accord. More than account in the new capital adequacy No. 92 (2001–2002)), which was 200 banks from over 40 countries rules. Kredittilsynet has invited passed into law by the Parliament are participating in the study includ- affected industry associations to take (Stortinget) on 13 November 2002 as ing, from Norway, Den norske Bank, part in the consultation round. Act No. 74 of 13 December 2002. Nordea Bank Norway, Gjensidige The act regulates the taking up and NOR and Fokus Bank. In 2003 Kredittilsynet will complete pursuit of the business of issuing its work on QIS3 and the European electronic money and the supervision Kredittilsynet’s impression is that the Commission’s “structured dialogue”. of institutions carrying on such busi- larger Norwegian banks are well pre- Kredittilsynet will also, in conjuncti- ness. pared for the introduction of the on with Norges Bank, forward a joint new Basel rules, but view the study statement on the third set of consul- The question of strengthen- as an important instrument for con- tation documents to the Basel ing the position of primary firming that this is actually the case: Committee and the European capital certificates (PCCs) in-house statistics and management Commission. Following an approach from the systems, for example, will have to Ministry of Finance, Kredittilsynet meet stringent requirements if inter- considered a proposal from the nal models are to be used as a basis A draft regulation on Savings Banks Association to the for measuring capital adequacy. accounting treatment of effect that the supervisory board of loans savings banks should have a freer In parallel with the Basel Committee, In March 2002 Kredittilsynet forward- hand in deciding the distribution of the European Commission is revising ed a draft regulation on accounting the net profit of PCC banks than its capital adequacy rules for credit treatment of loans and guarantees what follows from the “PCC holder institutions and investment firms. (the “loss regulations”) to the fraction”. Kredittilsynet did not con- The Commission’s revision is based Ministry of Finance. The proposal is sider there was a basis for extending on the Basel Committee’s proposals, intended to replace the current regu- preferential treatment to PCC hold- but gives special emphasis to issues lation (of 14 November 1991) on ers at the expense of other capital,

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but pointed to some minor steps trained member of their control ted to financial institutions’ organi- that could be taken to strengthen committee have submitted an appli- sation and business. These included the position of the PCC. cation to Kredittilsynet accompanied dividends and group contributions, by information confirming that the financial institutions’ ownership of Circular on new “standard person in question has taken their shares, ownership interests and real articles of association” final law examinations and applied estate, finance and mortgage com- Kredittilsynet’s guideline articles of for authorisation from Kredittilsynet. panies’ right to own banks of insur- association for commercial banks, Henceforth the law-trained member ance companies, dispute resolution finance and mortgage companies appointed to the control committee arrangements and national and and non-life insurance companies will be regarded as duly authorised supranational supervisory authorities. were reviewed and amended. The on condition that the institutions Kredittilsynet’s submission largely amendments are essentially designed themselves verify that the individual supported the commission’s recom- to bring the guideline articles into meets the requirements in question. mendations and assessments. line with new legislation. NOU 2002: 3 Mortgage bonds and securi- Directive on supervision of Ownership restriction and tisation – regulatory amend- financial conglomerates owner control at financial ments Kredittilsynet participated in a work- institutions In connection with the proposed law ing group appointed by the European Kredittilsynet’s submission supports on mortgage bonds and securitisa- Commission to prepare a directive on the main features of the model for tion, Kredittilsynet drafted in March supervision of mixed financial conglo- new rules on ownership restriction 2002 amendments to the associated merates. The directive, now in force, and owner control proposed in the legislation. It proposed assigning contains rules for reporting intra- NOU study. The committee recom- mortgage bonds a risk weight of 10 group transactions and measuring mends a Norwegian system based on per cent for calculating capital ade- financial strength on a consolidated the principles underlying the EU quacy requirements and large com- basis. The directive calls for close directives. According to the proposal mitments. Concurrently Kredittilsynet collaboration between supervisory an acquirer will have to seek prior reviewed the capital adequacy treat- authorities in Europe, and enlarges permission to acquire holdings of 10, ment of securitisation transactions, the right for the supervisory authori- 15, 20, 25, 67 and 90 per cent in a recommending that bonds issued by ties of one country to take part in financial institution. To obtain per- special-purpose institutions and on-site inspections in other countries mission to acquire any holding in secured on a mortgage loan portfolio within the EEA. excess of 25 per cent, the acquirer should on certain conditions qualify will have to make a takeover offer to for a 50 per cent risk weighting for Circular on the minutes of all shareholders and acquire an over- the purpose of calculating capital control committee meetings all holding of at least two-thirds of adequacy requirements. The Ministry and on the law-trained mem- the target institution’s shares. In its of Finance circulated the recommen- ber of control committees submission, Kredittilsynet expressed dations for comment on 5 July 2002. Kredittilsynet decided to alter the the view that the committee’s pro- For mortgage bonds a change in the routines for authorising control com- posal provides a sound basis for a discretionary management regulati- mittees’ minutes and for approving new body of rules, but recommended ons was proposed enabling compani- the law-trained member of control fewer thresholds requiring the acqui- es to hold up to 20 per cent of their committees. The financial legislation rer to obtain permission from technical provisions in a bond loan requires the control committee of Kredittilsynet. Kredittilsynet also secured on a mortgage portfolio. savings and commercial banks to asked the Ministry of Finance to Furthermore, an amendment was keep minutes, duly authorised by consider whether further delegation proposed to the Securities Funds Act Kredittilsynet, of its proceedings. to Kredittilsynet could result in simp- enabling securities funds to invest up Minutes will now be regarded as ler and quicker procedures than to 25 per cent of their assets in a authorised without being sent to provided for by the proposal. bond loan secured on a mortgage Kredittilsynet. portfolio. Financial institutions’ busi- The law-trained member appointed ness II – Report No. 8 from to the control committee must be the Banking Law Commission approved by Kredittilsynet. Thus far, The Banking Law Commission’s institutions that replace the law- eighth report addressed issues rela-

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Insurance

New pension legislation – the Insurance Activity Act and practis- Confederation of Trade Unions, in changes and need for clarifi- es premium equalisation between the shape of the Norwegian Union of cation policyholders to achieve gender- and Municipal Employees, brought action The Act on Defined Benefit age-neutrality. This system contrasts against these municipalities on 21 Occupational Pension Schemes and with the individual system enshrined January 2003 for breach of the main the Act on Defined Contribution in the Insurance Activity Act. collective bargaining agreement. Occupational Pension Schemes were amended in 2002 to permit combin- The Labour Court gave the 11 muni- Responsibility for sanctions ed pension schemes. The amend- cipalities that were subject to legal assigned to Kredittilsynet – ments will become effective once action until 1 July 2003 to bring Fourth EU motor insurance regulations are established on the their pension schemes’ funding sys- Directive design of combined pension sche- tem into line with the court’s under- EU Directive 2000/26/EC on the mes, probably in the spring of 2003. standing of the municipal collective approximation of the laws of the bargaining agreement. It meant that Member States relating to liability Amendments to the acts above the municipal pension schemes in insurance in respect of the use of introduce an obligation for instituti- question would have to transfer back motor vehicles (Fourth motor insur- ons with defined contribution sche- to KLP by the above date, and that ance Directive) of 16 May 2000 was mes to impose higher contributions no policyholder could transfer his or implemented in Norwegian law. The or contribution premiums for women her pension schemes from KLP to directive is designed to make it easier than for men if this is necessary to one of the three life insurance com- for EEA residents to pursue an insur- ensure that the annual pension will panies unless the latter were exemp- ance claim if they have a motor not depend of the member’s gender. ted from, or amendments were made accident in an EEA State other than to, the act. Subject to considerable their state of residence or in a state A number of interpretative problems doubt, Kredittilsynet concluded that that participates in the “green card” and issues related to the pension the three life insurance companies (an international insurance certificate) laws were dealt with by Kredittil- should be granted exemption from arrangement, and the accident was synet, several of which were referred Sections 7–5 and 7–6 of the caused by a motor vehicle insured in, to the Ministry of Finance for com- Insurance Activity Act. The Ministry and whose home state is, an EEA ment or assessment, including of Finance agreed, and granted state. Under the new rules the assessment of any need for law exemption subject to specified cond- Norwegian Motor Insurers’ Bureau is changes. itions. The exemption was in some recognised as an information centre respects not consistent with and compensation agency. Life insurance companies’ Kredittilsynet’s recommendation. The temporary exemption from three companies thereafter submit- The Ministry of Transport and the Insurance Activity Act ted product descriptions as required Communications and the Ministry of In the autumn of 2002 Storebrand by the conditions set. Their pension Justice, with the approval of the Livsforsikring AS, Gjensidige NOR products were however deemed to Ministry of Finance, advocated that Spareforsikring ASA and Vital be counter to the requirements of responsibility for imposing sanctions Forsikring ASA applied to the the main collective bargaining agree- against violations of Norwegian rules Ministry of Finance for exemption ment, but in line with the parties’ corresponding to the provisions of from the Insurance Activity Act. The view of this agreement. Kredittilsy- the Fourth motor insurance Directive applications were prompted by the net asked Storebrand to adjust its should be assigned to Kredittilsynet. Labour Court’s ruling of 8 October product to the conditions set by the 2002 which established that only ministry for exemption. Failure to do New directive on insurance Kommunal Landspensjonskasse (KLP, so would result in a daily recurring mediation a nationwide pension fund for the fine of NOK 100,000. Storebrand On 30 September 2002 the European municipal sector) had a funding sys- thereafter submitted a new product Parliament adopted a new Insurance tem for group pension insurances description which met the conditions Intermediaries Directive which that was in line with the require- for exemption. Kredittilsynet expects to be incor- ments of the main collective bargain- porated in the EEA agreement. ing agreement for the municipal sec- A total of four municipalities had Article 16 of the directive requires tor. The agreement required a gen- notified switching from KLP to private member states to implement the der- and age-neutral funding system. life insurance companies as of 1 directive in national law not later KLP is exempt from the provisions of January 2003. The Norwegian than two years after entry into force

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of the directive. The directive applies on a continual basis and to maintain to all intermediaries, including a positive equity capital position. The agents and advisers. No requirements new provisions are in line with are attached to such business at requirements applied at estate present. The directive aims for a agencies and debt collection agenci- minimum level of harmonisation. es. A requirement for positive equity capital will in Kredittilsynet’s opinion Regulations on workers stat- help to prevent financial dishonesty, ioned abroad for example in dealing with client In December 2002 Kredittilsynet for- assets. warded to the Ministry of Finance draft regulations on membership of a Work on new solvency company pension scheme and/or a margin rules defined contribution scheme for New EU directives on solvency margin workers temporarily stationed abroad. requirements for insurance companies The proposal will be circulated for were established in March 2002. comment in the course of 2003. Work on implementing the directives in Norwegian rules started in the Stricter solvency require- autumn of 2002. The new provisions ments proposed for insurance are expected to result in somewhat brokers higher solvency margin requirements Kredittilsynet recommended to the for non-life insurance companies. Ministry of Finance that stricter sol- Where life insurance companies are vency requirements be applied to concerned, the new rules will bring insurance brokers. The proposal only marginal adjustments to the entails requiring brokers to be in a solvency requirements. position to meet their commitments

Risk-based supervision The process of introducing a more risk-based supervisory regime Work is also under way on a study of the overall consequences for along international lines in compliance with the requirements of the supervision of the introduction of Pillar II of the new Basel Accord. new Basel Accord continued in 2002. Now that it is clear that Pillar II imposes new requirements on institutions in terms of risk introduction of Basel II will be postponed to 2006, more time can management and on supervisory authorities in terms of methodo- be spent on introducing the new methods. The project preparing for logy. The introduction of risk-based supervision will result in more risk-based supervision was reorganised in 2002, with greater systematic supervision. On-site inspection will be more resource- emphasis being given to building on current supervisory practice and demanding than at present. Steps must be taken to clarify what a gradual introduction of new methodology to ease the transition to aspects of the present on-site regime need to be carried forward new methods in purely organisational terms. The modules for credit under the new regime, for example monitoring of the individual risk, market risk and liquidity risk will be tested in a selection of institution’s compliance with laws and regulations. Moreover, the institutions in the first half of 2003. The modules for operational need for periodic reporting of data will probably change in keeping risk and insurance risk will be ready for testing in the same period. with the change in emphasis in the supervisory regime. The question After the trial period the scheme will be evaluated and any adjust- of whether staff increases and further specialisation will require a ments needed will be made. Kredittilsynet will be in a position to reorganisation within Kredittilsynet itself will also be addressed. make an overall risk assessment both of individual institutions and groups in the second half of 2003.

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Auditing

Kredittilsynet’s tasks in relation to auditors comprise approval or licensing of individuals and firms in accordance with the legal requirements applying to this profession as well as registration and supervision. Supervision encompasses entities listed in the register of auditors, and includes checking that they maintain their independ- ence, and that their activity complies with law and regulations and is conducted in a satisfactory manner.

The auditing industry features a Authorisation of individuals Following off-site examination, bipartite structure: a small number and undertakings Kredittilsynet warned 144 authorised of international auditing companies Under the Auditors Act, auditor aut- auditing companies that their licen- that audit the majority of listed horisation requires approved theore- ces would be withdrawn due to non- companies and other institutions of tical training and three years of vari- compliance with the requirements of public interest, and a large number ed experience. Practising auditors are company law. The great majority of smaller auditing companies whose required to furnish security of NOK 5 opted to meet the requirements with- main function is to audit small and million and to meet requirements as in the deadline set, while four com- medium-size companies. After the to post-qualifying training. panies lost their licences. acquisition of Arthur Andersen & Co AS by Ernst & Young AS in 2002, To achieve authorisation, auditing Administrative activity in only four large auditing companies firms need to be more than 50 per 2002 remain, which narrows the choice of cent owned by state authorised Among Kredittilsynet’s key responsi- auditors available to multinational auditors, and the majority of the bilities in relation to the Auditors Act companies. This is likely to occasion members of firms’ boards of directors is authorisation of auditors. The further structural change in the must be state authorised auditors. number of authorised auditors and industry both at the national and Requirements laid down in articles of auditing firms in 2002 is shown in international level. association and requirements as to table 9. financial probity also apply.

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Table 9: NUMBER OF APPROVED AUDITORS Auditors 31.12.2000 31.12.2001 31.12.2002 Approved in 2002 State authorised 1,902 1,998 2,107 114 Registered 2,738 2,826 2,899 136 Auditing firms 507 514 507 27

Regulations Early in December 2001 Kredittil- at 22 March 2002. The proposal to Kredittilsynet proposed that statuto- synet proposed amendments to the remove the course-approval scheme ry constraints on auditor counselling Ministry of Finance designed to was adopted by means of a regulatory of audit clients should also apply in simplify the Auditors Act and associ- amendment of 19 December 2002. respect of institutions with whom ated regulations. This involved remov- The Ministry did not, however, act on the auditor has a cooperation agree- ing the requirement that Kredittil- the proposal to simplify routines in ment, and which perform counselling synet approve courses for post-quali- relation to provision of security. or other services. The proposal was fying training and introducing simpler Kredittilsynet will now lay a basis for forwarded to the Ministry of Finance requirements in relation to provision electronic routines and reporting of in June 2002 and ratified by the of security and the content of the security furnished. The amendments Ministry on 19 December 2002 for register of auditors. The Ministry of proposed to the Auditors Act are still entry into force on 1 April 2003. Finance circulated the amending bill under consideration by the Ministry. for comment on 21 December 2001 with a deadline for submissions set

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Supervisory activity in 2002 attention given to auditing of entiti- counselling is substantial, and that Supervisory cases handled in 2002 es within the particular conglomera- regulations in this area need to be totalled 118, of which 32 were on te. This process reached completion clarified. the basis of on-site inspections. in 2002 with a largely successful These were to a large extent follow- outcome. In the few cases where the Kredittilsynet investigated some up inspections of auditors who had inspections brought to light unsatis- auditors who had been appointed to previously been criticised by factory circumstances, Kredittilsynet auditing companies attached to the Kredittilsynet, and of auditors report- issued comments both to auditing Finance Credit system. The investiga- ed to Kredittilsynet, mainly by the companies and the auditors respons- tions are designed to bring to light tax authorities and liquidators. ible that were proportional to the any censurable conduct on their Thirty-eight complaints against audi- gravity of the circumstance in quest- part. tors were received in 2002 compared ion. In one case Kredittilsynet react- with 31 and 32 in 2000 and 2001 ed because the auditor had relied Based on the “Commission respectively. excessively on the conglomerate’s Recommendation of 15 November on internal audit. quality assurance for the statutory Supervision entails checking compli- audit in the European Union: mini- ance with laws and regulations and In 2002 one thematic inspection was mum requirements”, Kredittilsynet with generally accepted auditing carried out with the focus on “audi- formalised an agreement with the standards. This requires a thorough tors’ counselling of audit clients”. It Norwegian Institute of Public assessment of the appropriateness of involved the five largest auditing Accountants, effective as from 2003, auditing methods, whether the scope companies and any collaborating on guidelines for coordinating con- of audit procedures is sufficient, companies that delivered counselling trol of auditors. The guidelines entail whether the auditor’s assessments or other services and was designed that all accountants with audit and conclusions accord with the to investigate compliance with the responsibility are to be checked on result of the audit procedures and Auditors Act’s provisions on indepen- five-year cycles. This agreement whether satisfactory supporting dence and objectivity. Counselling ensures that Norway broadly meets documentation for the audit is avail- services delivered to 50 major audit all EU requirements for quality con- able. clients were examined. The final trol of auditors. conclusions will be made known in In 2001 supervision focused on the first half of 2003. Inspections audits of larger conglomerates. All showed very wide variation both in the major auditing firms were involv- the nature and scope of auditors’ ed. Supervision was confined to counselling of their audit clients. It is predefined themes, with special clear that the scope of auditors’

Table 10: AUDITOR’S LICENCE WITHDRAWN 1996 1997 1998 1999 2000 2001 2002 State authorised auditors 0 0 0 1 4 0 1 Registered auditors 3 9 8 10 5 7 5 Approved auditing firms -----28 Total 3 9 8 11 9 9 14

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External accounting services

Kredittilsynet’s tasks in relation to external accounting services comprise authorisation of individuals and firms in accordance with the legal requirements applying to this profession as well as registration and supervision. Supervision encompasses entities listed in the register of external accountants and includes checking that their activities comply with laws and regulations and are conducted in an appropriate and satisfactory manner.

Authorisation of individuals Licensed external accountants need scheme is a major administrative and firms a higher qualification in economics task. As of 31 December 2002 the The Authorisation of External equivalent to at least two years’ full- register of external accountants Accountants Act regulates firms that time higher education and the equi- comprised 6,201 entities, of which provide accounting services for valent of two years’ relevant experi- 2,415 were individuals and 2,388 others on a commercial basis. ence. Running the authorisation were firms.

Table 11.1: POSITION – EXTERNAL ACCOUNTANTS 31.12.2000 31.12.2001 31.12.2002 Authorised 2002 Authorised external accountants 5,544 5,856 6,201 464 Authorised external accounting firms 2,138 2,377 2,415 208

In addition are registered external accountants with exemption or extended transitional period (298 in 2000, 38 in 2001 and 24 in 2002), and registered accounting firms with exemption or extended transitional period (35 in 2000, 11 in 2001 and 8 in 2002).

Table 11.2: NET INCREASE IN THE NUMBER OF NEW AUTHORISATIONS 2000 2001 2002 Authorised external accountants 545 312 345 Authorised external accounting firms 309 239 38

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There was a net increase in the num- are engaged in external accounting horities and other public agencies. ber of authorised external accoun- activity without mandatory authori- Thirty-eight reports concerning tants and authorised external sation as accountants. Kredittilsynet external accountants were received accounting firms in 2002, showing requires such accountants to submit in 2002 compared with 28 in 2001. that the profession continues to an account of their activities. Where Inspections based on geographical attract a fairly large number of new unlawful accounting activity is selection were also carried out. entrants. While the industry still fea- brought to light, Kredittilsynet orders tures a large number of small firms, its termination. In light of the The primary aim of supervision is to amalgamations and chains have recommendation to abolish the ensure that providers of external emerged. This could explain the low scheme for authorisation of external accounting services observe a mini- net increase in the number of autho- accountants, Kredittilsynet has been mum standard in relation to profes- rised external accounting firms in cautious in reporting unlawful exter- sional conduct. Where law and regu- 2002. nal accounting activity to the police, lations are not complied with, or although such action is considered in professional conduct is regarded as Regulations serious cases. One such case was unsatisfactory in other respects, Kredittilsynet reviewed the External referred to ØKOKRIM in 2002. This Kredittilsynet may revoke an external Accountants Act in 2001. Kredittil- involved long-lasting unlawful activ- accountant’s licence. At on-site synet recommended terminating the ity in which the person concerned inspections Kredittilsynet examined entire authorisation scheme, or had evaded investigation by how accountants organise their activ- transferring it to a public agency Kredittilsynet. Unlawful external ity in relation to Kredittilsynet’s other than Kredittilsynet. As an accounting activity is brought to guideline circular no. 12/2000, and alternative Kredittilsynet recommend- light by reports to Kredittilsynet, whether licensed accountants operate ed simplifying its administrative through processing licence applicati- in conformity with central aspects of tasks in relation to accountants. ons from individuals and through the accounting legislation and the Kredittilsynet also recommended ter- other investigations carried out by tax legislation in general. Based on minating the process of renewing Kredittilsynet. Reports to Kredittil- the inspections carried out, authorisation every fifth year, which synet of unlawful activity numbered Kredittilsynet’s main impression is will reduce the number of cases by 39 in 2002. Most of these reports that external accountants’ operati- about 1,500 per year. The amendment came from the tax authorities. ons vary widely in quality, and that proposal was circulated for comment in some areas material flaws seem to with the closing date for submissions Supervisory activity in 2002 be a common feature of the profes- set at 15 January 2002, and is under Seventy-one licensed external sion. consideration by the Ministry of accountants were examined in 2002, Finance. 41 on the basis of on-site inspecti- ons. In most cases it was a matter of Unlawful external accounting following up external accountants activity who had previously been criticised Kredittilsynet has noted that an by Kredittilsynet or had been repor- appreciable number of accountants ted to Kredittilsynet by the tax aut-

Table 12: NUMBER OF SANCTIONS – AUTHORISED EXTERNAL ACCOUNTANTS 2000 2001 2002 Withdrawal of licence 2 6 10 Warning 11 14 7 Withdrawal of licence – firms – – 1

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Estate agency

Supervision of estate agents encompasses the activities of firms licensed to practise estate agency and lawyers who have put up security for estate agency, as well as housing cooperatives that are licensed to provide estate agency services and ordinary housing cooperatives’ brokerage of cooperative flats. Firms, lawyers and housing cooperatives are checked for compliance with the requirements of law and regulations, including observance of generally accepted estate agency standards. Supervision of estate agents takes the form of on-site inspection and off-site supervision. Kredittilsynet is also assigned administrative and consultative tasks, and responsibility for framing regulations.

High activity, but weaker There were 528 licensed estate Chains strengthen their position earnings, in 2002 agency firms at the end of 2002. Recent years have seen the estab- In the first half of 2002 the housing Seventy-nine new licences were lishment of an increasing number of market still featured high turnover issued over the year, while 72 firms chains with centralised functions, and high prices, especially in the larg- ceased their estate agency activity. and estate agency chains now est towns. Despite this, 164 estate Moreover, 55 housing cooperatives account for two-thirds, or about 67 agencies reported negative operating provided estate agency services at per cent, of all property sales. Banks results at mid-year. This is presumed year-end, and 1,018 lawyers had predominate in the estate agency to be due to the longer average time furnished security to engage in estate context, and accounted for about 40 taken to sell properties and to keener agency. per cent of total transactions in competition for clients resulting 2002. There is reason to believe that from over-establishment in some banks will seek, within the limits set areas. In the autumn of 2002 the by legislation, to expand their sales market slowed appreciably, especially of banking and securities services for commercial properties and higher- through their estate agency operat- priced residential segments, but also ions. in the case of ordinary dwellings.

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On-site inspection Equity capital situation Media coverage and comments from Kredittilsynet carried out 71 on-site The tendency for declining earnings the consumer authorities were at inspections of estate agency firms, in the trade in 2002 necessitated times highly critical, and signals lawyers engaged in estate agency closer monitoring of estate agencies’ from the general public also indicate and housing cooperatives. Unlawful financial strength via extraordinary that the trade is viewed with some and highly censurable circumstances reporting of accounting data. Sixty scepticism. In 2002, as in 2001, the were brought to light at two agenci- agencies that were running an ope- media highlighted a number of es. One, which had broken the rules rating deficit and whose equity capi- instances of allegedly censurable cir- governing treatment of client funds tal was below NOK 100,000 at mid- cumstances at estate agencies, cas- and employed negligent routines, year were instructed to file such ting doubt on the industry’s integrity. lost its right to carry on estate agen- reports as of 1 October to document For Kredittilsynet it is important to cy business, and its manager lost his continued compliance with the law’s do its utmost to examine the more licence. In the other case the mana- requirement as to positive equity serious allegations that come to light gement failed in its duty to monitor capital. More than 40 per cent of via the media and other channels. In the broker in charge of the assign- these agencies were still running an this way Kredittilsynet can help to ment in question. Warned by operating deficit on the reporting ensure that property buyers receive Kredittilsynet that its right to carry date, and several had to strengthen correct information, which is import- on estate agency would be with- their equity capital position by ant for public confidence in the drawn, the firm handed in its licence increasing their share capital in order industry. of its own accord. A further firm was to lawfully continue their estate warned that its licence would be agency business. To Kredittilsynet’s knowledge, bad withdrawn if the manager continued experiences with the estate agency his negligent supervision of client The estate agency industry’s industry are rarely due to gross funds. Several firms continue to repute negligence on the part of the agen- attract censure due to unsatisfactory Public interest in the estate agency cies. Errors are, however, committed routines for documenting treatment industry appears to have risen in in the marketing of properties in the of client funds. step with the industry’s expansion. form of incomplete or misleading

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property descriptions. Equally, agents section 2–6 of the act should be address the recommendations regard- are not always sufficiently precise in extended to all employees of ing brokerage of properties abroad or their verbal communication with cli- estate agency firms the prohibition of other business ents; information and statements • That the act should empower activity for all estate agency employ- may not be as objective, precise or Kredittilsynet to issue regulations ees. The Parliament (Stortinget) pas- judicious as they should in light of on the bidding process and on the sed all the recommended amend- the importance that buying or selling manager’s duties and responsibili- ments. The following amendments, property has for the individual. The ties not proposed by Kredittilsynet, were result may be difficulties and irritati- • That the rules governing the duty also passed: on during the sale process, which of the agency and its employees to can affect the industry’s repute. furnish information to Kredittil- • The title “estate agent” was expli- synet should be amended or more citly protected, along with the title Law amendments clearly defined “state authorised estate agent”. In 2000 and 2001 Kredittilsynet • That Kredittilsynet’s power to over- • Estate agents, lawyers who carry recommended the following law see firms that have had their on estate agency, employees of amendments to the Ministry of estate agency licence withdrawn estate agency firms and owners Finance: should be extended to persons hold- and members of a firm’s governing ing an estate agency licence. bodies who normally participate in • That properties located abroad Parties that have handed in their the day-to-day business of the should, with certain exceptions, be licence voluntarily should also be firm without being employed there, exempt from the provisions of the subject to control and supervision. were absolutely prohibited from Estate Agency Act buying or selling properties • That fitness and propriety require- Based on the above recommendat- through their own estate agency ments should be introduced for ions, the Ministry of Finance tabled a firm. owners of estate agency firms Bill that was dealt with by the • That the ban on engaging in other Parliament (Stortinget) in the business activity contained in autumn of 2002. The Bill did not

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Where Kredittilsynet’s recommenda- Chart 5: tions regarding estate agency activi- NUMBER OF PROPERTY TRANSACTIONS – ESTATE AGENCY ty abroad and the prohibition of other business activity are concern- 100,000 ed, the Ministry considers it approp- 93,352 riate for these matters to be dealt with in conjunction with a broad- 90,000 86,886 based revision of the Estate Agency Act. The Ministry of Finance has 80,000 73,034 announced that a law commission will be appointed to this end. 70,000 65,587 63,270

60,000 56,626

50,528 50,000 46,164

40,000 37,074

28,687 30,000 27,721 27,303

NUMBER OF PROPERTY TRANSACTIONS 20,000

10,000

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 YEAR Source: Kredittilsynet 49 Annual_ENGpdf.qxd 30.06.03 16:32 Side 50

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Debt collection

Supervision of the debt collection industry encompasses agencies’ financial position and their treatment of client funds. It encompasses agencies that collect overdue debt on behalf of other businesses and organisations as well as agencies that purchase debt and collect it themselves. Collection of own claims and lawyers’ debt collection activities lie outside the scope of Kredittilsynet’s supervision. At on-site inspections Kredittilsynet checks that agencies operate in accordance with the requirements of law and regulations, including requirements as to correct treatment of recovered funds and, as far as possible, that agencies are run in accordance with generally accepted debt collection standards.

New licensing system – scope collection business has to be headed cies is an appropriate way of ensur- of Debt Collection Act by someone with a personal licence, ing that such business is run in widened the act specifically requires persons accordance with law and fair debt As from 1 January 2002 the previous effectively in charge of collecting collection practices. The requisite arrangement whereby ordinary debt purchased overdue debt to be of law amendment was dealt with by collection activity could be started good character. Moreover, as previ- Kredittilsynet and forwarded the on the basis of a personal licence ously, regular debt collection agenci- Ministry of Justice by letter of 14 was replaced by an arrangement es must maintain a positive equity January 2003. requiring the agency as such to capital position and put up a guar- apply for a licence. Since the law antee for their business. Agencies At the end of 2002 there were 113 now regards businesses that purcha- operating at the start of the year ordinary debt collection agencies, se overdue debt for collection as were given until year-end to apply seven of which were housing cooper- debt collection agencies under the for an agency licence. Kredittilsynet atives. Nine were new, while twelve Debt Collection Act, debt purchase is of the view that introducing fit- agencies closed down during the businesses also need to apply for a ness and propriety requirements for year. Eight debt purchase businesses debt collection licence as from 1 board members, general manager were registered at year-end. Forty- January 2002. Whereas ordinary debt and owners of debt collection agen- seven personal licences were issued.

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On-site inspection Finance Credit Norge AS’s debt Eight on-site inspections were carri- collection licence was revoked in the ed out at debt collection agencies in wake of the collapse of the Finance 2002. Kredittilsynet aims to inspect Credit system. The company was all debt purchase businesses on-site unable to produce documentation to in 2003 to obtain an overview of and prove that its responsibility for client insight into their activities, and will funds was consistent with the balan- organise the supervision of this ce on the client fund account. aspect of the industry on the basis of Finance Credit Norge AS also pur- the experience gained. chased debt for collection without having applied for the requisite Two personal debt collection licences licence, cf. transitional provisions were revoked in light of irregularities applying until the end of 2002, covered via reporting and inspection. referred to above. Since the company In one case a licence holder at the had carried on virtually no regular agency in question had failed to debt collection activity, any loss of ensure that client funds were hand- client funds traceable to debts that led according to regulations: pay- Finance Credit Norge AS had collect- ments from principals were used to ed on behalf of creditors will proba- cover the agency’s operating outlays. bly be covered by the mandatory In the other, the licence was revoked security put up by the company in because the holder had been barred order to carry on such business. (See from managing a business in the also p. 28) aftermath of bankruptcy, and was therefore viewed as unfit to carry on debt collection.

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Product development Complaints – board set up to Product development needs close handle complaints regarding attention if profitability in the debt collection services industry is to be maintained. The Kredittilsynet received 315 com- industry’s perception is that if debt plaints referring to debt collection collection agencies are to compete agencies in 2002. Most complainants successfully in the longer term, they alleged that collection action had must be able to offer a fairly wide been initiated unlawfully since the range of additional services over and debt was in dispute or had been above debt collection proper. They paid, or that the Debt Collection have largely become claims admini- Act’s notification provisions had not strators in the broad sense, and the been complied with. In some cases business sector and parts of the names had been confused and debt public sector appear increasingly to collection action was initiated outsource to collection agencies against the wrong person. On occasi- tasks related to invoicing, ledger on Kredittilsynet found cause to level management and collection of over- strong criticism at debt collection due accounts. Factoring with or agencies for breach of good debt without a credit element is relevant collection practice, and ordered them in this context. Some conglomerates to clean up deficient internal routi- establish companies to operate all nes to prevent a repeat. the above activities to the maximum Kredittilsynet has the impression extent permitted by law. Another that many debtors feel that they are crucial factor for success in the debt ignored when trying to bring up their collection industry is electronic case- case with the agency. Kredittilsynet handling systems with the capacity has in some cases censured agencies to process large quantities of data. for failing to respond to debtors. The accuracy and efficiency of these systems is presumed to be of key As a result of amendments to the significance both for profitability and Debt Collection Act that lay the basis for correct action vis-à-vis debtors. for public authorisation of private arrangements for resolving debt col- Reduced fees lection disputes, the Association of On 1 March 2002 the Government Norwegian Debt Collection Agencies lowered the basic debt collection fee and the Consumer Council formally from NOK 670 to NOK 520. Debt col- agreed to set up a board to deal with lection fees will no longer be tied to complaints regarding debt collection. the court fee. Instead the new col- The board goes into operation on 1 lection fee of NOK 520 will be peg- April 2003. The above act empowers ged to the consumer price index. At Kredittilsynet to make the granting the same time the debt category of a debt collection licence conditio- subject to the lowest collection fee nal upon joining a complaints board was extended from a maximum of arrangement. NOK 1,000 to a maximum of NOK 1,250. This entails a substantial reve- nue fall for the industry, and it is unclear at present how it will affect the current industry structure. A medium-term consequence could be attrition in the form of closures and takeovers, bringing further concen- tration in the debt collection industry.

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Chart 6: NUMBER OF CASES RECEIVED BY AGENCIES

3,500,000

3,068,484 3,000,000

2,478,271 2,500,000 2,228,788

2,000,000 1,830,960

1,560,065

1,500,000 1,351,694

NUMBER OF CASES 1,106,882 992,456 944,039 1,000,000 892,009 907,478 921,092

500,000

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

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Other measures

Draft legislation on measures lawyers, auditors, estate agents and mendations on terrorist financing. to prevent the laundering of dealers in valuable goods. The FATF is about to revise the 40 the proceeds of crime and Kredittilsynet’s submission supported recommendations. Kredittilsynet has terrorist financing, along the main content of the Bill. It attended the organisation’s meetings with international work in nonetheless pointed out that the Bill and worked on revising the recom- this field should more clearly reflect the large mendations. In 2002 the Ministry of Finance set volume of bank business transacted up an internal working group to pre- via the Internet. Kredittilsynet also pare draft legislation implementing recommended that a further three ICT regulations the revised money laundering direc- groups of businesses (debt collection New regulations on businesses’ use tive (Council Directive 2001/97/EC), agencies, securities registers as well of information and communication and a number of international stan- as stock exchanges and authorised technology were drafted and circula- dards in the field (in particular the market places) should come under ted for comment in October 2002. Financial Action Task Force on the rules, and that terminology as The regulations aim to provide a Money Laundering (FATF)’s special regards notification requirements structure more in line with changes recommendations on terrorist finan- should be clarified. Kredittilsynet did that have taken place in the use cing). Kredittilsynet was represented not expect the Bill to widen its made of information technology, and in the working group. The group pre- sphere of responsibility. to provide further concretisation in sented a submission on the Bill on individual areas. The regulations are Measures to Prevent the Laundering FATF is the leading international more process-oriented than previ- of the Proceeds of Crime and organisation drawing up standards to ously and therefore in keeping with Terrorist Financing which had been combat the laundering of proceeds international standards in the field. circulated for comments by the of crime and terrorist financing. The Ministry of Finance. The Bill substan- organisation has 31 members, includ- tially widens the range of persons ing Norway. The FATF has drawn up and businesses coming under the 40 recommendations on money money laundering rules to include laundering, and eight special recom-

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Internal control regulations Action plan for Kredittilsynet also recommended the An amendment was passed to “A simpler Norway” removal of the public scheme for Kredittilsynet’s internal control regu- Kredittilsynet suggested a number of authorisation of external accoun- lations requiring internal audits at simplifications in a letter to the tants or, alternatively, that amend- all financial institutions, including Ministry of Finance. Most were acted ments be made to the Authorisation investment firms, with assets under on by the ministry and were incorpo- of External Accountants Act to sim- management for own and clients’ rated in action plans, while some are plify Kredittilsynet’s administrative account in excess of NOK 10 billion. still being considered by the ministry. tasks in relation to accountants. The same applies to market places, Examples include: greater use of settlement centres and securities electronic reporting; lifting the rules registers. The amendment is designed on reporting own-trading under to further strengthen the instituti- chapter 2a of the securities trading ons’ internal control. act; simplified reporting of security put up for estate agency and debt Appeals handling – Register collection business; continued statis- of Company Accounts in tical cooperation between Norges Brønnøysund Bank, Statistics Norway and Kredittilsynet is the appeals body in Kredittilsynet; amendments to audi- respect of penalties imposed by the ting legislation to reduce reporting Register of Company Accounts for requirements; handling of licence late filing of company accounts. In application and delegation of 2002 316 appeals were received powers; and revision of the arrange- compared with 326 in 2001 and 186 ment for approving articles of asso- in 2000. The penalty was waived ciation in the banking, finance and entirely or in part in 115 of the cases insurance fields. (i.e. 36.5 per cent) compared with 18.4 per cent in 2001.

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Kredittilsynet’s international activities It is a long time since developing rules for the financial market, and conducting supervision based on those rules, was a purely national concern. Kredittilsynet’s activities greatly reflect international developments, especially within the European Union.

Growing need for global Commission will, in conjunction with Alongside the multilateral cooperati- coordination and the European Securities Committee ve bodies, Kredittilsynet has bilateral collaboration (with finance ministries), establish cooperation agreements, or Recent events have driven home the rules to supplement the directives. Memoranda of Understanding growing need for coordination of Detailed guidelines and standards for (MoUs), with the banking supervisory rules and supervisory practice on a practising and monitoring complian- authorities in France, Luxembourg, global basis. The events of 11 ce with these rules will be prepared the Netherlands, the United Kingdom September 2001 led to closer coope- by the Committee of European and Germany. ration in combating money launde- Securities Regulators (CESR). The ring and financial crime, especially in European Council has decided to Supervision of insurance business the context of terrorist financing, introduce a similar model in the The Ministry of Finance and while the Enron affair and other areas of banking and insurance. Kredittilsynet alternate in represen- accounting scandals in the US focu- ting Norway at meetings of the EU’s sed attention on the responsibilities Should the new structure be imple- Insurance Committee (IC). of corporate management and the mented in the banking and insurance Kredittilsynet is also an observer at role of auditors. Steps have been sectors, the existing system of EU the Conference of EU Insurance taken within the EU and on a wider committees and supervisory groups Supervision Authorities which meets level to harmonise rules on corporate in these areas will have to be modi- twice yearly. In keeping with the governance, and the effort to intro- fied. The new committees and expert decision to adhere to the Lamfalussy duce international accounting stan- groups are expected to require incre- model in the insurance area, the dards has grown in significance. ased resources and effort on the part conference will change its status to of Kredittilsynet. that of a formal supervisory commit- More countries opt for tee. Its participants have concluded a integrated financial Supervision of banks and finan- multilateral cooperation protocol supervision cial institutions based on the insurance directives, as The integrated supervision model The Ministry of Finance and well as a separate cooperation agree- continues to gain ground as a means Kredittilsynet alternate in represen- ment on supervision of insurance of promoting effective and efficient ting Norway at meetings of the groups carrying on cross-border acti- supervision of the financial industry. Banking Advisory Committee (BAC). vities. Under the latter cooperation Several countries have amalgamated The BAC and its Technical Sub Group, agreement, affected authorities have their supervisory regimes for banking, whose meetings are attended by set up a working group, currently insurance and the securities market, Kredittilsynet, are responsible for the chaired by Kredittilsynet, to coordi- or are considering doing so. In 2002 work done on the Basel Committee’s nate tasks related to supervision of integrated supervision was established new capital adequacy standards. insurance groups. The group is seek- in Estonia, Germany and Austria, Kredittilsynet also attends meetings ing cooperation agreements with while steps are being taken to do the of the liaison body Groupe de supervisory authorities outside the same in Ireland and Belgium. The Contact (GdC) together with banking EEA. integrated supervisory authorities supervisors from other EEA countries. meet annually to exchange experience Groupe de Contact is a forum where Supervision of the securities gained5. common supervisory standards are market within the EEA developed and information is In 2002 Norwegian authorities Cooperation within the EEA exchanged on institutions and mar- gained experience with the new EU ket players. In 2003 the committee committee structure for developing Focus on supervision and regula- structure will be revised in keeping rules for the securities market. The tion within the EU/EEA with the Lamfalussy model, and a Ministry of Finance represented The EU has introduced a model in new banking supervision committee Norway on the European Securities the securities field based on the will be established. Groupe de Committee, while Kredittilsynet pro- Lamfalussy Report with a view to Contact will continue in its role of vided experts at some meetings. expediting the creation of common expert group under the new commit- Kredittilsynet attends meetings of rules. Based on directives adopted by tee. CESR, the supervisory committee the European Council and established to formulate technical Parliament, the European details and develop supervisory col-

5 Thus far the group comprises the supervision authorities in Australia, Canada, Denmark, Iceland, Japan, Korea, Norway, Singapore, the United Kingdom and Sweden. Latvia and Hungary have also recently merged their banking, securities, and insurance supervisors. 56 Annual_ENGpdf.qxd 30.06.03 16:32 Side 57

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laboration. CESR acts as an advisory Closer cooperation on accounting EFTA’s sub-committee II (services and committee to the European and auditing capital) which prepares cases in the Commission and the European Kredittilsynet participates in the EU’s financial sector, evaluates directives Securities Committee and works for elaboration of accounting rules and to be included in the EEA Agreement consistent implementation of com- standards for auditors within the and updates the EFTA states on the munity law in member countries. EEA, and attends meetings of the EU activities of EU agencies. Participating in CESR sub-groups Accounting Contact Committee and was resource-demanding for the EU Committee on Auditing. In Collaboration with the European Kredittilsynet in 2002 since it was 2002 the EU adopted a regulation Central Bank (ECB) involved in several working groups requiring EU states to introduce There is an increasing need for coor- focusing on standardising prospectu- international accounting standards dination between supervisory autho- ses, harmonising clearing and settle- developed by the International rities and central banks to ensure ment procedures, and formulating Accounting Standards Board. A new financial stability in Europe and detailed rules on insider trading and body – the Accounting Regulatory worldwide. In conjunction with market manipulation. There were Committee, responsible for assessing Norges Bank, Kredittilsynet has esta- also several meetings of CESR’s and authorising new accounting blished a pattern of biannual mee- forum for information exchange on standards – was established in pur- tings with the European Central market surveillance (CESR-pol), and suance of the regulation. Norway is Bank on financial market issues. Two for coordination of accounting and invited to attend the committee’s meetings were held with the ECB in reporting rules (CESR-fin). meetings in an observer capacity. 2002.

Collaboration on supervision EU enlargement Nordic supervisory cooperation across sectoral divides Several peer reviews have been carri- Nordic cooperation remains import- Although there is a growing tenden- ed out ahead of the planned enlarge- ant to Kredittilsynet despite the cy to integrate supervisory regimes, ment of the Union. Peer reviews by existence of numerous cooperation coordination is still needed between teams of EU experts coordinated by fora at the global and EEA level. The supervisory authorities that have not the EU Commission examine the Nordic financial supervisors have taken this step. Kredittilsynet is a standard of financial legislation and drawn up an agreement on supervi- member of the Mixed Technical financial industry supervision in sory collaboration. In 2002 Group, an expert group under the applicant countries. Kredittilsynet was host to the annual European Commission which draws Kredittilsynet participated in two meeting of Nordic financial supervi- up recommendations for regulation such reviews in 2001, and forms part sors, this time held in Bergen in of financial conglomerates. A new of the expert group that started a June. Kredittilsynet regularly meets directive on supervision of financial review of Romania in 2002. its Nordic counterparts to collabora- conglomerates was adopted in 2002, te on the supervision of Nordic prompting creation of a separate Collaboration within EFTA financial conglomerates. There was committee to develop rules in this Kredittilsynet attends meetings of an extensive regime of meetings and sphere. EFTA’s Working Group on Financial information exchange in 2002. Services, a working group under

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Chart 7: OVERVIEW OF KREDITTILSYNET’S INTERNATIONAL ACTIVITY 1996–2002

120 Nordic meetings 104 100 EU/EEA meetings

80 69 62 57 60 54 48 48 45 38 40

16 20 12 14 9 8 0 1996 1997 1998 1999 2000 2001 2002

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Kredittilsynet’s part in global nical committee, which has overar- Money laundering supervisory collaboration ching responsibility for standards for As part of the fight against money supervision and regulation of the laundering, Kredittilsynet attended Supervision of the securities insurance sector. the meetings of the Financial Action market Task Force on Money Laundering Kredittilsynet is a member of the Supervision of banks and finan- (FATF) which develops international International Organization of cial institutions standards for anti-money-laundering Securities Commissions (IOSCO) and No global forum on a par with measures. In the period since 11 has acceded to a number of resoluti- IOSCO and IAIS exists for banking September 2001 the FATF has also ons adopted by IOSCO. Kredittilsynet supervision. The Basel Committee on recommended measures to combat also attends the biannual meetings Banking Supervision under the Bank terrorist financing. This collaboration of IOSCO’s European Regional for International Settlements (BIS) is was intensified in 2002, and numer- Committee, and participates in a responsible for coordinating global ous meetings were held. working group under the technical cooperation on banking supervision.6 Kredittilsynet participated in an committee which deals with enfor- Kredittilsynet attended the expert group that evaluated cement of IOSCO resolutions and International Conference of Banking Bulgaria’s follow-up of FATF recom- collaborates on issues related to sur- Supervisors (ICBS) held by the Basel mendations, and figures on the UN veillance, enquiries, investigation and Committee every second year. list of experts that can be contacted prosecution of criminal offences. Kredittilsynet receives relevant docu- by countries needing help to develop Under an international collaboration ments from the Committee and is rules and implement counter- agreement (MoU) drawn up by invited to comment on them, and to measures against money laundering. IOSCO, supervisors have to meet cer- attend some of the Committee’s tain criteria to qualify for member- activities. The Basel Committee has ship of the organisation. Kredittil- for some time worked on revising the synet has one representative on the international rules for calculating committee charged with processing banks’ capital adequacy, cf. page 36. applications for membership. Kredittilsynet is also a member of Cooperation on financial stability the Enlarged Contact Group for and macroeconomic surveillance Supervisors of Collective Investment Developments in financial markets Funds which meets once a year. have led to closer international col- laboration on financial stability and Supervision of the insurance macroeconomic surveillance. industry Kredittilsynet is in regular contact Kredittilsynet is a member of the with the European Central Bank and International Association of the International Monetary Fund Insurance Supervisors (IAIS). IAIS’s (IMF). It also attends the meetings of general meeting adopted internatio- the OECD Capital Markets nal standards for reinsurance super- Committee and Insurance Committee vision at its ninth annual conference as well as meetings of the UN-coor- in Santiago, Chile. The IAIS is also in dinated Project Link, a macroecono- the process of revising its Insurance mic analysis centre. Kredittilsynet Core Principles, and is developing hosted a seminar on financial crises standards for supervision of insuran- in 2002 which drew international ce activities on the Internet. At the speakers and participants, cf. page above conference Kredittilsynet’s 26. Director General, Bjørn Skogstad Aamo, was elected to the IAIS’s Executive Committee. Kredittilsynet is also represented on several IAIS sub-committees as well as the tech-

6 The Basel Committee comprises representatives for the banking supervision authorities and central banks in the following countries: Belgium, Canada, France, Italy, Japan, Luxembourg, the Netherlands, Spain, the United Kingdom, Switzerland, Sweden, Germany and the United States. 59 Annual_ENGpdf.qxd 30.06.03 16:32 Side 60

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Table 13: OVERVIEW OF INTERNATIONAL ORGANISATIONS AND EU/EEA RELATED COMMITTEES IN WHICH KREDITTILSYNET PARTICIPATES AS A MEMBER OR OBSERVER

Banking/finance Securities ICBS (International Conference of Banking Supervisors) IOSCO (The International Organization of Securities Commissions) OECD’s Financial Markets Committee ECG (Enlarged Contact Group on Supervision of Collective Investment Funds) BAC (EU’s Banking Advisory Committee) ESC (European Securities Committee) GdC (Groupe de Contact) CESR (Committee of European Securities Regulators) Nordic supervisory meetings Nordic meetings Insurance Accounting and auditing IAIS (International Association of Insurance Supervisors) ARC (Accounting Regulatory Committee) OECD’s Insurance Committee EU’s Accounting Contact Committee EU’s Insurance Committee EU Committee on Auditing Conference of EU/EEA Insurance Supervisory Authorities Nordic meetings Conference of European Insurance Supervisory Services Nordic supervisory meetings Money laundering Nordic-Baltic supervisory meetings FATF (Financial Action Task Force on Money Laundering) EU’s Contact Committee on Money Laundering Nordic meetings EFTA EFTA Working Group on Financial Services EFTA Working Group on Company Law

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Why regulate and supervise the financial system? external accountants is designed to ensure that the information provided by the institutions is correct. Financial market stability has received a great deal of attention in recent years. Many countries, including most of the Nordic ones, The second main goal of regulation and supervision is to protect have experienced banking crises. It has become clear to all that consumers and other users of financial services. Much of this pro- widespread problems in the financial sector can entail heavy costs tection is provided through regulation and supervision of the sol- for society and for the consumer, and that a properly functioning vency of financial institutions that manage their clients’ assets – financial market with strong financial institutions is a precondition whether in the form of bank deposits, insurance policies or invest- for a sound economy. Stability and confidence in the financial sys- ments in securities – and various types of public guarantee sche- tem are therefore a central aim of regulation and supervision. mes, such as deposit guarantee schemes.

While appropriate regulation and effective supervision of banking A very important aspect of consumer protection comprises regulati- and other financial activity are at centre-stage, regulation and on and supervision of intermediary functions performed by invest- supervision of securities markets and the insurance business are ment firms, management companies for securities funds, insurance also important for securing stability and confidence. Through brokers, estate agents, debt collection agencies etc. Here the objective supervision of banks and other credit institutions, investment firms is to prevent misuse of client assets along with other behaviour and insurance companies, a watch is kept on institutions’ compli- that promotes the interests of an intermediary at the expense of ance with the rules and on institutions’ management and control of user interests. their business and risk. Regulation and supervision of auditors and

61 Design: GRID Strategic Design AS, OSLO www.grid-design.com 05.2003/1,500 .Box 100 Bryn .Box 100 O el. +47 22 93 98 00 N-0611 Oslo N-0611 Norway T 26 Fax +47 22 63 02 [email protected] www.kredittilsynet.no The Banking, Insurance and Securities Commission of Norway and The Banking, Insurance Kredittilsynet Østensjøveien 43 P. Annual_ENGpdf.qxd 30.06.03 16:33 Side 62 Side 16:33 30.06.03 Annual_ENGpdf.qxd