Annual Report 2002 - Universitetet i Bergen · Vesta Forsikring sold off by Nordea Group Vesta Forsikring AS was a non-life insurance company and the parent company in the Norwegian

Annual Report2002

Annual_ENGpdf.qxd 30.06.03 16:31 Side 1

Chief Legal Adviser Marius RyelHead of Information Kjetil KarsrudInternational Coordinator Nina Moss Senior Legal Adviser Rune GrundekjønExecutive Secretary Signe Sørensen

FINANCE ANDINSURANCE DEPARTMENTDeputy Director GeneralSven-Henning Kjelsrud

LICENSING, LAWS AND REGULATIONSHead of Unit

Kjell Arne Aasgaarden

OFF-SITE SUPERVISION AND ANALYSISHead of Unit

Emil R. Steffensen

ON-SITE INSPECTIONSHead of Unit

Per Jostein Brekke

INSURANCE- AND PENSION-SPECIFIC ISSUES

Head of UnitHanne Myre

CAPITAL MARKETS DEPARTMENTDeputy Director General

Eirik Bunæs

SECURITIES MARKETSHead of Unit

Eystein Kleven

MARKET CONDUCTHead of UnitGeir Holen

ESTATE AGENCIES AND BROKERS, DEBT COLLECTION FIRMS

Head of UnitWilhelm Mohn Grøstad

ADMINISTRATION DEPARTMENTDeputy Director General

Gun Margareth Moy

STRATEGY AND FINANCEAss. Director GeneralNils Johan Korsvik

RECORDS DIVISIONHead of RecordsElse M. Skarheim

IT (internal)Head of IT

Per Sverre Frederichsen

PERSONNEL AND ORGANISATIONHead of Human Resources

Bjørn Drevlo

ACCOUNTING AND AUDITING DEPARTMENT Deputy Director GeneralAnne Merethe Bellamy

REGULATORY ISSUESAss. Director General

Tore Johan Berg

ACCOUNTING REGULATIONS

SUPERVISION OF AUDITORS AND EXTERNAL ACCOUNTANTS

Special AdviserSteinar Nyhus

IT SUPERVISIONSpecial Adviser

Frank Robert Berg

THE BOARDFinn Hvistendahl

Chairman

DIRECTOR GENERALBjørn Skogstad Aamo

STAFF

Organisation chart

KREDITTILSYNET’S ANNUAL REPORT 2002

Per 10.01.2003


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 andprovisions 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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Contents


Preface

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2002 was the third successive year of falling share valu-es. The fall affected several of Kredittilsynet’s areas ofsupervision, especially life insurance and securitiesmanagement.

Alongside poor corporate financial profits, the fall is dueto waning public confidence in many listed companies, inthe first instance in the United States. The boards andmanagement teams of the companies in question hadfailed to provide correct and complete financial informa-tion, and auditors had been insufficiently critical andindependent.

Many investors had entered the share market with unre-alistic expectations, and the pendulum now seems tohave swung in the opposite direction. Properly function-ing, confidence-inspiring securities markets are essentialfor savers, firms and for capital supply and economicgrowth alike.

It is primarily up to firms and the business sector itself torestore confidence by practising sound principles of cor-porate governance and management and by ensuringcorrect and complete information disclosure.

Improving the quality of accounts and ensuring auditors’independence is central to the strategy put forward bythe EU to secure confidence in, and to develop, a singleEuropean financial market. These goals are also import-

ant to Kredittilsynet’s revised strategy that was adoptedby its Board in November 2002.

The Accounting Law Commission is due to presentrecommendations in 2003 on how EU’s implementationof international accounting standards should be enforcedby Norwegian authorities. The issue of auditors’ independ-ence was the starting point for Kredittilsynet’s broad-based thematic inspections of the major auditing com-panies in 2002. The inspections revealed a need to clarifyand improve the rules governing the counselling servicesoffered by the investigated auditors. Kredittilsynet will inthe spring of 2003 give its recommendation on how thiswork should be taken forward.

Experience and analysis show that long-term investmentin shares can be profitable. This said, ordinary investorsneed good information about the risks they face if theyare to be in a position to make well-informed choices.This was the backdrop to Kredittilsynet’s proposal fornew information-disclosure requirements for vendors ofunits in securities funds to the consumer.

The share market slump has had limited direct effects onNorwegian banks. Investment firms and management companies have in general also managed satisfactorilyalthough their revenues are significantly reduced.


Although most Norwegian life insurance companiesreduced their shareholdings prior to the slump inSeptember-October, the fall in the share market meansthey are unable to give their policyholders more than theguaranteed return. Moreover, life insurance companies’buffer capital was very low at the start of 2003. Withlow shareholdings and low interest rates in the mediumterm, it will be difficult to build up buffer capital viaoperations in the years immediately ahead. Hence lifeinsurance companies and their policyholders will benefitlittle from a market recovery. If life insurance companiesare to play an active role in any increase in private pen-sion saving, a critical review of the current rules will beneeded. The Banking Law Commission’s proposal is avaluable contribution to a new framework for theNorwegian life insurance industry.

Via its inspections and other channels, Kredittilsynet hasin recent years warned small and medium-size banksagainst excessive growth in lending, especially to thecommercial sector. Developments have shown that thewarnings were well-founded. Many banks are experien-cing a marked increase in losses on loans to the commer-cial sector. Several need to review and improve their creditprocesses in light of the Finance Credit affair. A numberof banks should also improve their liquidity and liquidity-risk management. This said, the great majority ofNorwegian banks are now in a sound position. The larg-est Norwegian banks in particular are well placed in

terms of liquidity, financial strength and the quality oftheir banking. Hence there is little reason to fear a repeat in 2003 of the generalised banking crisis experi-enced at the start of the 1990s. A number of banks will,however, need close monitoring by Kredittilsynet in theperiod ahead.

Kredittilsynet conducted a comprehensive review of itsstrategy in 2002. The revised strategy gives some emphasisto explaining why regulation and supervision is neededfor the financial market to fill its role and contribute toeconomic growth and development. It also gives addedfocus to institutions, markets and users of financial services. New tasks will emerge and existing ones willexpand in several areas. Kredittilsynet will maintain atransparent and predictable supervisory regime and willact efficiently and soundly in the best interest of thebusinesses and individuals who are the end users offinancial institutions’ services.

Oslo, 22 January 2003

Finn Hvistendahl Bjørn Skogstad AamoChairman of the Board Director General

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Functions and objectives

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Kredittilsynet is an independent government agency thatbuilds on laws and decisions emanating from theParliament (Stortinget), the Government and the Ministryof Finance and on international standards for financialsupervision and regulation.

Through its supervision of enterprises and markets,Kredittilsynet strives to promote financial stability and

orderly market conditions and to instil confidence thatfinancial contracts will be honoured and services per-formed as intended. In addition to its preventative work,Kredittilsynet maintains a preparedness for dealing withconcrete problems that may arise. Kredittilsynet’s premi-se is that Norwegian enterprises must be afforded com-petitive conditions which all in all are in line with thoseenjoyed by institutions in other EEA countries.

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

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

InstitutionsKredittilsynet’s premise is that responsibility for busi-ness operations rests with the board and managementof the institutions themselves. Kredittilsynet will workto promote satisfactory capital strength, risk awareness,management and control in institutions under itssupervision. Through its administration and effectiveenforcement of the rules, Kredittilsynet will strive toensure that institutions and other market actors complywith laws, rules and ethical norms. Institutions ofmajor significance for financial stability and for usersare given priority for supervision purposes.

Users of financial servicesKredittilsynet will in its dealings with institutions,markets and market places promote the interests ofusers of financial services. Kredittilsynet will contributeto rules and arrangements that ensure that usersreceive correct information – in the first instance fromthe institutions themselves – about the institutions,their products and the associated risks.

Markets and market placesKredittilsynet will work for efficient and effectivecompetition and price formation in securities marketsand other markets under its supervision. Settlementand payment systems and the financial infrastructurein general must function in an appropriate and satis-factory manner. Markets and market places need tobe open and transparent, and market practitionersmust exhibit good conduct.

Kredittilsynet’s performance of its activityKredittilsynet intends to be an effective, flexible andindependent body featuring high competence andgood service. It will emphasise transparency and pre-dictability in its activities, good communication withsupervised institutions and the general public, andgood collaboration with other authorities and industryassociations.

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


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Structural changes and licensing

Gjensidige NOR Group converts to public limitedcompany statusUpon Kredittilsynet’s recommendation, the Ministry ofFinance authorised the conversion of Union Bank ofNorway and the life insurance company Gjensidige NORSpareforsikring into public limited liability companies. Allshares in the two companies are owned by a new holdingcompany, Gjensidige NOR ASA. After the conversion thenon-life insurance company was linked to the GjensidigeNOR Group via a strategic cooperation agreement.

Vesta Forsikring sold off by Nordea GroupVesta Forsikring AS was a non-life insurance companyand the parent company in the Norwegian Vesta Groupwhich in turn was a part of the Nordea Group. Nordeaapplied for permission to split its insurance business intotwo subgroups, one for non-life insurance and one forlife insurance, with a view to selling off the non-lifeinsurance business. Kredittilsynet advised the Ministry ofFinance to grant the application, and the sale and reorg-anisation went ahead.

DnB Holding acquires Skandia Asset ManagementUpon Kredittilsynet’s recommendation, the Ministry ofFinance gave DnB Holding ASA the go-ahead to acquireall shares in Skandia Financial Holding’s Aktiebolag alongwith the latter’s subsidiaries. Kredittilsynet has approvedthe organisation of asset management business in theDnB Group. The acquisition made DnB the fourth largestasset manager in the Nordic area.

Norwegian Central Securities Depository convertedfrom private foundation to limited liability companyThe new Securities Registry Act required the CentralSecurities Depository to convert from a private founda-tion to a public limited liability company and to apply fora licence under the provisions of the act. Kredittilsynetadvised the Ministry of Finance in the autumn of 2002 togrant the institution a licence under the new legislation.

Steep increase in property transactions – greaterconcentrationThe banks have acquired steadily growing prominence inthe estate agency industry over the past ten years, andare at the forefront of the chain formation process thatis a marked feature of the industry. The banks’ share ofthe total market has now passed the 40 per cent mark interms of transaction numbers.

Regulatory framework

Kredittilsynet proposes clarification on counsellingservices provided by auditors’ collaborating enter-prisesKredittilsynet proposed closer definition of counsellingservices that can be provided to audit clients by instituti-ons with whom the auditor has established a cooperationagreement. The Ministry of Finance issued pertinentregulations in line with Kredittilsynet’s recommendation.

Study of the impact on banks of proposed newcapital requirementsOn 1 October 2002 the Basel Committee presented aQuantitative Impact Study to gauge the impact that theproposed new capital standards will have on banks. Morethan 200 banks from over 40 countries are participatingin the study including from Norway – Den norske Bank,Nordea Bank Norway, Union Bank of Norway and FokusBank.

Savings banks can be converted to limited liabilitycompaniesIn 2002 the Parliament (Stortinget) passed amendmentsto the Financial Institutions Act that enable savingsbanks to convert to private limited companies or publiclimited companies. Savings banks will now be freer tochoose the organisation form best suited to bringing infresh capital. The act has come into force.

New act on securities registers – VPS monopolyremovedThe new Act on Registration of Financial Instruments(the Securities Registry Act), passed in July 2002, wentinto force on 1 January 2003. Under the act, responsibili-ty for assessing rules and commercial conditions forsecurities registers rests with Kredittilsynet. TheNorwegian Central Securities Depository’s (VPS) statutorymonopoly on operating a rights register for financialinstruments was removed and replaced by a generallicensing requirement which opens the way for compet-ing businesses.

Complaints board established for debt collectioncasesAs a result of a law amendment in December 2002, acomplaints board for debt collection cases will be estab-lished on 1 April 2003 by agreement between theNorwegian Association of Debt Collectors and theConsumer Council. The board will deal with consumercomplaints against debt collection agencies that operateon the basis of a licence from Kredittilsynet.Kredittilsynet will have access to the board’s decisionsand be empowered to order agencies to join the scheme.

Important events in 2002


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New regulations proposed on ownership restrictionand owner control in financial institutionsKredittilsynet supports the main features of the modelfor new regulations on ownership restriction and ownercontrol that were proposed by the Selvig Committee inJanuary 2002. The committee recommends a Norwegiansystem that builds on the same principles as pertinent EUdirectives. Kredittilsynet views the committee’s recom-mendation as a good basis for a new set of rules.Kredittilsynet asked the Ministry of Finance to contem-plate further delegation to Kredittilsynet in this area.

Internal audit requirement for financial industrypassedAmendments to Kredittilsynet’s internal control regulati-ons were passed entailing that internal auditing will berequired at all institutions with assets under manage-ment for own and clients’ account in excess of NOK 10billion. The same applies to market places, settlementhouses and securities registers. The amendments aredesigned to further strengthen institutions’ internal control.

Kredittilsynet proposes amendments to SecuritiesFunds ActAfter changes were made to Council Directive 85/611 EEC(UCITS), Kredittilsynet recommended amendments to theSecurities Funds Act. One such change will enable manage-ment companies to offer individual portfolio manage-ment services in addition to managing their own funds,and to offer investment counselling and safekeeping andmanagement of fund units. Rules on “simplified prospec-tuses” are also proposed, requiring management compan-ies to prepare a simplified version of the full prospectus.In addition changes are proposed to the Securities FundsAct in respect of the products offered.

Proposal to extend information requirementKredittilsynet drafted regulations on management com-panies’ information requirement when marketing units insecurities funds and subsequent reporting. The regulati-ons are principally designed to make it easy for unit hold-ers to compare the merits of saving in securities fundswith the merits of other savings mediums, and to ensurethat purchasers of securities fund units are informed ofthe risk that saving in funds entails compared with othersaving options.

Kredittilsynet recommends simplifications in connection with the action plan for “A simplerNorway”Kredittilsynet suggested several simplifications for inclu-sion in the Government’s action plan “A simpler Norway”.Among them are simplified procedures for approving andamending articles of association in the banking, financialand insurance sphere, removal of the reporting require-ment for employees’ own trading in securities and simpli-fied reporting of security lodged for estate agents, debtcollection agencies and auditors.

Supervision and administration

Kredittilsynet follows up EDB Business Partner ASASince the critical shutdown at EDB Fellesdata and EDBTeamco in August 2001 and Kredittilsynet’s subsequentcomments, EDB Business Partner ASA have taken a num-ber of steps to improve operating quality. Even so, severalshutdowns occurred in 2002 that affected banks, aboveall associated with major systems upgrading in the springand autumn of 2002. Kredittilsynet inspected EDBFellesdata’s operating units several times via client banks,and will intensify this effort ahead.

Finance Credit collapse causes heavy bank lossesPrompted by media coverage, Kredittilsynet asked banksin October for updated information on and an assess-ment of their exposure to the Finance Credit system.When the system collapsed and the top managers werearrested in November, the banks’ exposure totalled NOK1.4 billion, most of which will have to be written off.

No losses expected for ordinary debt collection clients as a result of the Finance Credit affairThe company’s involvement in ordinary debt collectionactivity was minimal. Hence any loss of client assets traceable to monetary claims collected by Finance CreditNorge AS on behalf of creditors will probably be coveredby the statutory security that the company had furnishedin order to carry on its business.

Nordlandsbanken in troubleIn consequence of the problems faced by Nordlands-banken after losses on loans to the Finance Credit system,DnB, at the invitation of the management board ofNordlandsbanken, made an offer to buy all the shares inthe bank. DnB aims to create North Norway’s largestbank by merging Nordlandsbanken’s and Den norskeBank’s operations in the northernmost counties. A localmove to retain the bank’s North Norwegian ownershipfailed. By 16 January 2003 DnB had received acceptanceswhich, together with the shares DnB already owned,added up to 90.32 per cent of Nordlandsbanken’s totalshares. DnB applied for a licence on this basis.

Strong criticism levelled at Nesset SparebankIn its comments after inspecting Nesset Sparebank,Kredittilsynet criticised the bank’s management boardand administration for the way they dealt with a loan toNorsk Trelastimport AS, and for repeated breaches of therules governing large exposures. The supervisory boardwas asked to consider the management board’s position.The management board stepped down shortly afterKredittilsynet’s comments were forwarded, and a newboard was appointed on 23 October.

Samspar Norge’s licence withdrawnIn 1995 Samspar Norge was exempted from the FinancialInstitutions Act’s licensing requirements on the basis thatit would receive deposits exclusively from members of the


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Pentecostal church. In the autumn of 2002, uponKredittilsynet’s advice, the Ministry of Finance withdrewSamspar Norge’s exemption from the general rules of theFinancial Institutions Act. The background to the ministry’sdecision was that Samspar Norge operated in conflict withthe terms of the exemption. Samspar Norge is now beingwound up.

Thematic inspection of liquidity riskIn the autumn of 2002 a liquidity survey was conductedin the eleven largest banks. The survey showed that com-pliance with international standards for managementand control varies from bank to bank. The largest bankshave improved their liquidity risk management in recentyears. Management and control are now increasinglybased on a framework designed to ensure a diversifiedfunding structure. Kredittilsynet’s calculations showed asubstantial spread in liquidity risk among the eleven largest banks.

Liquidity survey December 2002In December 2002 Kredittilsynet conducted a liquiditysurvey among a selection of banks. The survey revealedthat some banks had substantial liquidity problems. Themajority nonetheless reported that they would not befacing liquidity problems in the short and medium term.The survey shows that the banks need to improve theirmanagement of liquidity risk since the market now appe-ars to a greater degree to differentiate between strongand weak banks.

Kredittilsynet establishes cooperation agreementwith the Norwegian Institute of Public AccountantsKredittilsynet established cooperation with theNorwegian Institute of Public Accountants on qualitycontrol of accountants. The cooperation entails that allpractising accountants will be quality controlled at leastonce every five years. This meets EU recommendations onpublic oversight of accountants.

Thematic inspections of the largest auditing companiesKredittilsynet conducted thematic inspections of the lar-gest auditing companies. Inspections focused on auditors’counselling services – and collaborating companies’counselling – provided to audit clients. Inspections reve-aled a need to clarify and improve the rules governingcounselling activity that can be offered by the auditors inquestion. In the spring of 2003 Kredittilsynet will recom-mend how this work should move forward.

Insurance companies show poor resultsAs previously, life insurance companies’ were affected bya negative stock market trend. Due to their impaired risk-bearing capacity the companies continued to reducetheir shareholdings. Bondholdings rose in 2002, in thefirst instance bonds held to maturity.

Life insurance companies exempt from InsuranceActivity ActKLP Insurance was exempted from the Insurance ActivityAct to allow it to practise premium equalisation with aview to achieving gender and age neutrality. In theautumn of 2002 the Ministry of Finance grantedStorebrand Livsforsikring AS, Vital Forsikring ASA andGjensidige NOR Spareforsikring ASA temporary exemptionfrom the above act subject to specific conditions. Pensionproducts based on this exemption were held by the socialpartners to be counter to the main agreement betweenthe worker and employer unions. After approaches fromKredittilsynet, Storebrand adjusted a product to bring itinto line with the terms of the exemption given by theMinistry.

Investment funds closely monitored The market situation over the year, featuring falling activity levels, substantially affected investment fundresults. Supervision of these institutions focused to a greater extent than normal on financial circumstances,especially capital adequacy and liquidity. Institutionswere in general quick to reduce costs in order to comp-ensate for revenue shortfalls. Capital strength was, withsome exceptions, satisfactory.

International cooperation

Kredittilsynet attends more than 100 meetings inEU/EEA bodiesThe EU continues work on its ambitious plan to develop asingle European financial market that will includeNorway and the other EEA EFTA countries. Work on pre-paring and overseeing the common body of rules, especi-ally in the securities field, is gathering pace.Kredittilsynet attended 103 meetings under EU/EEA aus-pices in 2002 compared with 69 in 2001.

EU supervisory agencies reorganisedWith a view to accelerating the introduction of commonrules, the EU has introduced a supervisory model for thesecurities area based on the Lamfalussy Report. Startingout from directives adopted by the European Council andthe European Parliament, the Commission in conjunctionwith the European Securities Committee will adopt sup-plementary rules to the directives. The Committee ofEuropean Securities Regulators (CESR) is to preparedetailed guidelines and standards for practising andmonitoring compliance with the rules. The EuropeanCouncil has decided to introduce a similar model in thebanking and insurance fields.

Nordic cooperation still expandingBoth the desire to promote uniform enforcement of rulesand the need for strong supervision of Nordic financialconglomerates have spurred growing collaboration between the Nordic regulatory authorities. The number ofNordic meetings rose from 16 in 2000 to 38 in 2001 andto 45 in 2002. Kredittilsynet hosted the annual Nordicmeeting of financial supervisors held in Bergen in June2002.


Kredittilsynet is headed by a board of five members. Members and alternates are appointed by the King for aperiod of four years. The current period started on 1 March 2002 and a new board chairman, three new boardmembers and new alternates were appointed. The preceding period started on 30 January 1998.

Organisational set-up and resource use

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Board of Directors


Kredittilsynet’s Board was asfollows up to 1 March 2002:Mr Erling Selvig, professor and dr.juris, chairmanMr Asbjørn Rødseth, professor, depu-ty chairMs Eli Aas, advocate, board memberMr Kolbjørn Almlid, divisional direc-tor, board memberMs Hilde Myrberg, advocate, boardmember

Ms Lisbet Hjort, director, first alter-nateMr Lasse Ekeberg, divisional director,second alternate

As from 1 March 2002Kredittilsynet’s Board hasbeen as follows:Mr Finn Hvistendahl, chartered engi-neer, chairmanMr Endre Skjørestad, advocate,deputy chairMs Eli Aas, advocate, board member

Mr Erling Steigum, professor, boardmemberMs Nina Mår Tapper, court-of-appe-als judge, board member

Ms Marianne Berg, district courtjudge, first alternateMr Lasse Ekeberg, divisional director,second alternate

Mr Henning Strand, director atNorges Bank, has attended as obser-ver. Mr Thorvald Grung Moe, specialadviser, has been his alternate.

Two members elected by and fromamong the employees supplementthe board when administrative mat-ters are dealt with. In 2002 theemployee representatives were:

Ms Kjersti T. Trøbråten, special adviserMs Ellen Jakobsen, adviser

Alternates: Mr Johan Arnt Mettevoll,special adviser, and Mr Stein ToreNæprud, adviser

Mr Johan Arnt Mettevoll, specialadviser, took over as employee repre-sentative from Ms Kjersti T.Trøbråten, special adviser, as from 18August 2002. Mr Jon Reiersen, senioradviser, took over as employee repre-sentative from Mr Johan ArntMettevoll, special adviser, on thesame date.

Ms Liv Karin Methi, adviser, tookover as alternate for Mr Stein ToreNæprud, adviser, as from 1November 2002.

Eleven ordinary board meetings wereheld in 2002. The board dealt with63 administrative matters and 69matters related to institutionalsupervision. The board received afurther 91 matters of an informatio-nal nature.


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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 fromNorges Bank).Henning Strand and Lasse Ekeberg (second alternate) were absent when the photograph was taken.

Photo: Morten Brun

Kredittilsynet’smanagement team

Back row from the left: Sven-Henning Kjelsrud (director, Finance and Insurance Dept.), Marius Ryel (chief legal advi-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


Prioritised tasks in 2002Kredittilsynet’s supervisory activitiesare based on statutory tasks, signalsgiven by the Ministry of Finance(including the annual letter of allo-cation) and Kredittilsynet’s strategydocument. Kredittilsynet’s prioritisedtasks in 2002 were:

• Credit risk and financial strength• Supervision of market risk and buf-

fer capital• Supervision of Norwegian and

Nordic financial conglomerates• Supervision of stock exchanges,

authorised market places and other securities market infrastructure

• Monitoring standards of conduct in the securities market

• Good administration – simplifying regulations

• Reform of life and pensions insur-ance

• Risk and vulnerability in the ICT field

• Anti-money laundering measures, and uncovering financial crime

• Prudential safeguards and prepared-ness

• Development of risk-based supervi-sion

• Strategy and organisation develop-ment

Administration, staff andorganisation developmentKredittilsynet’s Director General isappointed by the King in council fora six-year term. Mr Bjørn SkogstadAamo was appointed for a new six-year term in February 1999 witheffect from April 1999.

As from 1 October 2002 the DirectorGeneral’s salary was NOK 875,000per annum, and the Chairman of theBoard’s fee in 2002 was NOK150,000.

Seventeen vacancies were advertisedin 2002 compared with 35 in 2001.Five of the advertised positions were

internal compared with eight in2001. Applicants totalled 314 com-pared with 449 in 2001.

At the end of 2002 Kredittilsynethad 176 permanent staff comparedwith 165 at the end of 2001. Thestaff increase is partly due to a sub-stantially slower turnover rate, 5.6per cent compared with 11 per centin 2001, and partly to recruitment ofadditional financial expertise in theareas of on-site inspection and mathe-matical modelling. Forty-seven percent of the permanent staff arefemale. Eighty-two per cent hold auniversity degree or the equivalent.

Since 1995 Kredittilsynet has syste-matically sought to attract staff withspecialised competence and solidexperience from financial markets, toretain staff with high competenceand long supervisory experience, andto attract, retain and develop recentgraduates. To this end managerial/specialist positions have been set upfor staff with specialised competen-ce; a wage policy has been introdu-ced to permit the recruitment ofstaff from industries with pay levelsappreciably higher than governmentinstitutions are normally able tooffer; and systems have been develo-ped to provide recent graduates witha predictable salary trend in the ini-tial years after joining Kredittilsynet.A flexible personnel policy enablingstaff to combine professional andfamily responsibilities is of key signi-ficance.

Kredittilsynet has very largely succe-eded in this endeavour. Whereas in1995 24 staff members had solidexperience from industries undersupervision, by the end of 2002 thefigure had reached 42. The fact thatstaff recruited from high-salary sec-tors are willing to accept a lowersalary to join Kredittilsynet, and tostay there for some time, impliesrecognition of a high-quality environ-

ment offering jobs that spur personaldevelopment. Moreover, Kredittilsynetis now more successful than just afew years ago at retaining staff whohave gained long supervisory experi-ence and high expertise during theircareer with Kredittilsynet. A far grea-ter number of recent graduates stayon and develop their skills withKredittilsynet than was the case priorto 1995. These factors are all essentialto Kredittilsynet’s ability to perform ahigh-quality supervisory role.

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Actuaries 5 per cent

Auditors 5 per cent

Business economics / Bachelor's degree 9 per cent

Other higher education 10 per cent

Economics 13 per cent

No higher education 18 per cent

Business administration 17 per cent

Law 23 per cent

Chart 1: STAFF EDUCATIONAL BACKGROUND AS OF31 DECEMBER 2002

23 %

17 %

18 %

13 %

10 %

9 %

5 %5 %


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Table 1: CASE DOCUMENTS HANDLED BY KREDITTILSYNET 1993–2002Sector 1993 1995 1997 1999 2000 2001 2002Administration/support staff 834 556 480 594 686 1116 850Finance and insurance 7,187 7,020 8,141 6,497 7,098 6,696 6,947Securities 1,872 2,920 3,850 3,798 4,908 6,833 7,911Estate agency and debt collection 2,744 4,188 3,910 3,489 4,625 5,347 6,285Accounting and auditing* 3,360 4,981 4,356 11,101 10,346 9,482 9,567Total 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 inthe other areas.)

Finances ExpenditureKredittilsynet’s budget forms part ofthe government budget and is esta-blished by the Parliament(Stortinget). The budget for 2002totalled NOK 125.3 million includingfunds of NOK 2.1 million carried forward from 2001. Kredittilsynet

received an additional NOK 2.2 millionin refunds of maternity and sicknessbenefits. Aggregate disposable reve-nues accordingly came to NOK 127.5million. The agency’s expendituretotalled NOK 123.6 million, anincrease of 10.9 per cent from 2001.

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

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

(Preliminary accounts for 2002)


RevenuesUnder section 9 of the FinancialSupervision Act, Kredittilsynet’sexpenses are covered by the institu-tions under its supervision at thestart of the financial year. TheParliament (Stortinget) thereforeadopts a revenue appropriation equalto the expenditure appropriation. Theact requires the expenses to beapportioned among the various insti-tutional groups based on the extent

of the supervision, and the expensesare therefore payable in arrears. Thetotal amount levied for 2000 wasNOK 108.05 million. The amountlevied was smaller than actualexpenses because the levy is basedon the budget appropriation, anyamount carried forward from theprevious year is deducted and part ofthe expenses are covered by theNational Insurance Fund throughrefunds of maternity and sickpay

outlays. The levy proposed byKredittilsynet was approved by theMinistry of Finance on 16 May 2001,which was earlier than in previousyears. Supervised entities liable topay the amount levied for 2001number 8,952 compared with 8,402in 2000. The apportionment of thelevy among the various categories ofsupervised entities is shown in Table 3.

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

12


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

1997 2000 2001Credit institutions Totalt assets 0.0030 0.0024 0.0022Insurance Premium income 0.0324 0.0432 0.0421Investment firms Income from investment

and ancillary services 0.1563 0.1551 0.1787Management companies Total assets 0.0027 0.0028 0.0034for securities fundsEstate agencies Commission earnings 0.2477 0.1736 0.1547Debt collection Debt collection income 0.2121 0.1674 0.1551Auditors Turnover 0.1923 0.2147 0.1873

Table 4 shows the size of the levy inper cent of the calculation base forvarious groups of supervised entitiesfor the years 1997, 2000 and 2001.The burden represented by the levy is

insignificant, and shows a fallingtendency in terms of the calculationbase. This applies even thoughKredittilsynet’s expenses have incre-ased substantially. The nominal

increase in expenses from 1997 to2000 was 34.4 per cent, and from1997 to 2001 41.9 per cent.


Kredittilsynet views information andcommunication as a strategic instru-ment of supervision, especially witha view to preventing breaches ofrules and standards. The informationeffort is directed in the first instanceat the institutions and sectors undersupervision, and is based on theprinciples guiding the centralgovernment information policy.Kredittilsynet attaches importance tocontact with sectors under supervisi-on, and holds regular meetings withindustry associations. Similar meet-ings are held with collaboratingpublic authorities. Regular contactmeetings are held with the Office ofthe Consumer Ombudsman and theConsumer Council.

Information and communication isan aspect of Kredittilsynet’s strategy.In 2002 a new communication strat-egy was drawn up and adopted.

The second generation website andintranet solution that were launched

in 2001 were further developed in2002. A steadily increasing share ofKredittilsynet’s documents is publish-ed on its web pages. In 2002 a basiswas laid for English language pageson the website.

Steps were taken to ensure thatKredittilsynet adheres to the guide-lines for use of both official forms ofNorwegian. In the second half of2002 five out of six circulars and 28per cent of press releases were in thenynorsk form.

Twenty circulars were issued in 2002compared with 35 in 2001, and 41press releases compared with 36 in2001. One press conference washeld.

Kredittilsynet has wide-ranging con-tacts. Each year Kredittilsynet’smanagement and other staff meetwith a large number of representati-ves of supervised institutions, indus-try associations, collaborating autho-

rities etc. All visits to Kredittilsynetin 2002 were recorded. Eighty-sevenper cent of visitors were fromOslo/Akershus and south-eastNorway as a whole. Visitors totalled1,635 persons, with the followinggeographical breakdown: 1,382 fromOslo/Akershus, 42 from elsewhere insouth-east Norway, 61 from southand west Norway, 21 from Trøndelag,5 from North Norway and 124 fromabroad. Although institutions visitedby Kredittilsynet’s officers in connect-ion with on-site inspections are dis-persed across the entire country,most of them are located in the Osloand south-eastern region.Kredittilsynet therefore notes withsatisfaction the Government’s wishto retain the supervisory authority inOslo where the bulk of the country’sfinancial institutions are located.This is of major significance forKredittilsynet’s ability to carry outefficient and effective supervision incontact with the institutions’ users.

13


Information and communication

From abroad 8 per cent

North Norway 0 per cent

Trøndelag 1 per cent

South and west Norway 4 per cent

South-east Norway 3 per cent

Oslo/Akershus 84 per cent

Chart 2: VISITORS TO KREDITTILSYNET

84 %

4 %

3 %

1 %8 %


Key figures and data on supervisory activities

14


Table 5: PRINCIPAL SUPERVISED ENTITIES AS AT 31 DECEMBER 1997–20021997 1998 1999 2000 2001 2002

Banks and financial institutionsSavings banks 133 133 131 130 129 129Commercial banks 13 13 13 13 15 16Postbanken 1 1 – – – –Foreign branches of Norwegian banks 12 12 12 12 10 10Norwegian branches of foreign banks 6 6 8 9 8 8Finance companies 38 34 35 35 35 33Foreign branches of Norwegian finance companies – – – – 2 2Norwegian branches of foreign finance companies 11 12 13 18 21 21Mortgage companies 8 9 9 11 10 10Norwegian branches of foreign mortgage companies 0 0 1 1 1 1InsuranceLife insurance companies 10 10 9 8 8 7Unit Linked companies 6 6 6 6 8 6Non-life insurance companies 53 52 51 52 53 52Local marine insurance associations 18 15 15 14 14 14Local fire insurance associations 39 38 22 21 20 20EEA branches and foreign companies’ general agents 13 17 21 29 29 29Insurance brokers 40 41 41 44 49 50Private pension funds 136 144 132 130 122 120Municipal pension funds 104 96 84 80 70 65Pension schemes 29 28 26 30 29 29

Holding companiesHolding companies 11 11 12 13 12 13

Securities marketInvestment firms 55 70 88 93 93 92Management companies for securities funds 23 26 27 29 28 24Clearing houses 1 1 1 1 1 2The Norwegian Central Securities Depository 1 1 1 1 1 1Stock exchanges – – – – 1 2Authorised market places – – – – – 2

Estate agencyEstate agencies 381 407 428 479 507 528Lawyers’ practices incl. estate agencies 944 898 928 961 1,016 1,018Cooperative building associations – – – 77 67 55

Debt collectionDebt collection agencies 123 122 117 115 113 113Debt purchase businesses – – – – – 8

AuditorsAuditors 4,058 4,303 4,454 4,640 4,824 5,006Auditing firms 468 493 489 507 514 507

External accounting servicesExternal accountants – – 6,961 5,544 5,856 6,201External 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 forKredittilsynet’s supervisory activity as providers of technical solutions to Norwegian financial institutions.


15


Table 6: NUMBER OF ON-SITE INSPECTIONS BY TYPE OF INSTITUTION 1997–20021997 1998 1999 2000 2001 2002

Banks/finance1 40 47 43 42 51 552

Holding companies1 0 0 0 0 2 2Insurance1 14 17 12 17 12 162

Insurance brokers 2 2 4 3 6 4Pension funds 8 7 13 12 5 8Investment firms1 19 25 23 25 20 20Other 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 71Debt collection agencies 10 14 7 6 5 6Auditors 123 82 128 80 73 32Data processing centres 2 1 3 0 1 2External accountants / External accounting firms3 – – 47 147 62 41

Table 7: CASES HANDLED AFTER THE DELEGATION FROM THE MINISTRY OF FINANCE 1997–20021997 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) – – – 2 0 –

1 IT supervision in banks, insurance and the securities market are included under the categories Banks/finance (4), Holding companies (2), Insurance (2), Investment firmsand 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 fromKredittilsynet. 3 Kredittilsynet took over the authorisation scheme for external accounting services in January 1999.


Investment firmsSupervisionThe market situation over the year,featuring falling activity levels, had asubstantial impact on institutions’results. Supervision consequentlyfocused on financial aspects to agreater degree than normal, especi-ally capital adequacy and liquidity.Institutions were generally quick toreduce costs to make up for some ofthe revenue shortfall. Capital ratioswere, with some exceptions, satis-factory.

Kredittilsynet conducted 20 on-siteinspections of investment firms in2002. As in previous years the focuswas on whether investment firmshad prepared and put in place suffi-cient systems and routines to carryout proper internal control. Alongsidethe regular on-site inspections, anumber of ad hoc investigationswere carried out to check instituti-ons’ compliance with good businesspractice and with requirements as tothe organisation of their busi-

ness. Cases were brought to lightwhere deficient control systems hadresulted in unfair consideration ofthe interests of some clients at theexpense of others. Attention wasdrawn to these circumstances, and inone case an order to rectify the cir-cumstance was issued.

At the end of 2002, 92 investmentfirms were licensed to provide one ormore investment services.Investment firms vary widely in size

The overarching aim of regulation and supervision is to ensure that the securities market functions well as asource 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, SecuritiesFunds Act, Central Securities Depository Act and Stock Exchange Act. Important areas of supervision are marketplayers’ financial position and operations and their compliance with regulations governing their activities.

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

16


Securities market


and organisational set-up. They aremonitored largely on the basis ofdata contained in capital adequacyreports and quarterly returns submit-ted to Kredittilsynet. The data areprocessed and systematised inKredittilsynet’s in-house reportswhich are an important tool forselecting and prioritising firms for

inspection and for analyses of thesecurities market.

Due to impaired results amonginvestment firms, priority was givento monitoring their financialstrength (net capital base) in 2002.In some cases, including small firmswhose earning capacity weakened

substantially over the year, it provednecessary to impose an extraordinaryreporting requirement.Coordinated supervision was carriedout at one sizeable investment firmin 2002 with a focus on IT-relatedissues.

17

Table 8: INVESTMENTS FIRMS2000 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



18


05,000

10,00015,00020,00025,00030,00035,00040,00045,00050,000

20022001200019991998199719961995199419931992

Chart 3: SHARE ISSUES (VOLUME) AT OSLO BØRS

Source: Oslo Børs

Legislation and administrationCalls have been made for investmentfirms’ discretionary asset manage-ment operations to be organised insuch a way as to ensure more ratio-nal and flexible use of expertise inthe field of investment decisions,especially in conglomerates. Respond-ing to these calls, Kredittilsynet drafted in 2002 a regulation on outsourcing by investment firms. Theregulation is essentially based on asimilar regulation for managementcompanies for securities funds.

Kredittilsynet also drafted a regulati-on on issuing requirements in con-nection with investment firms’ trad-ing in quoted warrants that does notinvolve a clearing house.

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

Kredittilsynet believes it is funda-mentally detrimental for require-ments imposed on persons withresponsibility for the managementof, and for dealing in, securities tobe less than those imposed on otherstaff.

Kredittilsynet also proposed the abo-lition of provisions requiring em-ployees’ own-account trading to bereported to Kredittilsynet. The mainrationale was that it would be morein line with the principles underlyinginternal control for institutions tomonitor their employees’ own-account trading. It would also simplifyinstitutions’ task of reporting toKredittilsynet.

NO

K M

illio

n

6,674

12,494 12,898

7,632 9,029

21,501

11,39914,413

43,587

28,494

5,639


SupervisionAt the end of 2002 24 managementcompanies were in operation, a marg-inal reduction on the 2001 figure.The number of securities funds rosefrom about 390 to 419 in the sameperiod.

Seven on-site inspections were per-formed at management companiesfor securities funds in 2002.

One institution was revealed to havesystematically placed orders in illi-quid shares with the result that theprice used to compute the value ofthe share portfolio was higher thanit would otherwise have been. Basedon an overall assessment,Kredittilsynet concluded that therewas no reasonable grounds to sus-pect that the provision on dishonestprice manipulation had been viola-ted. The management company washowever ordered to rectify its order-placing routines.

In light of highly volatile share mark-ets in the second half of 2001 andthe financial crisis at Kværner thesame autumn, Kredittilsynet continu-ed its effort to ensure that manage-ment companies are adequately pre-pared to tackle a suspension of pricing and redemption of units insecurities funds in situations inwhich it is difficult to calculate prices.

Management companies submitreturns to Kredittilsynet on a quar-terly basis. Off-site supervision spe-cifically focuses on managementcompanies’ compliance with theinvestment limits contained in theSecurities Funds Act. In Kredittilsyn-et’s experience the limits are adheredto, although reporting reveals thatsome companies are in breach.Kredittilsynet will give continued priority to this work ahead.

Coordinated supervision was carriedout at one sizeable management

company in 2002 with a focus on IT-related issues.

Legislation and administrationAlongside its ongoing administrativetasks, Kredittilsynet worked on thefollowing regulatory amendments in2001:

Members of managementboardsThe amendment to the SecuritiesFunds Act that was passed in June2001 imposed new requirementsboth on management companies andmutual funds. Under special transiti-onal provisions, management com-panies were given until 1 March2002 to meet requirements onmanagement boards. Kredittilsynettested the fitness and propriety ofboard members as required by thenew provisions.

New articles of associationfor mutual fundsKredittilsynet prepared new standard-ised articles of association for secur-ities funds following the introductionof new requirements for the articlesof such funds. Management com-panies were given until 1 August2002 to meet the new requirements.New articles of association for some400 securities funds, drawn up bymanagement companies on the basisof the standardised articles, wereapproved by Kredittilsynet.

OutsourcingA regulation on outsourcing bymanagement companies for securi-ties funds went into force on 8 July2002. The regulation, based onKredittilsynet’s proposal, regulatesmanagement companies’ right tooutsource specific tasks, amongthem asset management, to anotherinstitution, assuming that the latterinstitution has the requisite authori-sations. Outsourcing presupposesthat Kredittilsynet is notified of anyoutsourcing agreement with another

institution. Regulatory amendmentsof this nature will help to ensureconcentration and more effectiveutilisation of investment expertise.

Marketing of foreign securi-ties fundsA regulation on marketing of foreignsecurities funds went into force on 8July 2002. Kredittilsynet drafted theregulations as early as end-2001.UCITS funds, i.e. funds approved formarketing in the EEA, can continueto be marketed in Norway subject tonotification to Kredittilsynet andregistration of the fund in question.Registration is also required for marketing via investment funds.Under the new regulations, otherfunds can only be marketed subjectto special authorisation.

Derivatives regulationsOn 8 July 2002 the Ministry ofFinance established new regulationson securities funds’ trading in deriva-tives. The regulations, which arebased on a proposal drafted byKredittilsynet, widen securities funds’right to invest in derivatives, and laya basis for trading in unlisted deriva-tives provided they are cleared by aclearing house or transacted with aqualified counterparty. The regulati-on also entitles securities funds tohedge foreign exchange risk bymeans of derivatives.

Information disclosureKredittilsynet drafted a proposal forregulation on management compani-es’ information requirement in con-nection with the sale of mutual fundunits and the reporting of such sales.The main aim of the regulation is tomake it simple for unit holders tocompare saving in a securities fundwith saving in other instruments,and to ensure that they receive theinformation they need on the riskinvolved in saving in mutual fundscompared with other saving options.

19

Management companies for securities funds



Capital requirementsThe Securities Funds Act requiresmanagement companies to maintaina capital base equivalent to at leastEUR 125,000. Kredittilsynet drafted aregulation on the calculation of, andrequirements for, start-up capitaland capital base. The draft is intendedto conform the requirements forstart-up capital and capital base tothe latest amendments to relevantEU directives.

Nominee registrationConcurrent with the passage of thenew act on registration of financialinstruments (Securities Registry Act)in July 2002, the Securities FundsAct was amended to permit the regis-tration of nominees in managementcompanies’ unit holder registers.

Kredittilsynet has drafted a regulati-on on the registration of nominees inmanagement companies’ unit holderregisters.

Differentiated managementfees and loansThe Securities Funds Act was amendedin 2001 to allow management com-panies to differentiate managementfees. The amendment entails thatmanagement commission charged oninvestments in one and the samefund can vary based on the size ofthe investment. Moreover, securitiesfunds can, subject to furnishingsatisfactory security, engage in thelending of financial instruments. Thiswill enable funds revenues to beincreased by charging a fee for loansof financial instruments. Regulationsdrafted by Kredittilsynet as a resultof these amendments were adoptedby the Ministry of Finance on 6January 2003.

Based on amendments to CouncilDirective 89/611/EEC (UCITS),Kredittilsynet prepared two submissi-ons proposing changes to theSecurities Funds Act. One opens theway for management companies to

offer individual portfolio manage-ment services in addition to manag-ing their own funds, and for manage-ment companies to offer investmentcounselling along with custody andmanagement of fund units. The otherproposes rules on “simplified pro-spectuses” requiring managementcompanies to prepare a simplifiedversion of the complete prospectus,and proposes amendments to theSecurities Funds Act in respect of theproducts offered.

20



Kredittilsynet supervises the CentralSecurities Depository (VPS), OsloBørs, NOS Clearing ASA (formerly theNorwegian Futures and OptionsClearing House), Nord Pool ASA (for-merly the Nordic Electric ClearingHouse ASA) and IMAREX(International Maritime ExchangeAS). Kredittilsynet conducted on-siteinspections at Nord Pool ASA andOslo Børs in 2002.

The Parliament (Stortinget) passedan act on the registration of finan-cial instruments in July 2002. Inforce as from 1 January 2003, thenew act removes the NorwegianCentral Securities Depository’s (VPS)legal monopoly on registering financialinstruments. It requires Kredittilsynetto assess rules and commercial termsfor securities registries. Partly inconjunction with the CentralSecurities Depository, Kredittilsynetdrafted regulations to the SecuritiesRegistry Act which were duly for-warded to the Ministry of Finance.Kredittilsynet is empowered to laydown regulations pursuant to someof the provisions of the above act.These regulations have been drawnup and are expected to be ready intime for the commencement of theact.

The Securities Registry Act alsorequires the Central SecuritiesDepository to convert from a “self-owned” institution into a public limit-ed company and to apply for a licenceunder the provisions of the act.Kredittilsynet recommended theMinistry of Finance to approve theregistry’s licence application.

The market for securities and otherfinancial instruments is subject tocontinual technological and structu-ral change. Development of rules,products and systems is therefore aprocess of mutual adjustment.Dependence on a robust infrastruct-ure is growing steadily. Shutdownsor faults at crucial infrastructuralinstitutions can have grave conse-quences. In its capacity as financialregulator, Kredittilsynet wishes tosee the risk of serious problemsreduced to a minimum.

Kredittilsynet’s priority in 2002 wasto supervise institutions’ use ofinformation technology, with thefocus on security and vulnerability. ITinspections were conducted at thesix key institutions in the securitiesmarket infrastructure.

The electricity market was affectedby high prices towards the end of2002. This was due to an unusuallydry summer and autumn combinedwith low temperatures in the Nordicarea towards year-end. Electricityderivatives contracts with delivery inJanuary-April 2003 were traded onthe Nordic power exchange, NordPool ASA, at historically very highprices. This is assumed to be relatedprimarily to low reservoir levels inthe Nordic hydroelectricity system,resulting in a significant reduction inthe system’s energy content in thewinter of 2002–2003.

Prices in the electricity derivativesmarket were also highly volatiletowards the end of 2002, resulting insubstantial value transfers betweenthe clearing members of Nord PoolClearing ASA. Given Kredittilsynet’sresponsibility for supervision of NordPool ASA and Nord Pool ClearingASA, Kredittilsynet needed to keep aclose watch on developments in theelectricity market.

21

Securities market infrastructure


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

Trading Act

Supervision in this field is designedto ensure enforcement of the generalrules of conduct contained in theSecurities Trading Act. At centre-stage are the rules on unlawful insid-er trading and price manipulation.Kredittilsynet also oversees compli-ance with provisions on confidential-ity and prohibition of counselling

along with special notification rulesfor primary insiders and rules requir-ing disclosure of sizeable shareacquisitions. Hence a wide circle ofsupervised entities is involved: invest-ors, issuers and their partners, includ-ing investment firms. The object is tobring to light and prosecute unlawfulconduct in the securities market and,

insofar as the conduct provisions areapplicable, in the markets for freightand power derivatives. Kredittilsynetaims to show potential lawbreakersthat contravention incurs risk. Othermeasures that are presumed to havea preventive effect in relation to criminal acts will also be applied.


0

2,000

4,000

6,000

8,000

10,000

Transactions per day

Market value (NOK billion)

12,000

200220012000199919981997199619951994199319920

100

200

300

400

500

600

700

800

20022001200019991998199719961995199419931992

22


Chart 4: TURNOVER AND NUMBER OF TRADESAT OSLO BØRS

Source: Oslo Børs

The majority of cases dealt with in2002 were referred to Kredittilsynetby Oslo Børs. According to the agree-ment between Oslo Børs andKredittilsynet, only a low level ofsuspicion is required to justify referralto Kredittilsynet. In 2002 Kredit-tilsynet investigated a number ofcases where breaches of the insidertrading provisions were suspected. Itis important to ascertain who arebehind the transactions in question.In the case of heavily traded securi-ties, a large number of transactionsare investigated, which is time-con-suming. In addition, steps must betaken to ascertain what informationwas held by the persons involved atthe time they carried out the trans-actions. One case that Kredittilsynetreferred to ØKOKRIM4 involved abroker who, in Kredittilsynet’s view,passed price-sensitive information toa client. The broker in question isalso suspected of inciting clients totrade in the same securities, i.e. without passing the above informat-ion to these clients.

Kredittilsynet investigated severalcases of suspected price manipulati-on. It is crucial in such cases toprove whether or not parties havecolluded, or whether a person’s con-duct was motivated by a desire toinfluence the price of a security. Onecase referred to ØKOKRIM involvedan investment firm broker who, inKredittilsynet’s view, sought dishon-estly to influence the price of a warrant by placing orders in underly-ing shares. This was done in such away as to influence the price quotedby the warrant’s market-maker. Bythis means the investment firm’s cli-ents acquired the warrant at a lowerprice, or sold it at a higher pricethan would otherwise have beenpossible.

Kredittilsynet noted several instanceswhere the Internet was used to spreadmisleading or incorrect informationof significance for securities prices.Kredittilsynet takes a serious view ofsuch behaviour, which could behighly damaging for the issuingcompanies involved and for confid-

ence in the market. Also worrying isthe fact that this is an area wherethe risk of discovery is perceived tobe slight. Kredittilsynet proposedchanges to the Securities Trading Actthat empower the agency to compelwebsites to hand over IP addresses.Kredittilsynet also provided input toa new act on electronic communicat-ion in regard to storing and loggingcommunicated data.

Following Kredittilsynet’s approachto Nord Pool ASA on possible mani-pulation of the power market aroundEaster time in 2002, a major investi-gation was initiated, conducted pri-marily by Nord Pool ASA. The investi-gation was prompted by indicationsthat someone had sought to influen-ce the price of electricity in thefinancial market by dishonestlyinfluencing spot market prices.Although the investigation broughtno irregularities to light, its thorough-ness provided valuable experience instudying and reporting on the powerderivatives market. It also revealed,among other things, formal barriers

Supervisory tasks and resources

Aver

age

no. o

f tr

ansa

ctio

ns p

er d

ay

NO

K bi

llion

778

1,32

4

1,21

8

1,57

6

2,26

9

3,29

4

3,37

3

5,28

0

9,63

4

10,0

76

9,02

6

126

207

245

289

389

556

414

583

638677

503

4 National Authority for Investigation and Prosecution of Economic and Environmental Crime in Norway


to the submission of relevant datafrom the Finnish system operator.Since Finnish players are an impor-tant segment of the market, theissue will be discussed further withthe Finnish authorities.

Where Kredittilsynet finds reasonableground to suspect a breach of therules of conduct contained in theSecurities Trading Act, the matter isnormally referred to the prosecutingauthority for further action.

In 2002 three cases of suspectedunlawful insider dealing and/or bre-aches of confidentiality, and twocases of price manipulation, werereferred to ØKOKRIM. Twenty-sevenbreaches of the securities tradingnotification requirement were report-ed to the police over the year. Atotal of 326 notification cases wereforwarded by Oslo Børs comparedwith 536 in 2001. The decline from2001 was essentially due to a reduct-ion in the number of incoming cases.Despite this, Kredittilsynet dealt withmore cases in 2002 than in preceding

years since a number of cases thatwere backlogged at the start of 2002also had to be dealt with. Kredit-tilsynet noted that some cases receiv-ed from Oslo Børs were not of a serious nature, or did not involvebreaches of the notification require-ment. Fourteen cases against issuingcompanies and individuals resultedin fines. Two cases were decided bycourt judgment, both resulting inacquittal. One has been appealed byØKOKRIM.

In 2002 ØKOKRIM brought chargesin three cases of unlawful insidertrading and market manipulationthat were referred to it byKredittilsynet. One conviction andone fine were handed down for pricemanipulation.

Over the year Kredittilsynet investi-gated several cases of breaches ofthe disclosure requirements inrespect of large share holdings.Based on the legislative history ofthe existing Securities Trading Act,and on a Supreme Court judgment of

2002, Kredittilsynet will confinereferrals to the prosecuting authorityto repeated or gross breaches.Kredittilsynet referred one case tothe prosecuting authority in 2002.

In 2002, as previously, work progres-sed on further developing the colla-boration between Kredittilsynet, OsloBørs and ØKOKRIM. Joint seminarswere organised for staff of the threeinstitutions to this end. Kredittilsynetalso collaborated fruitfully with NordPool in the period. The aim of thecollaborations is to improve theoverall efficiency of market surveil-lance. Topics discussed included rou-tines, priorities and legal issues.

23



Banking, finance and insurance

Off-site supervision and analysisentails overseeing financial instituti-ons’ compliance with statutoryrequirements – including those relatedto capital adequacy, liquidity andlarge commitments. In conjunctionwith Statistics Norway and NorgesBank, Kredittilsynet allocates sub-stantial resources on maintainingand refining systems used by creditinstitutions and insurance companiesto report data to the three authorities.

Off-site supervision of credit institut-ions and insurance companies invol-ves overseeing and analysing theirprofitability, financial strength andrisk. Analyses of topical problems areprepared on both a regular and adhoc basis. Quarterly reports on

financial institutions’ results andfinancial strength are published onKredittilsynet’s website, and quarter-ly press releases illuminate the maintrends. In its macroeconomic surveil-lance Kredittilsynet monitors deve-lopments in the Norwegian andinternational economy that mayaffect stability in the financial mark-ets. Confidential biannual reports arecommunicated to the Ministry ofFinance and Norges Bank. As from2003 Kredittilsynet will each yearpublish a summary of the state ofthe Norwegian financial industry. Thereader is referred to the report entit-led The Financial Market in Norway2002: Risk Outlook.

The banks reported poorer results in

2002 than in 2001. The impairmentis partly due to lower earnings as aresult of the stock market trend, butalso to higher loan losses. Severalsmall banks recorded accountingshortfalls. Overall core capital ade-quacy remained stable comparedwith 2001, partly thanks to reducedlending growth at many banks. Lossprovisions rose markedly in 2002.Even so, Norwegian banks’ aggregateloss provisions remained low interms of outstanding loans.

Results in the insurance field wereweak, as in 2001, mainly as a resultof the decline in equity markets. Lifeinsurance companies’ buffer capitalwas further reduced from the levelat the start of the year. Both life and

24


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 draftingregulations.

Off-site supervision and analysis


non-life insurance companies sub-stantially reduced their sharehold-ings to bring risk exposure into linewith their risk-bearing capacity.Several years of weak technicalresults in the non-life insurancebusiness led to sizeable premiumincreases as from 2000. The premiumincreases have helped to improvetechnical results in recent years, andthe improvement in technicalaccounts continued in 2002. Even so,weak financial revenues broughtpoor profit performances for non-lifeinsurance companies as a whole.

In 2002, as in 2001, off-site supervi-sion of banks and other credit insti-tutions focused on the trend indefaults, losses and financialstrength. A number of small andmedium-size banks have incurredrising credit risk after several yearsof substantial lending growth, at the

same time as activity levels in partsof the Norwegian economy have fal-len. 2002 saw a marked increase inloan defaults and loan losses. Bothdefaults and loan losses nonethelessremained at a low level in relation tothe total loan volume for the banksas a whole. Off-site analysis of thetrend in profitability, liquidity andfinancial strength in individual insti-tutions provides important input forselecting institutions for on-siteinspection.

Off-site supervision included a num-ber of investigations of banks’ creditrisk. In the home loan survey, bankswere asked to report on variousaspects of loans secured on housingproperty, including loan-to-valueratios and collateral security. Bankswere also asked to give an accountof their credit practices and theextent of their lending with securiti-

es as collateral. Although this type oflending is relatively limited inNorway, it is a fairly significant itemfor some banks. As in 2001,Kredittilsynet investigated banks’exposure to, and their assessmentsof risk associated with loans to,selected sectors. Loans to commerci-al properties were included. Theresults of these surveys are describedin the report entitled The FinancialMarket in Norway 2002: Risk Outlook.Off-site supervision in 2002 also prioritised large exposures andchanges in banks’ funding and liquid-ity. To this end, improved reportingof maturities on banks’ funding andinvestments was introduced. An ana-lysis of banks’ counterparty exposures,including their exposures in foreignexchange transactions, was carriedout in conjunction with Norges Bank.

25



Considerable attention was given tomonitoring insurance companies. Onseveral occasions life insurance com-panies were asked to submit specialreports on their risk exposure andbuffer capital. Stress tests wereemployed on a continual basis toassess their vulnerability to furthershare market falls, and to possiblefalls in the fixed income market. Thestress test results were then employ-ed in on-site inspections or were dis-cussed at other meetings with thecompanies involved. Weak sharemarkets also affected the perform-ance of mixed financial groupswhich dominate the Norwegianfinancial market. Their financial situ-ation was monitored via a combinat-ion of off-site supervision and on-siteinspections.

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

financial industry of the internatio-nal economic downturn and theweak share markets. Continuedattention was given to the disparatetrends in various sections of theNorwegian economy and the signifi-cance of this for banks’ credit risk.Activity in the competitively exposedsector weakened appreciably, whilegrowth in credit to households,including home loans and consumerloans, continued to grow strongly.Macroeconomic surveillance paysspecial attention to the credit mark-et, housing market and the marketfor commercial properties.

26


International seminar on the Nordic banking crisesOn 11 and 12 September 2002 Kredittilsynet hosted an internatio-nal seminar on financial crises. The background to the seminar wasthe far-reaching banking crises in Norway, Sweden and Finland inthe early 1990s (Denmark and Iceland averted problems on a similarscale). The past 15–20 years have seen financial crises in a numberof countries.

Finn Hvistendahl, Chairman of the Board of Kredittilsynet, openedthe seminar and outlined its background and purpose. He pointedout that the social costs of financial crises are difficult to computeand are often too high to put a figure on. In his presentation entit-led The Nordic Banking Crises from an International Perspective, StefanIngves from the IMF gave an overview of international experienceswith crises, while representatives appointed by the Nordic supervis-ors described experiences from the respective Nordic countries.Professor Erling Steigum of the Norwegian School of ManagementBI analysed the Norwegian crisis in a presentation entitled The

Norwegian Boom-Bust Cycle and Banking Crisis Revisited, while LarsJonung of the European Commission analysed banking and currencycrises in the Nordic countries in a historical perspective.

Claes Norgren, Director General at Finansinspektionen, the SwedishFinancial Supervisory Authority, assessed possible consequences forfinancial stability of the new capital standards currently in prepara-tion. Carl-Johan Granvik at Nordea compared banks’ risk manage-ment and control around 1990 and today, while Ernest Napier fromStandard & Poor’s in New York gave an assessment of new financialproducts and techniques in his presentation entitled Trends in CreditRisk Management: Can Systemic Banking Crises Be Avoided? The semi-nar concluded with a panel debate and closing remarks byKredittilsynet’s Director General, Bjørn Skogstad Aamo. He recalledthe importance of keeping the collective memory fresh, and ofrecognising that any new crisis will not necessarily be a repeat ofthe last one. Visit Kredittilsynet’s website at www.kredittilsynet.noto see the presentations and a summary of the seminar.


A main aim of on-site inspections inthe financial industry is to see to itthat institutions have the requisitefinancial strength, and that theirmanagement and control systemsensure satisfactory risk managementand internal control.

Eighty-five inspections were carriedout in 2001 at banks, finance com-panies, life and non-life insurancecompanies, pension funds and insur-ance brokers. Kredittilsynet was clo-sely involved in the Nordic supervi-sory collaboration on Nordea and IfSkadeförsäkring, and participated infour inspections under the auspicesof Sweden’s Finansinspektionen.

BankingForty-seven inspections were carriedout at commercial and savings banksin 2002.

Banks’ credit riskThe three largest banks’ systems formeasuring credit risk show thatportfolio quality deterioratedsomewhat over the year. As a step inmonitoring credit risk, somemedium-size banks’ corporate port-folios were tested against NorgesBank’s new model for analysing losslikelihood. The analyses indicate thatmost of the tested banks have assum-ed a somewhat higher risk profilethan the average for the private sec-tor at the national and local level.Moreover, they appear unable toapply sufficiently differentiated riskpricing. In addition to their graduallyincreasing credit risk, some banksincurred further losses in the wakeof the collapse of the Finance Creditsystem in November 2002.

Inspections in 2002 confirmed that anumber of small savings banks haveincreased their credit risk recentlydue to a heavier focus on the corpor-ate segment. The higher level of riskmay represent a substantive threatto some banks’ independence.However, increased losses are also

due to bad banking in combinationwith a weaker economic climate.Small savings banks’ credit expertiseon the corporate client front is a cri-tical area.

As part of the ongoing supervisorycollaboration on banks’ credit opera-tions, the largest banks’ use of creditrisk models was surveyed in thespring of 2002. EDB Fellesdata AS, adata processing centre, was alsoassessed since its risk classificationsystem is employed by the majorityof smaller banks. Although credit riskmanagement models used by thethree largest banks are relativelyadvanced, they are still being deve-loped on a continual basis. Themedium-size banks are also activelyworking to improve their internalclassification models. In general,however, there appears to be roomfor improvement among the majorityof smaller and medium-size bankswhen it comes to making active useof risk classification systems as atool for lending, pricing and portfoliomonitoring.

Banks’ liquidity riskIn the autumn of 2002 a liquiditysurvey was carried out which includ-ed the eleven largest banks inNorway. The object was to obtain amore systematic overview of thebanks’ practice as regards manage-ment and control of liquidity risk,and an overview of the trend in thebanks’ actual level of risk. The surveyformed part of the ongoing supervi-sion of the banking sector, and willprovide a platform for the introduct-ion of risk-based supervision. Whilethe survey shows variations in theextent to which the banks meetinternational standards of manage-ment and control, the largestNorwegian banks have improvedtheir management of liquidity risk inrecent years. Management and con-trol are now increasingly based onparameters designed to ensure adiversified funding structure. This is

exemplified by the increasing usemade of stress tests. Kredittilsynet’scalculations confirm a substantialspread of liquidity risk among theeleven largest banks.

December 2002 saw a new liquiditysurvey of 19 banks which either hadlarge outstanding commitments withthe Finance Credit system or hadreported negative results in thecourse of the year. The survey showsthat several banks’ liquidity risk atend-2002 was by no means insub-stantial. This calls for close attentionfrom the management boards invol-ved and rigorous monitoring byKredittilsynet.

Banks’ market risk Only a minority of banks have invest-ed more than 3 per cent of theirtotal assets in shares, and none hasexceeded the maximum limit of 4per cent. The declining share marketin the second and third quarter of2002 nonetheless contributed heavi-ly to the negative results recorded bya number of banks in some quarters.Moreover, in some cases poor follow-up of loans secured on shares necessi-tated substantial loss provisioning.

Individual casesBased on initiatives from its controlcommittee and media coverage,Nesset Sparebank was inspected atthe end of July 2002. Kredittilsynet’sensuing comments were highly criti-cal of the bank’s management boardand administration for the way theyhandled a loan to Norsk Trelast-import AS and for repeated instancesof non-compliance with the rulesgoverning large exposures. Thesavings bank’s supervisory board wasaccordingly asked to consider replac-ing the management board or mem-bers of it.

Shortly after Kredittilsynet commu-nicated its comments the manage-ment board stepped down and wasreplaced by a new board appointedon 23 October 2002.

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On-site inspection



Enebakk Sparebank incurred seriousliquidity problems in December 2002,and the bank’s management boardacknowledged that the best optionwas to collaborate with LillestrømSparebank to bring about an orderlyliquidation. In compliance with theSavings Bank Act, Kredittilsynetappointed a liquidation committee.

Based on the information availableto Kredittilsynet at the end of 2002,substantial losses are expected atbanks exposed to the Finance Creditsystem. The latter’s owners werereported to ØKOKRIM on 15November. The involved banks’ over-all exposure totalled NOK 1.4 billion.Prompted by media coverage,Kredittilsynet had as early as inOctober asked for up-to-date detailsfrom banks that were known to beexposed to the Finance Credit sys-tem. Commitments with companiesin the Finance Credit system hadbeen called into question beforehandduring ordinary inspections atNordlandsbanken ASA, Bank 1 Osloand Sparebanken Øst. Following thearrest of the company’s owners on16 November 2002, the banks inquestion were asked to give anaccount of their internal routinesand procedures. They are being clo-sely monitored by Kredittilsynet (Seealso page 51.)

After the collapse of the FinanceCredit system Nordlandsbanken indi-cated that it would incur a loss ofNOK 300 million on its commitment.As a result of this loss the bank soonhad difficulty renewing its CDs andterm deposits. In order to strengthenits financial position the bank’smanagement board decided to issuenew share capital worth NOK 300million. However, a number of largeshareholders indicated to the bankahead of the extraordinary generalmeeting that it should seek a struct-ural solution rather than issue newshare capital. Scrutiny of the

Nordlandsbanken’s largest loan com-mitments by Den norske Bank (DnB)and an independent audit companyrevealed a need for substantially high-er loss provisioning, and consequentlya greater need to strengthen thebank’s equity capital. On 20December, in response to an invitati-on from Nordlandsbanken’s board,DnB ASA offered to take over thebank. DnB wishes to create North-Norway’s largest bank by uniting thetwo banks’ operations in the nor-thernmost counties. A local initiativeto retain Nordlandsbanken as anindependent bank failed. (See alsopage 32.)

Finance companies and mort-gage companiesFour inspections at finance compani-es and mortgage companies in 2002called into question their credit riskassessment and loss provisioningpractices, and their accounting forresidual value guarantees in connect-ion with leasing. Moreover, criticismwas levelled at the companies’ coop-eration agreements with agents andsuppliers.

Non-life insurance companiesNine non-life insurance companieswere inspected in 2002. In the caseof non-marine insurance the generalimpression was that technical resultshad improved partly due to verylarge premium increases over thepast couple of years. However, theimprovement is offset by reducedfinancial returns due to share marketdevelopments. The companies madesubstantial cuts in their share port-folios, and took losses.

The picture was more nuanced in thecase of marine insurance. Prices arefixed in an international competitivemarket, and although the trend hasbeen on the upgrade for two years,premiums were in general not at aprofitable level. This, combined witha shortfall in financial earnings, hasbrought relatively large losses forNorwegian players in recent years.

ReinsuranceThe price of reinsurance was expect-ed to rise in the wake of the terroristattacks on 11 September 2001. Thisdid not happen immediately, butbecame increasingly apparent in thecourse of 2002. Some Norwegiancompanies have thus far been shield-ed against premium increases bylong-term contracts and specialagreements, although instances haveoccurred where companies havebeen compelled to accept a signific-ant increase in own-account exposure.Since this automatically entails high-er provisions, it may have conse-quences for their capital adequacy.

Life insurance companies andpension fundsFive life insurance companies andeight pension funds were inspectedin 2002. On-site inspection at lifeinsurance companies and pensionfunds focuses on their compliancewith the asset management regulati-ons. Amended asset managementregulations effective from 1 October2001 impose stricter requirements oninstitutions’ management boards interms of managing and monitoringmarket risk, including an obligationto conduct stress tests and to assessthe ability to withstand value falls.

Life insurance companies and pensi-on funds have outsourced much oftheir asset management business toinvestment firms engaged in discreti-onary management. As in 2001,ensuring that companies operateunder an updated management agree-ment which clearly describes themanagement mandate and reportingrequirements was an important con-cern. A further key concern was toassess whether sufficient expertiseremained in the company after out-sourcing for the management boardto properly discharge its asset man-agement responsibilities.

Life insurance companies’ failure tomake the changes needed in thetechnical basis for premiums and

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provisioning until ordered to do soby Kredittilsynet appears to be ageneral problem.

A number of pension funds fail toprepare estimates for underwritingprovisions on a quarterly or biannualbasis. As a result any need for freshequity capital only becomes clear atyear-end.

Many pension funds have had poorinternal control routines, both inrelation to compliance with laws andregulations and in terms of manag-ing and monitoring their own riskexposures. The internal control regu-lation was made applicable to pensi-on funds as from 1 October 2001. Itis expected to prove an importanttool for improving pension funds’management and control systems indue course.

Insurance brokersFour insurance brokerages wereinspected in 2002. The inspectionsbrought to light weak financial posi-tions and failure to bring securityfurnished up to date in relation tothe number of brokers. One insuran-ce brokerage’s registration was dele-ted in 2002, partly for non-compli-ance with an order issued after anearlier inspection. A further broker-age was warned of possible superviso-ry sanctions after breaching sections9 and 10 of the brokerage regulati-ons by mediating private insurancesto an insurer outside the EuropeanEconomic Area. However, after furtherconsideration Kredittilsynet concludedthat deleting this brokerage’s regi-stration was an excessive responseto the breach committed.

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IT supervision

Banking and insuranceOperational risk associated with theuse and operation of IT systemsrepresents a substantial risk factorfor Norwegian financial institutions.As a step in refining the supervisoryeffort, it was decided in 2002 toemploy CobiT – an internationalstandard for control and audit of ITbusiness – as the platform forKredittilsynet’s IT supervision. It wasalso decided to try out a standard-ised electronic solution designed tomake better use of data on eventsand problems as a basis for methodo-logy development and risk and vulner-ability analyses.

Nine ICT inspections were carried outin 2002. The inspections coveredinstitutions’ own IT activities andoutsourced segments. They includedan overall IT inspection of theInternet bank solution at Nordeabanks in conjunction with the otherNordic supervisory authorities.

Based on its monitoring and investi-gations in the field of card security,Kredittilsynet formally took up thismatter with the banking industryrepresented by the Savings BanksAssociation and the NorwegianFinancial Services Association.Meetings were held with these asso-ciations and other interested parties.The associations wish to continuetheir dialogue with the banks inorder to arrive at relevant measuresfor reducing risk in this field.

February 2002 saw the publicationof a risk and vulnerability analysis ofthe financial IT structure and use ofInternet bank services in Norway. Thereport was presented to several insti-tutions and interest organisations toincrease awareness of risk associatedwith areas identified as vulnerable.The report is available at Kredittil-synet’s website at www.kredittilsy-net.no.

Data processing institutionsOne IT inspection was carried out atthe Banks’ Payment and CentralClearing House in 2002. In its com-ments Kredittilsynet pointed to theabsence of an integrated changemanagement system and expectedthis to be installed as soon as practi-cable.

Kredittilsynet’s comments from its ITinspection of EDB Fellesdata AS andEDB Teamco AS in 2001 were publish-ed in 2002. The key features of thesecomments were contained in a letterto 114 savings and commercial banksthat were affected by a shutdown inAugust 2001. Similarly, steps weretaken in 2002 to check compliancewith orders issued via GjensidigeNOR Bank AS. Moreover, separatefollow-up meetings related toInternet bank operating problemswere held in April and May 2002.The agreed measures will be follow-ed up in 2003.

On 31 October the NorwegianCompetition Authority announced apossible intervention against anagreement between the NorwegianFinancial Services Association, theSavings Banks Association and theBanks’ Payment and Central ClearingHouse which commits the banks toutilising the latter institution for col-lection of card transactions from theretail sector. In the view of theNorwegian Competition Authoritythe agreement restricts market com-petition. Organisation, technicalsolutions and operation related tothe EFTPOS system in Norway have abearing on vulnerability and operati-onal risk. Kredittilsynet regards thesolutions established in this area assatisfactory, and does not want tosee standardisation and risk aspectsaffected in the event of changes inestablished solutions. In its submissi-on regarding the NorwegianCompetition Authority’s intervention

warning, Kredittilsynet asked foremphasis to be given to the riskaspect in the further treatment ofthe case.

Payments Systems Act – col-laboration with Norges BankThe Payments Systems Act (No. 95 of17 December 1999) assigns NorgesBank responsibility for licensing andsupervision of interbank systems, andKredittilsynet responsibility forsupervision of systems for moneytransfer services and securities clear-ing systems. These systems interlock,requiring clarification of responsibili-ties and work sharing betweenNorges Bank and Kredittilsynet. Tothis end the two institutions haveformalised an agreement definingsystem limits and a regime for coop-eration and task sharing. The agree-ment also describes relevant warningand information routines in theevent of insolvencies or suspensionof system participants.

In 2003 a formal collaboration willbe established on IT inspections atsupervised institutions that are alsolicensed by Norges Bank as clearingbanks. Monitoring these institutions’compliance with the obligationunder the Payment Systems Act tonotify Norges Bank will be integratedinto IT supervision and coordinatedwith the ongoing supervisory effortin the course of 2003.

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NordeaSince 2000 the Nordic supervisoryauthorities have operated a coopera-tion agreement on supervision of theNordea Group. The regime comprisesa coordinating supervisory team plussubteams for assessment of totalrisk, capital allocation, insurance andaccounts. A team to assess theGroup’s liquidity management wasset up in 2002. In the spring of 2002the risk team presented to the super-visory team a document reviewingoverall risk evaluation practice withinthe Nordea Group. The documentwas thereafter considered by theheads of the four Nordic supervisorybodies at the meeting of Nordicsupervisors in Bergen in June 2002,and by Nordea’s Group managementlater the same month. Nordea gaveits comments to the document in aletter of 25 August 2002.

Three group-wide inspections wereconducted in 2002 in the fields ofcredit risk, management and control,and liquidity management.Kredittilsynet was present at theinspections. Altogether the supervi-sory team and the risk team met 11times, the liquidity team four times.

If Skadeförsäkring HoldingGroupThe agreement betweenFinansinspektionen (the SwedishFinancial Supervisory Authority) andKredittilsynet on supervision of IfSkadeförsäkring Holding AB wasrevised in March 2002, and also sign-ed by Försäkringsinspektionen (theFinnish Insurance SupervisoryAuthority) after Sampo’s former non-life insurance business was takenover by If Holding as from 1 January2002. The agreement entitlesKredittilsynet to attend importantmeetings that Finansinspektionenholds with If and to take part in on-site inspections.

Kredittilsynet assisted Finansinspek-tionen’s preparation of a “Total RiskAssessment” of If, which took intoaccount the Sampo transaction. Therisk assessment was published inJanuary 2002, and Kredittilsynet,together withFörsäkringsinspektionen, also carriedout an updated risk assessment ofthe If Group for the first half of2002. Moreover, Kredittilsynet parti-cipated, under Finansinspektionen’sauspices, in an inspection of IfSkadeförsäkring AB’s premium-setting, discounts and monitoring ofclaims payments. Kredittilsynet alsoattended two meetings with If onannual and interim financial state-ments.

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Nordic supervisory collaboration



Banking/finance

Changes in the structure ofthe Nordea Group, includingthe Vesta GroupIn its submission to the Ministry ofFinance, Kredittilsynet advised theministry to approve the NordeaGroup’s application for permission toreorganise its insurance business.Vesta Forsikring AS, a non-life insur-ance company, was the parent com-pany in the Norwegian Vesta Group,which is in turn part of the NordeaGroup. Permission was sought toorganise the insurance business intwo sub-groups, one for non-life andone for life insurance, ahead of theplanned sale of the non-life arm. Thereorganisation went ahead, and thetwo insurance groups established acomprehensive set of cooperationagreements.

Nordea Bank Norway was also com-prehensively reorganised.Kredittilsynet approved the sale ofthe bank’s subsidiaries, NordeaManagement ASA and NordeaFondene AS, to the Swedish compa-ny Nordea Asset Management AB,and the spinoff and sale of the bank’ssecurities business to the Swedishcompany Nordea Securities AB. Allthe companies remain wholly-ownedsubsidiaries within the Nordea Group.

Gjensidige NOR Group –conversion to public limitedcompaniesUpon Kredittilsynet’s advice, theMinistry of Finance authorised UnionBank of Norway and the life insuran-ce company Gjensidige NORSpareforsikring to convert to publiclimited companies. All shares in bothcompanies are owned by the newholding company Gjensidige NORASA. Prior to the conversion thesavings bank and the life insurancecompany, together with the non-lifeinsurance company Gjensidige NORForsikring, created a group with acommon management board. Since

the conversion the non-life insuran-ce company has been linked to theGjensidige NOR Group by a strategiccooperation agreement. The formerUnion Bank of Norway is now apublic limited company regulated bythe Commercial Banks Act. The bankis nonetheless entitled to use theterm “sparebank” (savings bank) inits name, and is a member of theSavings Banks’ Guarantee Fund. Thiswill remain the case so long as thesavings bank foundation (StiftelsenGjensidige NOR Sparebank) owns 10per cent or more of Gjensidige NORASA’s share capital.

Den norske Bank’s takeoverof Nordlandsbanken ASAIn response to an invitation from theBoard of Nordlandsbanken ASA, Dennorske Bank (DnB) offered to takeover the bank. By 16 January 2003DnB had received acceptances which,together with the shares alreadyheld by DnB, came to 90.32 per centof the bank’s shares. On this basisDnB applied on 21 January 2003 tothe Ministry of Finance for a licenceto purchase Nordlandsbanken’s sha-res. (See also page 28.)

Verdibanken ASAThe Ministry of Finance authorisedVerdibanken ASA to carry on bankingoperations in the segments stated inthe bank’s application. The authori-sation was in line withKredittilsynet’s recommendation.Payment of share capital of NOK 50million was required, along with ashare subscription premium bringingtotal equity to NOK 85 million. Dueto the bank’s risk profile,Kredittilsynet will consider imposinga capital adequacy requirementabove the statutory minimum.

UPS Capital Nordic ASKredittilsynet authorised UPS CapitalNordic AS to establish a financecompany and to carry on financingoperations. The company will offerfinancial factoring, stock financing

and documentary credits financing,mainly to clients of United ParcelService Inc. (UPS) and FritzCompanies Norway AS. The companyis also planning to expand its busi-ness to other Nordic countries in thelonger term.

Application to mergeFinansbanken ASA andStorebrand Bank ASSince 1999, when Storebrand ASAwas granted a licence to acquire theshares of Finansbanken ASA, thecompany has been provisionally aut-horised to retain Storebrand Bank ASand Finansbanken within the samegroup. In November 2002Kredittilsynet received an applicationto merge the two companies, and inJanuary 2003 Kredittilsynet advisedthe Ministry of Finance to approvethe merger.

DnB Holding ASA – acquisition of Skandia’s discretionary asset management businessUpon Kredittilsynet’s advice, theMinistry of Finance authorised DnBHolding ASA to acquire all shares ofSkandia Financial HoldingsAktiebolag and its subsidiaries. Thecompanies provide discretionaryasset management services underthe name “Skandia Asset Manage-ment”. As required for authorisation,Kredittilsynet approved the organisat-ion of discretionary asset manage-ment business in the DnB Group. Theapproval covers the merger ofSkandia’s asset management businessin Norway with equivalent businessin the Norwegian section of the DnBGroup.

Capital Merchant Bank ASAKredittilsynet advised the Ministry ofFinance to turn down CapitalPartners’ application for authorisati-on to act as a commercial bank forCapital Merchant Bank ASA.Although in some doubt, Kredittil-synet recommended rejecting the

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Licensing and regulatory compliance



application on the basis that theintended business did not qualify ascommercial banking. Kredittilsynet’salternative recommendation was togrant the application on specificconditions, including a capital ratioof 16 per cent based on assessmentsof the bank’s risk profile.

Financial and operationalleasingIn connection with a specific exemp-tion, Kredittilsynet considered thedefinition of what is to be regardedas leasing business subject to alicensing requirement under theFinancial Institutions Act (No. 40 of10 June 1988). The issue involved“car administration with financing”which has clear-cut features in com-mon with ordinary car-hire. Afterreviewing international definitions ofoperational and financial leasing,Kredittilsynet concluded that thetype of car financing operated by thecompany did not qualify as businesssubject to licensing. The Ministry ofFinance agreed with Kredittilsynet,and the company handed in itslicence.

Samspar Norge – withdrawalof exemption by Ministry ofFinanceIn 1995 Samspar Norge was exemp-ted from the financial institutionsact’s licensing requirements on thebasis that it would receive depositsexclusively from members of thePentecostal church. In the autumn of2002 the Ministry of Finance with-drew Samspar Norge’s exemptionupon Kredittilsynet’s recommendation.

At the end of 2000 Samspar had anegative equity capital of NOK 3.3million. By the end of 2001 the figu-re was a negative NOK 23.2 million.A major reason for the large deficitin 2001 was that the association hadplaced a substantial portion of itscapital in equity funds, which led toheavy losses for the contributors.

The background to the ministry’sdecision was that Samspar Norgeoperated in conflict with the termsof the exemption. The Ministry stres-sed that the contributors had notbeen informed that their contributi-ons were not secured; that the asso-ciation received contributions frompersons who were not members ofthe Pentecostal church; and that ithad failed to comply with its ownstatutes. Withdrawal of the licencewas also based on a desire to protectcontributors against risk of furtherloss. Samspar is now being wound up.

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Pension Funds’ financialstrengthDue to the developments in thesecurities market, a number of pensi-on funds fell short of the InsuranceActivity Act’s capital requirements inthe third quarter of 2002. The major-ity of pension funds sought permis-sion to raise capital in the form ofcore capital and subordinated debt.Kredittilsynet also received applicati-ons for temporary exemption fromthe capital requirements. So far onlyshort-term exemptions – lasting upto three months – have been grant-ed. Since the pension fund regulati-ons confine exemption to specialcases, a condition for exemption wasthat the sponsoring undertakinginject the requisite capital in thenear future. Exemption was alsogranted to pension funds that pre-sented a plan to sell shares or toreclassify the portfolio by othermeans in order to meet the capitaladequacy requirement.

Articles of associationKredittilsynet revised the standardarticles of association for privatepension funds and municipal pensionfunds in 2001. The background forthe revision was the addition ofnotification rules to the pensionfund regulations, new pension legis-lation for the private sector andchanges in the collective bargainingagreement in the municipal sector.All pension funds were instructed tosubmit revised articles in 2002.Under the notification rules, pensionfunds only receive a response fromKredittilsynet if their articles ofassociation are not accepted.

Problems for life insurancecompanies as a result of falling securities pricesSome Norwegian life insurance com-panies faced problems in meetingthe minimum capital and solvencymargin requirements in the summerand autumn of 2002 due to theweak securities market. Both traditi-onal life insurance companies andcompanies offering unit-linked lifeinsurance were affected. Upon theadvice of Kredittilsynet, the Ministryof Finance granted three life insur-ance companies exemption from thesolvency and capital adequacyrequirements.

Occupational injury insuranceRecent years’ large premium increas-es in the occupational injury insu-rance sector are now starting to bearfruit for non-life insurance compani-es. Figures for the six largest compan-ies offering occupational injury insu-rance show an aggregate technicalresult for own account of NOK 18million in 2001 compared with anaccumulated technical deficit ofabout NOK 1.3 billion in the period1997–2000. For the six companiescombined, the gross claims ratio for2001 was estimated at 120 per cent,in other words just over half the1998–1999 level. In 2001 the six largest companies’ share of theoccupational injury insurance marketwas 94 per cent in terms of grosspremium.

The above figures are taken from areport on a sectoral account foroccupational injury insurance as ofend-2001 which was prepared byKredittilsynet with assistance fromthe technical calculating committeefor non-life insurance. The reportwas published by Kredittilsynet inSeptember 2002.

Guarantee schemes in theinsurance sector Kredittilsynet acts as secretariat tothe Non-Life Insurance Companies’Guarantee Scheme and the CreditInsurance Companies’ GuaranteeScheme. The latter scheme was inac-tive in 2002. The Non-Life InsuranceCompanies’ Guarantee Scheme mettwice in the course of the year toconsider claims on the scheme frompolicyholders in Star Forsikring ASwhich had been placed under publicadministration. In a ruling deliveredon 20 March 2002 the SupremeCourt established that interestclaims accruing after a claim againstan insurer falls due also have priorityunder the earlier Insurance ActivityAct, Section 11–5. In light of thisruling the policyholder in questionclaimed payment of interest fromthe scheme. The issue of payment bythe scheme was not addressed bythe court. The guarantee scheme hasitself previously covered the actualdamage and interest up to the duedate, but resolved not to cover theremaining interest segment of theclaim against the insurer. The guar-antee scheme’s decision has beenappealed to the Ministry of Finance.

Bluewater Insurance ASA /Zürich Holding Norge ASKredittilsynet authorised BluewaterInsurance ASA to acquire 100 percent of Zürich Holding Norge AS’sshares ahead of a merger of the twocompanies. It also authorised areduction of Zürich Holding NorgeAS’s share capital and a merger ofZürich Protector Forsikring AS withZürich Holding Norge AS prior to theacquisition.

34

Insurance



35


ForbrukerForsikring ASIn line with Kredittilsynet’s recom-mendation, the Ministry of Financeissued a licence to Forbruker-Forsikring AS to carry on insurance.The company will offer legal aidinsurance to purchasers of goods priced at NOK 2,000 and upwards.This type of insurance is uncommonin Norway. Kredittilsynet recommend-ed imposing a condition requiringthe company upon start-up to havecapital exceeding the minimumrequirement contained in theInsurance Activity Act Section 7–3.The company has yet to commenceoperations.

Corporate fine imposed onHalden KommunalePensjonskasse by ØKOKRIMAn inspection at Halden KommunalePensjonskasse (a municipal pensionfund) in June 2001 brought to lightlarge losses on the share portfolioand deficit for 2000 of almost NOK80 million. Central provisions of therules governing pension funds hadbeen breached; for example itsassets had not been invested in anappropriate and satisfactory manner.The board of directors was asked toconsider its position, and thereafterstepped down. The matter was refer-red to ØKOKRIM which on 20December 2002 handed down a cor-porate fine of NOK 100,000.


Banking/finance

New rules proposed for cal-culating capital adequacyThe Basel Committee on BankingSupervision has drafted new guideli-nes for computing banks’ capitaladequacy. Since 1999 the committeehas completed two rounds of consul-tation in which Kredittilsynet andNorges Bank have issued joint com-ments. A third and final consultationdocument is expected in the spring/summer of 2003 ahead of the adopt-ion of the new Basel Capital Accordby the Basel Committee at the endof 2003. The new guidelines forcomputing capital adequacy will takeeffect at the end of 2006.

On 1 October 2002 the BaselCommittee presented a scheme forascertaining the impact of the newguidelines on capital requirements.The study, known as the thirdQuantitative Impact Study, or QIS3,highlights the minimum require-ments proposed under Pillar I of therevised Capital Accord. More than200 banks from over 40 countriesare participating in the study includ-ing, from Norway, Den norske Bank,Nordea Bank Norway, GjensidigeNOR and Fokus Bank.

Kredittilsynet’s impression is that thelarger Norwegian banks are well pre-pared for the introduction of thenew Basel rules, but view the studyas an important instrument for con-firming that this is actually the case:in-house statistics and managementsystems, for example, will have tomeet stringent requirements if inter-nal models are to be used as a basisfor measuring capital adequacy.

In parallel with the Basel Committee,the European Commission is revisingits capital adequacy rules for creditinstitutions and investment firms.The Commission’s revision is basedon the Basel Committee’s proposals,but gives special emphasis to issues

of importance in the EU context. Likethe new Basel Accord, the new capi-tal adequacy directive will takeeffect at the end of 2006.

On 18 November 2002 the EuropeanCommission published a workingdocument on revision of the currentcapital adequacy rules for creditinstitutions and investment firms.The document, which is based on theEuropean Commission’s draft newcapital adequacy directive andreflects the Commission’s currentthinking, was circulated for com-ment.

The current round of consultationwas initiated by the EuropeanCommission in order to obtain anearly assessment of the draft capitaladequacy directive ahead of publica-tion of the third and final consultati-on document in the spring/summerof 2003. The working documentidentifies issues specific to the EUwhich the European Commissionconsiders should be taken intoaccount in the new capital adequacyrules. Kredittilsynet has invitedaffected industry associations to takepart in the consultation round.

In 2003 Kredittilsynet will completeits work on QIS3 and the EuropeanCommission’s “structured dialogue”.Kredittilsynet will also, in conjuncti-on with Norges Bank, forward a jointstatement on the third set of consul-tation documents to the BaselCommittee and the EuropeanCommission.

A draft regulation onaccounting treatment ofloansIn March 2002 Kredittilsynet forward-ed a draft regulation on accountingtreatment of loans and guarantees(the “loss regulations”) to theMinistry of Finance. The proposal isintended to replace the current regu-lation (of 14 November 1991) on

valuation of losses on loans, guaran-tees etc. It brings Norwegian rulesinto line with international account-ing standards (IAS 39) and clarifiesthe concept of loss on an individualbasis and on a group basis. It alsobrings terminology into line withgeneral accounting legislation andIAS 39. The proposed regulation wascirculated for comment in July 2002,with a deadline for comments set at2 October 2002, and is currentlybeing considered by the Ministry ofFinance. Kredittilsynet advised theMinistry of Finance not to implementthe loss regulation until 1 January2004.

Act on e-money institutionsWith a view to implementation inNorway of Directive 2000/46/EC onelectronic money institutions (the e-money directive), Kredittilsynetforwarded a submission to theMinistry of Finance containing a pro-posal for an act concerning issuers ofelectronic money. The Ministry there-after tabled an e-money bill (Ot. prp.No. 92 (2001–2002)), which waspassed into law by the Parliament(Stortinget) on 13 November 2002 asAct No. 74 of 13 December 2002.The act regulates the taking up andpursuit of the business of issuingelectronic money and the supervisionof institutions carrying on such busi-ness.

The question of strengthen-ing the position of primarycapital certificates (PCCs)Following an approach from theMinistry of Finance, Kredittilsynetconsidered a proposal from theSavings Banks Association to theeffect that the supervisory board ofsavings banks should have a freerhand in deciding the distribution ofthe net profit of PCC banks thanwhat follows from the “PCC holderfraction”. Kredittilsynet did not con-sider there was a basis for extendingpreferential treatment to PCC hold-ers at the expense of other capital,

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Regulatory amendments



but pointed to some minor stepsthat could be taken to strengthenthe position of the PCC.

Circular on new “standardarticles of association”Kredittilsynet’s guideline articles ofassociation for commercial banks,finance and mortgage companiesand non-life insurance companieswere reviewed and amended. Theamendments are essentially designedto bring the guideline articles intoline with new legislation.

Directive on supervision offinancial conglomeratesKredittilsynet participated in a work-ing group appointed by the EuropeanCommission to prepare a directive onsupervision of mixed financial conglo-merates. The directive, now in force,contains rules for reporting intra-group transactions and measuringfinancial strength on a consolidatedbasis. The directive calls for closecollaboration between supervisoryauthorities in Europe, and enlargesthe right for the supervisory authori-ties of one country to take part inon-site inspections in other countrieswithin the EEA.

Circular on the minutes ofcontrol committee meetingsand on the law-trained mem-ber of control committeesKredittilsynet decided to alter theroutines for authorising control com-mittees’ minutes and for approvingthe law-trained member of controlcommittees. The financial legislationrequires the control committee ofsavings and commercial banks tokeep minutes, duly authorised byKredittilsynet, of its proceedings.Minutes will now be regarded asauthorised without being sent toKredittilsynet.

The law-trained member appointedto the control committee must beapproved by Kredittilsynet. Thus far,institutions that replace the law-

trained member of their controlcommittee have submitted an appli-cation to Kredittilsynet accompaniedby information confirming that theperson in question has taken theirfinal law examinations and appliedfor authorisation from Kredittilsynet.Henceforth the law-trained memberappointed to the control committeewill be regarded as duly authorisedon condition that the institutionsthemselves verify that the individualmeets the requirements in question.

NOU 2002: 3Ownership restriction andowner control at financialinstitutionsKredittilsynet’s submission supportsthe main features of the model fornew rules on ownership restrictionand owner control proposed in theNOU study. The committee recom-mends a Norwegian system based onthe principles underlying the EUdirectives. According to the proposalan acquirer will have to seek priorpermission to acquire holdings of 10,15, 20, 25, 67 and 90 per cent in afinancial institution. To obtain per-mission to acquire any holding inexcess of 25 per cent, the acquirerwill have to make a takeover offer toall shareholders and acquire an over-all holding of at least two-thirds ofthe target institution’s shares. In itssubmission, Kredittilsynet expressedthe view that the committee’s pro-posal provides a sound basis for anew body of rules, but recommendedfewer thresholds requiring the acqui-rer to obtain permission fromKredittilsynet. Kredittilsynet alsoasked the Ministry of Finance toconsider whether further delegationto Kredittilsynet could result in simp-ler and quicker procedures than provided for by the proposal.

Financial institutions’ busi-ness II – Report No. 8 fromthe Banking Law CommissionThe Banking Law Commission’seighth report addressed issues rela-

ted to financial institutions’ organi-sation and business. These includeddividends and group contributions,financial institutions’ ownership ofshares, ownership interests and real estate, finance and mortgage com-panies’ right to own banks of insur-ance companies, dispute resolutionarrangements and national andsupranational supervisory authorities.Kredittilsynet’s submission largelysupported the commission’s recom-mendations and assessments.

Mortgage bonds and securi-tisation – regulatory amend-mentsIn connection with the proposed lawon mortgage bonds and securitisa-tion, Kredittilsynet drafted in March2002 amendments to the associatedlegislation. It proposed assigningmortgage bonds a risk weight of 10per cent for calculating capital ade-quacy requirements and large com-mitments. Concurrently Kredittilsynetreviewed the capital adequacy treat-ment of securitisation transactions,recommending that bonds issued byspecial-purpose institutions andsecured on a mortgage loan portfolioshould on certain conditions qualifyfor a 50 per cent risk weighting forthe purpose of calculating capitaladequacy requirements. The Ministryof Finance circulated the recommen-dations for comment on 5 July 2002.For mortgage bonds a change in thediscretionary management regulati-ons was proposed enabling compani-es to hold up to 20 per cent of theirtechnical provisions in a bond loansecured on a mortgage portfolio.Furthermore, an amendment wasproposed to the Securities Funds Actenabling securities funds to invest upto 25 per cent of their assets in abond loan secured on a mortgageportfolio.

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Insurance

New pension legislation –changes and need for clarifi-cationThe Act on Defined BenefitOccupational Pension Schemes andthe Act on Defined ContributionOccupational Pension Schemes wereamended in 2002 to permit combin-ed pension schemes. The amend-ments will become effective onceregulations are established on thedesign of combined pension sche-mes, probably in the spring of 2003.

Amendments to the acts aboveintroduce an obligation for instituti-ons with defined contribution sche-mes to impose higher contributionsor contribution premiums for womenthan for men if this is necessary toensure that the annual pension willnot depend of the member’s gender.

A number of interpretative problemsand issues related to the pensionlaws were dealt with by Kredittil-synet, several of which were referredto the Ministry of Finance for com-ment or assessment, includingassessment of any need for lawchanges.

Life insurance companies’temporary exemption fromthe Insurance Activity ActIn the autumn of 2002 StorebrandLivsforsikring AS, Gjensidige NORSpareforsikring ASA and VitalForsikring ASA applied to theMinistry of Finance for exemptionfrom the Insurance Activity Act. Theapplications were prompted by theLabour Court’s ruling of 8 October2002 which established that onlyKommunal Landspensjonskasse (KLP,a nationwide pension fund for themunicipal sector) had a funding sys-tem for group pension insurancesthat was in line with the require-ments of the main collective bargain-ing agreement for the municipal sec-tor. The agreement required a gen-der- and age-neutral funding system.KLP is exempt from the provisions of

the Insurance Activity Act and practis-es premium equalisation betweenpolicyholders to achieve gender- andage-neutrality. This system contrastswith the individual system enshrinedin the Insurance Activity Act.

The Labour Court gave the 11 muni-cipalities that were subject to legalaction until 1 July 2003 to bringtheir pension schemes’ funding sys-tem into line with the court’s under-standing of the municipal collectivebargaining agreement. It meant thatthe municipal pension schemes inquestion would have to transfer backto KLP by the above date, and thatno policyholder could transfer his orher pension schemes from KLP toone of the three life insurance com-panies unless the latter were exemp-ted from, or amendments were madeto, the act. Subject to considerabledoubt, Kredittilsynet concluded thatthe three life insurance companiesshould be granted exemption fromSections 7–5 and 7–6 of theInsurance Activity Act. The Ministryof Finance agreed, and grantedexemption subject to specified cond-itions. The exemption was in somerespects not consistent withKredittilsynet’s recommendation. Thethree companies thereafter submit-ted product descriptions as requiredby the conditions set. Their pensionproducts were however deemed tobe counter to the requirements ofthe main collective bargaining agree-ment, but in line with the parties’view of this agreement. Kredittilsy-net asked Storebrand to adjust itsproduct to the conditions set by theministry for exemption. Failure to doso would result in a daily recurringfine of NOK 100,000. Storebrandthereafter submitted a new productdescription which met the conditionsfor exemption.

A total of four municipalities hadnotified switching from KLP to privatelife insurance companies as of 1 January 2003. The Norwegian

Confederation of Trade Unions, inthe shape of the Norwegian Union ofMunicipal Employees, brought actionagainst these municipalities on 21January 2003 for breach of the maincollective bargaining agreement.

Responsibility for sanctionsassigned to Kredittilsynet –Fourth EU motor insuranceDirectiveEU Directive 2000/26/EC on theapproximation of the laws of theMember States relating to liabilityinsurance in respect of the use ofmotor vehicles (Fourth motor insur-ance Directive) of 16 May 2000 wasimplemented in Norwegian law. Thedirective is designed to make it easierfor EEA residents to pursue an insur-ance claim if they have a motoraccident in an EEA State other thantheir state of residence or in a statethat participates in the “green card”(an international insurance certificate)arrangement, and the accident wascaused by a motor vehicle insured in,and whose home state is, an EEAstate. Under the new rules theNorwegian Motor Insurers’ Bureau isrecognised as an information centreand compensation agency.

The Ministry of Transport andCommunications and the Ministry ofJustice, with the approval of theMinistry of Finance, advocated thatresponsibility for imposing sanctionsagainst violations of Norwegian rulescorresponding to the provisions ofthe Fourth motor insurance Directiveshould be assigned to Kredittilsynet.

New directive on insurancemediationOn 30 September 2002 the EuropeanParliament adopted a new InsuranceIntermediaries Directive whichKredittilsynet expects to be incor-porated in the EEA agreement.Article 16 of the directive requiresmember states to implement thedirective in national law not laterthan two years after entry into force

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of the directive. The directive appliesto all intermediaries, includingagents and advisers. No requirementsare attached to such business at present. The directive aims for aminimum level of harmonisation.

Regulations on workers stat-ioned abroadIn December 2002 Kredittilsynet for-warded to the Ministry of Financedraft regulations on membership of acompany pension scheme and/or adefined contribution scheme forworkers temporarily stationed abroad.The proposal will be circulated forcomment in the course of 2003.

Stricter solvency require-ments proposed for insurancebrokersKredittilsynet recommended to theMinistry of Finance that stricter sol-vency requirements be applied toinsurance brokers. The proposalentails requiring brokers to be in aposition to meet their commitments

on a continual basis and to maintaina positive equity capital position. Thenew provisions are in line withrequirements applied at estate agencies and debt collection agenci-es. A requirement for positive equitycapital will in Kredittilsynet’s opinionhelp to prevent financial dishonesty,for example in dealing with clientassets.

Work on new solvency margin rulesNew EU directives on solvency marginrequirements for insurance companieswere established in March 2002.Work on implementing the directivesin Norwegian rules started in theautumn of 2002. The new provisionsare expected to result in somewhathigher solvency margin requirementsfor non-life insurance companies.Where life insurance companies areconcerned, the new rules will bringonly marginal adjustments to thesolvency requirements.

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Risk-based supervisionThe process of introducing a more risk-based supervisory regimealong international lines in compliance with the requirements of thenew Basel Accord continued in 2002. Now that it is clear thatintroduction of Basel II will be postponed to 2006, more time canbe spent on introducing the new methods. The project preparing forrisk-based supervision was reorganised in 2002, with greateremphasis being given to building on current supervisory practice anda gradual introduction of new methodology to ease the transition tonew methods in purely organisational terms. The modules for creditrisk, market risk and liquidity risk will be tested in a selection ofinstitutions in the first half of 2003. The modules for operationalrisk and insurance risk will be ready for testing in the same period.After the trial period the scheme will be evaluated and any adjust-ments needed will be made. Kredittilsynet will be in a position tomake an overall risk assessment both of individual institutions andgroups in the second half of 2003.

Work is also under way on a study of the overall consequences forsupervision of the introduction of Pillar II of the new Basel Accord.Pillar II imposes new requirements on institutions in terms of riskmanagement and on supervisory authorities in terms of methodo-logy. The introduction of risk-based supervision will result in moresystematic supervision. On-site inspection will be more resource-demanding than at present. Steps must be taken to clarify whataspects of the present on-site regime need to be carried forwardunder the new regime, for example monitoring of the individualinstitution’s compliance with laws and regulations. Moreover, theneed for periodic reporting of data will probably change in keepingwith the change in emphasis in the supervisory regime. The questionof whether staff increases and further specialisation will require areorganisation within Kredittilsynet itself will also be addressed.


The auditing industry features abipartite structure: a small numberof international auditing companiesthat audit the majority of listedcompanies and other institutions ofpublic interest, and a large numberof smaller auditing companies whosemain function is to audit small andmedium-size companies. After theacquisition of Arthur Andersen & CoAS by Ernst & Young AS in 2002,only four large auditing companiesremain, which narrows the choice ofauditors available to multinationalcompanies. This is likely to occasionfurther structural change in theindustry both at the national andinternational level.

Authorisation of individualsand undertakingsUnder the Auditors Act, auditor aut-horisation requires approved theore-tical training and three years of vari-ed experience. Practising auditors arerequired to furnish security of NOK 5million and to meet requirements asto post-qualifying training.

To achieve authorisation, auditingfirms need to be more than 50 percent owned by state authorisedauditors, and the majority of themembers of firms’ boards of directorsmust be state authorised auditors.Requirements laid down in articles ofassociation and requirements as tofinancial probity also apply.

Following off-site examination,Kredittilsynet warned 144 authorisedauditing companies that their licen-ces would be withdrawn due to non-compliance with the requirements ofcompany law. The great majorityopted to meet the requirements with-in the deadline set, while four com-panies lost their licences.

Administrative activity in2002Among Kredittilsynet’s key responsi-bilities in relation to the Auditors Actis authorisation of auditors. Thenumber of authorised auditors andauditing firms in 2002 is shown intable 9.

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AuditingKredittilsynet’s tasks in relation to auditors comprise approval or licensing of individuals and firms in accordancewith the legal requirements applying to this profession as well as registration and supervision. Supervisionencompasses 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.


RegulationsKredittilsynet proposed that statuto-ry constraints on auditor counsellingof audit clients should also apply inrespect of institutions with whomthe auditor has a cooperation agree-ment, and which perform counsellingor other services. The proposal wasforwarded to the Ministry of Financein June 2002 and ratified by theMinistry on 19 December 2002 forentry into force on 1 April 2003.

Early in December 2001 Kredittil-synet proposed amendments to theMinistry of Finance designed to simplify the Auditors Act and associ-ated regulations. This involved remov-ing the requirement that Kredittil-synet approve courses for post-quali-fying training and introducing simplerrequirements in relation to provisionof security and the content of theregister of auditors. The Ministry ofFinance circulated the amending billfor comment on 21 December 2001with a deadline for submissions set

at 22 March 2002. The proposal toremove the course-approval schemewas adopted by means of a regulatoryamendment of 19 December 2002.The Ministry did not, however, act onthe proposal to simplify routines inrelation to provision of security.Kredittilsynet will now lay a basis forelectronic routines and reporting ofsecurity furnished. The amendmentsproposed to the Auditors Act are stillunder consideration by the Ministry.

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


Supervisory activity in 2002Supervisory cases handled in 2002totalled 118, of which 32 were onthe basis of on-site inspections.These were to a large extent follow-up inspections of auditors who hadpreviously been criticised byKredittilsynet, and of auditors report-ed to Kredittilsynet, mainly by thetax authorities and liquidators.Thirty-eight complaints against audi-tors were received in 2002 comparedwith 31 and 32 in 2000 and 2001respectively.

Supervision entails checking compli-ance with laws and regulations andwith generally accepted auditingstandards. This requires a thoroughassessment of the appropriateness ofauditing methods, whether the scopeof audit procedures is sufficient,whether the auditor’s assessmentsand conclusions accord with theresult of the audit procedures andwhether satisfactory supportingdocumentation for the audit is avail-able.

In 2001 supervision focused onaudits of larger conglomerates. Allthe major auditing firms were involv-ed. Supervision was confined to predefined themes, with special

attention given to auditing of entiti-es within the particular conglomera-te. This process reached completionin 2002 with a largely successfuloutcome. In the few cases where theinspections brought to light unsatis-factory circumstances, Kredittilsynetissued comments both to auditingcompanies and the auditors respons-ible that were proportional to thegravity of the circumstance in quest-ion. In one case Kredittilsynet react-ed because the auditor had reliedexcessively on the conglomerate’sinternal audit.

In 2002 one thematic inspection wascarried out with the focus on “audi-tors’ counselling of audit clients”. Itinvolved the five largest auditingcompanies and any collaboratingcompanies that delivered counsellingor other services and was designedto investigate compliance with theAuditors Act’s provisions on indepen-dence and objectivity. Counsellingservices delivered to 50 major auditclients were examined. The finalconclusions will be made known inthe first half of 2003. Inspectionsshowed very wide variation both inthe nature and scope of auditors’counselling of their audit clients. It isclear that the scope of auditors’

counselling is substantial, and thatregulations in this area need to beclarified.

Kredittilsynet investigated someauditors who had been appointed toauditing companies attached to theFinance Credit system. The investiga-tions are designed to bring to lightany censurable conduct on theirpart.

Based on the “CommissionRecommendation of 15 November onquality assurance for the statutoryaudit in the European Union: mini-mum requirements”, Kredittilsynetformalised an agreement with theNorwegian Institute of PublicAccountants, effective as from 2003,on guidelines for coordinating con-trol of auditors. The guidelines entailthat all accountants with auditresponsibility are to be checked onfive-year cycles. This agreementensures that Norway broadly meetsall EU requirements for quality con-trol of auditors.

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Table 10: AUDITOR’S LICENCE WITHDRAWN1996 1997 1998 1999 2000 2001 2002

State authorised auditors 0 0 0 1 4 0 1Registered auditors 3 9 8 10 5 7 5Approved auditing firms - - - - - 2 8Total 3 9 8 11 9 9 14


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Authorisation of individualsand firmsThe Authorisation of ExternalAccountants Act regulates firms thatprovide accounting services forothers on a commercial basis.

Licensed external accountants needa higher qualification in economicsequivalent to at least two years’ full-time higher education and the equi-valent of two years’ relevant experi-ence. Running the authorisation

scheme is a major administrativetask. As of 31 December 2002 theregister of external accountantscomprised 6,201 entities, of which2,415 were individuals and 2,388were firms.

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Kredittilsynet’s tasks in relation to external accounting services comprise authorisation of individuals and firms inaccordance 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 theiractivities comply with laws and regulations and are conducted in an appropriate and satisfactory manner.

Table 11.1: POSITION – EXTERNAL ACCOUNTANTS31.12.2000 31.12.2001 31.12.2002 Authorised 2002

Authorised external accountants 5,544 5,856 6,201 464Authorised 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 accountingfirms with exemption or extended transitional period (35 in 2000, 11 in 2001 and 8 in 2002).

External accounting services

Table 11.2: NET INCREASE IN THE NUMBER OF NEW AUTHORISATIONS2000 2001 2002

Authorised external accountants 545 312 345Authorised external accounting firms 309 239 38


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There was a net increase in the num-ber of authorised external accoun-tants and authorised externalaccounting firms in 2002, showingthat the profession continues toattract a fairly large number of newentrants. While the industry still fea-tures a large number of small firms,amalgamations and chains haveemerged. This could explain the lownet increase in the number of autho-rised external accounting firms in2002.

RegulationsKredittilsynet reviewed the ExternalAccountants Act in 2001. Kredittil-synet recommended terminating theentire authorisation scheme, ortransferring it to a public agencyother than Kredittilsynet. As analternative Kredittilsynet recommend-ed simplifying its administrativetasks in relation to accountants.Kredittilsynet also recommended ter-minating the process of renewingauthorisation every fifth year, whichwill reduce the number of cases byabout 1,500 per year. The amendmentproposal was circulated for commentwith the closing date for submissionsset at 15 January 2002, and is underconsideration by the Ministry ofFinance.

Unlawful external accountingactivityKredittilsynet has noted that anappreciable number of accountants

are engaged in external accountingactivity without mandatory authori-sation as accountants. Kredittilsynetrequires such accountants to submitan account of their activities. Whereunlawful accounting activity isbrought to light, Kredittilsynet ordersits termination. In light of therecommendation to abolish thescheme for authorisation of externalaccountants, Kredittilsynet has beencautious in reporting unlawful exter-nal accounting activity to the police,although such action is considered inserious cases. One such case wasreferred to ØKOKRIM in 2002. Thisinvolved long-lasting unlawful activ-ity in which the person concernedhad evaded investigation byKredittilsynet. Unlawful externalaccounting activity is brought tolight by reports to Kredittilsynet,through processing licence applicati-ons from individuals and throughother investigations carried out byKredittilsynet. Reports to Kredittil-synet of unlawful activity numbered39 in 2002. Most of these reportscame from the tax authorities.

Supervisory activity in 2002Seventy-one licensed externalaccountants were examined in 2002,41 on the basis of on-site inspecti-ons. In most cases it was a matter offollowing up external accountantswho had previously been criticisedby Kredittilsynet or had been repor-ted to Kredittilsynet by the tax aut-

horities and other public agencies.Thirty-eight reports concerningexternal accountants were receivedin 2002 compared with 28 in 2001.Inspections based on geographicalselection were also carried out.

The primary aim of supervision is toensure that providers of externalaccounting services observe a mini-mum standard in relation to profes-sional conduct. Where law and regu-lations are not complied with, orprofessional conduct is regarded asunsatisfactory in other respects,Kredittilsynet may revoke an externalaccountant’s licence. At on-siteinspections Kredittilsynet examinedhow accountants organise their activ-ity in relation to Kredittilsynet’s guideline circular no. 12/2000, andwhether licensed accountants operatein conformity with central aspects ofthe accounting legislation and thetax legislation in general. Based onthe inspections carried out,Kredittilsynet’s main impression isthat external accountants’ operati-ons vary widely in quality, and thatin some areas material flaws seem tobe a common feature of the profes-sion.

Table 12: NUMBER OF SANCTIONS – AUTHORISED EXTERNAL ACCOUNTANTS2000 2001 2002

Withdrawal of licence 2 6 10Warning 11 14 7Withdrawal of licence – firms – – 1


High activity, but weakerearnings, in 2002In the first half of 2002 the housingmarket still featured high turnoverand high prices, especially in the larg-est towns. Despite this, 164 estateagencies reported negative operatingresults at mid-year. This is presumedto be due to the longer average timetaken to sell properties and to keenercompetition for clients resultingfrom over-establishment in someareas. In the autumn of 2002 themarket slowed appreciably, especiallyfor commercial properties and higher-priced residential segments, but alsoin the case of ordinary dwellings.

There were 528 licensed estateagency firms at the end of 2002.Seventy-nine new licences wereissued over the year, while 72 firmsceased their estate agency activity.Moreover, 55 housing cooperativesprovided estate agency services atyear-end, and 1,018 lawyers had furnished security to engage in estateagency.

Chains strengthen their positionRecent years have seen the estab-lishment of an increasing number ofchains with centralised functions,and estate agency chains nowaccount for two-thirds, or about 67per cent, of all property sales. Bankspredominate in the estate agencycontext, and accounted for about 40per cent of total transactions in2002. There is reason to believe thatbanks will seek, within the limits setby legislation, to expand their salesof banking and securities servicesthrough their estate agency operat-ions.

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


On-site inspectionKredittilsynet carried out 71 on-siteinspections of estate agency firms,lawyers engaged in estate agencyand housing cooperatives. Unlawfuland highly censurable circumstanceswere brought to light at two agenci-es. One, which had broken the rulesgoverning treatment of client fundsand employed negligent routines,lost its right to carry on estate agen-cy business, and its manager lost hislicence. In the other case the mana-gement failed in its duty to monitorthe broker in charge of the assign-ment in question. Warned byKredittilsynet that its right to carryon estate agency would be with-drawn, the firm handed in its licenceof its own accord. A further firm waswarned that its licence would bewithdrawn if the manager continuedhis negligent supervision of clientfunds. Several firms continue toattract censure due to unsatisfactoryroutines for documenting treatmentof client funds.

Equity capital situationThe tendency for declining earningsin the trade in 2002 necessitatedcloser monitoring of estate agencies’financial strength via extraordinaryreporting of accounting data. Sixtyagencies that were running an ope-rating deficit and whose equity capi-tal was below NOK 100,000 at mid-year were instructed to file suchreports as of 1 October to documentcontinued compliance with the law’srequirement as to positive equitycapital. More than 40 per cent ofthese agencies were still running anoperating deficit on the reportingdate, and several had to strengthentheir equity capital position byincreasing their share capital in orderto lawfully continue their estateagency business.

The estate agency industry’sreputePublic interest in the estate agencyindustry appears to have risen instep with the industry’s expansion.

Media coverage and comments fromthe consumer authorities were attimes highly critical, and signalsfrom the general public also indicatethat the trade is viewed with somescepticism. In 2002, as in 2001, themedia highlighted a number ofinstances of allegedly censurable cir-cumstances at estate agencies, cas-ting doubt on the industry’s integrity.For Kredittilsynet it is important todo its utmost to examine the moreserious allegations that come to lightvia the media and other channels. Inthis way Kredittilsynet can help toensure that property buyers receivecorrect information, which is import-ant for public confidence in theindustry.

To Kredittilsynet’s knowledge, badexperiences with the estate agencyindustry are rarely due to grossnegligence on the part of the agen-cies. Errors are, however, committedin the marketing of properties in theform of incomplete or misleading

47



property descriptions. Equally, agentsare not always sufficiently precise intheir verbal communication with cli-ents; information and statementsmay not be as objective, precise orjudicious as they should in light ofthe importance that buying or sellingproperty has for the individual. Theresult may be difficulties and irritati-on during the sale process, whichcan affect the industry’s repute.

Law amendmentsIn 2000 and 2001 Kredittilsynetrecommended the following lawamendments to the Ministry ofFinance:

• That properties located abroad should, with certain exceptions, be exempt from the provisions of the Estate Agency Act

• That fitness and propriety require-ments should be introduced for owners of estate agency firms

• That the ban on engaging in other business activity contained in

section 2–6 of the act should be extended to all employees of estate agency firms

• That the act should empower Kredittilsynet to issue regulations on the bidding process and on the manager’s duties and responsibili-ties

• That the rules governing the duty of the agency and its employees to furnish information to Kredittil-synet should be amended or more clearly defined

• That Kredittilsynet’s power to over-see firms that have had their estate agency licence withdrawn should be extended to persons hold-ing an estate agency licence. Parties that have handed in their licence voluntarily should also be subject to control and supervision.

Based on the above recommendat-ions, the Ministry of Finance tabled aBill that was dealt with by theParliament (Stortinget) in theautumn of 2002. The Bill did not

address the recommendations regard-ing brokerage of properties abroad orthe prohibition of other businessactivity for all estate agency employ-ees. The Parliament (Stortinget) pas-sed all the recommended amend-ments. The following amendments,not proposed by Kredittilsynet, werealso passed:

• The title “estate agent” was expli-citly protected, along with the title“state authorised estate agent”.

• Estate agents, lawyers who carry on estate agency, employees of estate agency firms and owners and members of a firm’s governing bodies who normally participate in the day-to-day business of the firm without being employed there, were absolutely prohibited from buying or selling properties through their own estate agency firm.

48



Where Kredittilsynet’s recommenda-tions regarding estate agency activi-ty abroad and the prohibition ofother business activity are concern-ed, the Ministry considers it approp-riate for these matters to be dealtwith in conjunction with a broad-based revision of the Estate AgencyAct. The Ministry of Finance hasannounced that a law commissionwill be appointed to this end.

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

200120001999199819971996199519941993199219911990

49


Chart 5: NUMBER OF PROPERTY TRANSACTIONS – ESTATE AGENCY

YEAR

NUM

BER

OF

PRO

PERT

Y TR

ANSA

CTIO

NS

27,721 27,30328,687

37,074

46,164

50,528

56,626

65,58763,270

73,034

86,886

93,352

Source: Kredittilsynet


New licensing system – scopeof Debt Collection Act widenedAs from 1 January 2002 the previousarrangement whereby ordinary debtcollection activity could be startedon the basis of a personal licencewas replaced by an arrangementrequiring the agency as such toapply for a licence. Since the lawnow regards businesses that purcha-se overdue debt for collection asdebt collection agencies under theDebt Collection Act, debt purchasebusinesses also need to apply for adebt collection licence as from 1January 2002. Whereas ordinary debt

collection business has to be headedby someone with a personal licence,the act specifically requires personseffectively in charge of collectingpurchased overdue debt to be ofgood character. Moreover, as previ-ously, regular debt collection agenci-es must maintain a positive equitycapital position and put up a guar-antee for their business. Agenciesoperating at the start of the yearwere given until year-end to applyfor an agency licence. Kredittilsynetis of the view that introducing fit-ness and propriety requirements forboard members, general managerand owners of debt collection agen-

cies is an appropriate way of ensur-ing that such business is run inaccordance with law and fair debtcollection practices. The requisitelaw amendment was dealt with byKredittilsynet and forwarded theMinistry of Justice by letter of 14January 2003.

At the end of 2002 there were 113ordinary debt collection agencies,seven of which were housing cooper-atives. Nine were new, while twelveagencies closed down during theyear. Eight debt purchase businesseswere registered at year-end. Forty-seven personal licences were issued.

50


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


On-site inspectionEight on-site inspections were carri-ed out at debt collection agencies in2002. Kredittilsynet aims to inspectall debt purchase businesses on-sitein 2003 to obtain an overview of andinsight into their activities, and willorganise the supervision of thisaspect of the industry on the basis ofthe experience gained.

Two personal debt collection licenceswere revoked in light of irregularitiescovered via reporting and inspection.In one case a licence holder at theagency in question had failed toensure that client funds were hand-led according to regulations: pay-ments from principals were used tocover the agency’s operating outlays.In the other, the licence was revokedbecause the holder had been barredfrom managing a business in theaftermath of bankruptcy, and wastherefore viewed as unfit to carry ondebt collection.

Finance Credit Norge AS’s debt collection licence was revoked in thewake of the collapse of the FinanceCredit system. The company wasunable to produce documentation toprove that its responsibility for clientfunds was consistent with the balan-ce on the client fund account.Finance Credit Norge AS also pur-chased debt for collection withouthaving applied for the requisitelicence, cf. transitional provisionsapplying until the end of 2002,referred to above. Since the companyhad carried on virtually no regulardebt collection activity, any loss ofclient funds traceable to debts thatFinance Credit Norge AS had collect-ed on behalf of creditors will proba-bly be covered by the mandatorysecurity put up by the company inorder to carry on such business. (Seealso p. 28)

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Product developmentProduct development needs closeattention if profitability in the industry is to be maintained. Theindustry’s perception is that if debtcollection agencies are to competesuccessfully in the longer term, theymust be able to offer a fairly widerange of additional services over andabove debt collection proper. Theyhave largely become claims admini-strators in the broad sense, and thebusiness sector and parts of thepublic sector appear increasingly tooutsource to collection agenciestasks related to invoicing, ledgermanagement and collection of over-due accounts. Factoring with or without a credit element is relevantin this context. Some conglomeratesestablish companies to operate allthe above activities to the maximumextent permitted by law. Anothercrucial factor for success in the debtcollection industry is electronic case-handling systems with the capacityto process large quantities of data.The accuracy and efficiency of thesesystems is presumed to be of keysignificance both for profitability andfor correct action vis-à-vis debtors.

Reduced feesOn 1 March 2002 the Governmentlowered the basic debt collection feefrom NOK 670 to NOK 520. Debt col-lection fees will no longer be tied tothe court fee. Instead the new col-lection fee of NOK 520 will be peg-ged to the consumer price index. Atthe same time the debt categorysubject to the lowest collection feewas extended from a maximum ofNOK 1,000 to a maximum of NOK1,250. This entails a substantial reve-nue fall for the industry, and it isunclear at present how it will affectthe current industry structure. Amedium-term consequence could beattrition in the form of closures andtakeovers, bringing further concen-tration in the debt collection industry.

Complaints – board set up tohandle complaints regardingdebt collection servicesKredittilsynet received 315 com-plaints referring to debt collectionagencies in 2002. Most complainantsalleged that collection action hadbeen initiated unlawfully since thedebt was in dispute or had beenpaid, or that the Debt CollectionAct’s notification provisions had notbeen complied with. In some casesnames had been confused and debtcollection action was initiatedagainst the wrong person. On occasi-on Kredittilsynet found cause to levelstrong criticism at debt collectionagencies for breach of good debtcollection practice, and ordered themto clean up deficient internal routi-nes to prevent a repeat.Kredittilsynet has the impressionthat many debtors feel that they areignored when trying to bring up theircase with the agency. Kredittilsynethas in some cases censured agenciesfor failing to respond to debtors.

As a result of amendments to theDebt Collection Act that lay the basisfor public authorisation of privatearrangements for resolving debt col-lection disputes, the Association ofNorwegian Debt Collection Agenciesand the Consumer Council formallyagreed to set up a board to deal withcomplaints regarding debt collection.The board goes into operation on 1April 2003. The above act empowersKredittilsynet to make the grantingof a debt collection licence conditio-nal upon joining a complaints boardarrangement.

52



0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

200120001999199819971996199519941993199219911990

53


Chart 6: NUMBER OF CASES RECEIVED BY AGENCIES

YEAR

NUM

BER

OF

CASE

S

892,009 907,478 921,092992,456 944,039

1,106,882

1,351,694

1,560,065

1,830,960

2,228,788

2,478,271

3,068,484

Source: Kredittilsynet


Draft legislation on measuresto prevent the laundering ofthe proceeds of crime andterrorist financing, alongwith international work inthis fieldIn 2002 the Ministry of Finance setup an internal working group to pre-pare draft legislation implementingthe revised money laundering direc-tive (Council Directive 2001/97/EC),and a number of international stan-dards in the field (in particular theFinancial Action Task Force onMoney Laundering (FATF)’s specialrecommendations on terrorist finan-cing). Kredittilsynet was representedin the working group. The group pre-sented a submission on the Bill onMeasures to Prevent the Launderingof the Proceeds of Crime andTerrorist Financing which had beencirculated for comments by theMinistry of Finance. The Bill substan-tially widens the range of personsand businesses coming under themoney laundering rules to include

lawyers, auditors, estate agents anddealers in valuable goods.Kredittilsynet’s submission supportedthe main content of the Bill. Itnonetheless pointed out that the Billshould more clearly reflect the largevolume of bank business transactedvia the Internet. Kredittilsynet alsorecommended that a further threegroups of businesses (debt collectionagencies, securities registers as wellas stock exchanges and authorisedmarket places) should come underthe rules, and that terminology asregards notification requirementsshould be clarified. Kredittilsynet didnot expect the Bill to widen itssphere of responsibility.

FATF is the leading internationalorganisation drawing up standards tocombat the laundering of proceedsof crime and terrorist financing. Theorganisation has 31 members, includ-ing Norway. The FATF has drawn up40 recommendations on moneylaundering, and eight special recom-

mendations on terrorist financing.The FATF is about to revise the 40recommendations. Kredittilsynet hasattended the organisation’s meetingsand worked on revising the recom-mendations.

ICT regulations New regulations on businesses’ useof information and communicationtechnology were drafted and circula-ted for comment in October 2002.The regulations aim to provide astructure more in line with changesthat have taken place in the usemade of information technology, andto provide further concretisation inindividual areas. The regulations aremore process-oriented than previ-ously and therefore in keeping withinternational standards in the field.

54


Other measures


55


Internal control regulationsAn amendment was passed toKredittilsynet’s internal control regu-lations requiring internal audits atall financial institutions, includinginvestment firms, with assets undermanagement for own and clients’account in excess of NOK 10 billion.The same applies to market places,settlement centres and securitiesregisters. The amendment is designedto further strengthen the instituti-ons’ internal control.

Appeals handling – Registerof Company Accounts inBrønnøysundKredittilsynet is the appeals body inrespect of penalties imposed by theRegister of Company Accounts forlate filing of company accounts. In2002 316 appeals were receivedcompared with 326 in 2001 and 186in 2000. The penalty was waivedentirely or in part in 115 of the cases(i.e. 36.5 per cent) compared with18.4 per cent in 2001.

Action plan for “A simpler Norway”Kredittilsynet suggested a number ofsimplifications in a letter to theMinistry of Finance. Most were actedon by the ministry and were incorpo-rated in action plans, while some arestill being considered by the ministry.Examples include: greater use ofelectronic reporting; lifting the ruleson reporting own-trading underchapter 2a of the securities tradingact; simplified reporting of securityput up for estate agency and debtcollection business; continued statis-tical cooperation between NorgesBank, Statistics Norway andKredittilsynet; amendments to audi-ting legislation to reduce reportingrequirements; handling of licenceapplication and delegation ofpowers; and revision of the arrange-ment for approving articles of asso-ciation in the banking, finance andinsurance fields.

Kredittilsynet also recommended theremoval of the public scheme forauthorisation of external accoun-tants or, alternatively, that amend-ments be made to the Authorisationof External Accountants Act to sim-plify Kredittilsynet’s administrativetasks in relation to accountants.


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, especiallywithin the European Union.

Kredittilsynet’s international activities

56


Growing need for globalcoordination and collaboration Recent events have driven home thegrowing need for coordination ofrules and supervisory practice on aglobal basis. The events of 11September 2001 led to closer coope-ration in combating money launde-ring and financial crime, especially inthe context of terrorist financing,while the Enron affair and otheraccounting scandals in the US focu-sed attention on the responsibilitiesof corporate management and therole of auditors. Steps have beentaken within the EU and on a widerlevel to harmonise rules on corporategovernance, and the effort to intro-duce international accounting stan-dards has grown in significance.

More countries opt forintegrated financial supervisionThe integrated supervision modelcontinues to gain ground as a meansof promoting effective and efficientsupervision of the financial industry.Several countries have amalgamatedtheir supervisory regimes for banking,insurance and the securities market,or are considering doing so. In 2002integrated supervision was establishedin Estonia, Germany and Austria,while steps are being taken to do thesame in Ireland and Belgium. Theintegrated supervisory authoritiesmeet annually to exchange experiencegained5.

Cooperation within the EEA

Focus on supervision and regula-tion within the EU/EEAThe EU has introduced a model inthe securities field based on theLamfalussy Report with a view toexpediting the creation of commonrules. Based on directives adopted bythe European Council andParliament, the European

Commission will, in conjunction withthe European Securities Committee(with finance ministries), establishrules to supplement the directives.Detailed guidelines and standards forpractising and monitoring complian-ce with these rules will be preparedby the Committee of EuropeanSecurities Regulators (CESR). TheEuropean Council has decided tointroduce a similar model in theareas of banking and insurance.

Should the new structure be imple-mented in the banking and insurancesectors, the existing system of EUcommittees and supervisory groupsin these areas will have to be modi-fied. The new committees and expertgroups are expected to require incre-ased resources and effort on the partof Kredittilsynet.

Supervision of banks and finan-cial institutionsThe Ministry of Finance andKredittilsynet alternate in represen-ting Norway at meetings of theBanking Advisory Committee (BAC).The BAC and its Technical Sub Group,whose meetings are attended byKredittilsynet, are responsible for thework done on the Basel Committee’snew capital adequacy standards.Kredittilsynet also attends meetingsof the liaison body Groupe deContact (GdC) together with bankingsupervisors from other EEA countries.Groupe de Contact is a forum wherecommon supervisory standards aredeveloped and information isexchanged on institutions and mar-ket players. In 2003 the committeestructure will be revised in keepingwith the Lamfalussy model, and anew banking supervision committeewill be established. Groupe deContact will continue in its role ofexpert group under the new commit-tee.

Alongside the multilateral cooperati-ve bodies, Kredittilsynet has bilateralcooperation agreements, orMemoranda of Understanding(MoUs), with the banking supervisoryauthorities in France, Luxembourg,the Netherlands, the United Kingdomand Germany.

Supervision of insurance businessThe Ministry of Finance andKredittilsynet alternate in represen-ting Norway at meetings of the EU’sInsurance Committee (IC).Kredittilsynet is also an observer atthe Conference of EU InsuranceSupervision Authorities which meetstwice yearly. In keeping with thedecision to adhere to the Lamfalussymodel in the insurance area, theconference will change its status tothat of a formal supervisory commit-tee. Its participants have concluded amultilateral cooperation protocolbased on the insurance directives, aswell as a separate cooperation agree-ment on supervision of insurancegroups carrying on cross-border acti-vities. Under the latter cooperationagreement, affected authorities haveset up a working group, currentlychaired by Kredittilsynet, to coordi-nate tasks related to supervision ofinsurance groups. The group is seek-ing cooperation agreements withsupervisory authorities outside theEEA.

Supervision of the securitiesmarket within the EEAIn 2002 Norwegian authorities gained experience with the new EUcommittee structure for developingrules for the securities market. TheMinistry of Finance representedNorway on the European SecuritiesCommittee, while Kredittilsynet pro-vided experts at some meetings.Kredittilsynet attends meetings ofCESR, the supervisory committeeestablished to formulate technicaldetails 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 andSweden. Latvia and Hungary have also recently merged their banking, securities, and insurance supervisors.


57


laboration. CESR acts as an advisorycommittee to the EuropeanCommission and the EuropeanSecurities Committee and works forconsistent implementation of com-munity law in member countries.Participating in CESR sub-groupswas resource-demanding forKredittilsynet in 2002 since it wasinvolved in several working groupsfocusing on standardising prospectu-ses, harmonising clearing and settle-ment procedures, and formulatingdetailed rules on insider trading andmarket manipulation. There werealso several meetings of CESR’sforum for information exchange onmarket surveillance (CESR-pol), andfor coordination of accounting andreporting rules (CESR-fin).

Collaboration on supervisionacross sectoral dividesAlthough there is a growing tenden-cy to integrate supervisory regimes,coordination is still needed betweensupervisory authorities that have nottaken this step. Kredittilsynet is amember of the Mixed TechnicalGroup, an expert group under theEuropean Commission which drawsup recommendations for regulationof financial conglomerates. A newdirective on supervision of financialconglomerates was adopted in 2002,prompting creation of a separatecommittee to develop rules in thissphere.

Closer cooperation on accountingand auditingKredittilsynet participates in the EU’selaboration of accounting rules andstandards for auditors within theEEA, and attends meetings of the EUAccounting Contact Committee andthe EU Committee on Auditing. In2002 the EU adopted a regulationrequiring EU states to introduceinternational accounting standardsdeveloped by the InternationalAccounting Standards Board. A newbody – the Accounting RegulatoryCommittee, responsible for assessingand authorising new accountingstandards – was established in pur-suance of the regulation. Norway isinvited to attend the committee’smeetings in an observer capacity.

EU enlargementSeveral peer reviews have been carri-ed out ahead of the planned enlarge-ment of the Union. Peer reviews byteams of EU experts coordinated bythe EU Commission examine thestandard of financial legislation andfinancial industry supervision inapplicant countries. Kredittilsynet participated in twosuch reviews in 2001, and forms partof the expert group that started areview of Romania in 2002.

Collaboration within EFTAKredittilsynet attends meetings ofEFTA’s Working Group on FinancialServices, a working group under

EFTA’s sub-committee II (services andcapital) which prepares cases in thefinancial sector, evaluates directivesto be included in the EEA Agreementand updates the EFTA states on theactivities of EU agencies.

Collaboration with the EuropeanCentral Bank (ECB)There is an increasing need for coor-dination between supervisory autho-rities and central banks to ensurefinancial stability in Europe andworldwide. In conjunction withNorges Bank, Kredittilsynet has esta-blished a pattern of biannual mee-tings with the European CentralBank on financial market issues. Twomeetings were held with the ECB in2002.

Nordic supervisory cooperationNordic cooperation remains import-ant to Kredittilsynet despite the existence of numerous cooperationfora at the global and EEA level. TheNordic financial supervisors havedrawn up an agreement on supervi-sory collaboration. In 2002Kredittilsynet was host to the annualmeeting of Nordic financial supervi-sors, this time held in Bergen inJune. Kredittilsynet regularly meetsits Nordic counterparts to collabora-te on the supervision of Nordicfinancial conglomerates. There wasan extensive regime of meetings andinformation exchange in 2002.


58


Nordic meetings

EU/EEA meetings

0

20

40

60

80

100

120

2002200120001999199819971996

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

4854

48

5762

69

104

9 128

14 16

3845


59


Kredittilsynet’s part in globalsupervisory collaboration

Supervision of the securitiesmarketKredittilsynet is a member of theInternational Organization ofSecurities Commissions (IOSCO) andhas acceded to a number of resoluti-ons adopted by IOSCO. Kredittilsynetalso attends the biannual meetingsof IOSCO’s European RegionalCommittee, and participates in aworking group under the technicalcommittee which deals with enfor-cement of IOSCO resolutions andcollaborates on issues related to sur-veillance, enquiries, investigation andprosecution of criminal offences.Under an international collaborationagreement (MoU) drawn up byIOSCO, supervisors have to meet cer-tain criteria to qualify for member-ship of the organisation. Kredittil-synet has one representative on thecommittee charged with processingapplications for membership.Kredittilsynet is also a member ofthe Enlarged Contact Group forSupervisors of Collective InvestmentFunds which meets once a year.

Supervision of the insuranceindustryKredittilsynet is a member of theInternational Association ofInsurance Supervisors (IAIS). IAIS’sgeneral meeting adopted internatio-nal standards for reinsurance super-vision at its ninth annual conferencein Santiago, Chile. The IAIS is also inthe process of revising its InsuranceCore Principles, and is developingstandards for supervision of insuran-ce activities on the Internet. At theabove conference Kredittilsynet’sDirector General, Bjørn SkogstadAamo, was elected to the IAIS’sExecutive Committee. Kredittilsynetis also represented on several IAISsub-committees as well as the tech-

nical committee, which has overar-ching responsibility for standards forsupervision and regulation of theinsurance sector.

Supervision of banks and finan-cial institutionsNo global forum on a par withIOSCO and IAIS exists for bankingsupervision. The Basel Committee onBanking Supervision under the Bankfor International Settlements (BIS) isresponsible for coordinating globalcooperation on banking supervision.6

Kredittilsynet attended theInternational Conference of BankingSupervisors (ICBS) held by the BaselCommittee every second year.Kredittilsynet receives relevant docu-ments from the Committee and isinvited to comment on them, and toattend some of the Committee’sactivities. The Basel Committee hasfor some time worked on revising theinternational rules for calculatingbanks’ capital adequacy, cf. page 36.

Cooperation on financial stabilityand macroeconomic surveillanceDevelopments in financial marketshave led to closer international col-laboration on financial stability andmacroeconomic surveillance.Kredittilsynet is in regular contactwith the European Central Bank andthe International Monetary Fund(IMF). It also attends the meetings ofthe OECD Capital MarketsCommittee and Insurance Committeeas well as meetings of the UN-coor-dinated Project Link, a macroecono-mic analysis centre. Kredittilsynethosted a seminar on financial crisesin 2002 which drew internationalspeakers and participants, cf. page26.

Money launderingAs part of the fight against moneylaundering, Kredittilsynet attendedthe meetings of the Financial ActionTask Force on Money Laundering(FATF) which develops internationalstandards for anti-money-launderingmeasures. In the period since 11September 2001 the FATF has alsorecommended measures to combatterrorist financing. This collaborationwas intensified in 2002, and numer-ous meetings were held.Kredittilsynet participated in anexpert group that evaluatedBulgaria’s follow-up of FATF recom-mendations, and figures on the UNlist of experts that can be contactedby countries needing help to developrules and implement counter-measures against money laundering.

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.


60


Banking/finance ICBS (International Conference of Banking Supervisors)OECD’s Financial Markets Committee BAC (EU’s Banking Advisory Committee)GdC (Groupe de Contact) Nordic supervisory meetings

InsuranceIAIS (International Association of Insurance Supervisors)OECD’s Insurance Committee EU’s Insurance Committee Conference of EU/EEA Insurance Supervisory AuthoritiesConference of European Insurance Supervisory Services Nordic supervisory meetingsNordic-Baltic supervisory meetings

SecuritiesIOSCO (The International Organization of Securities Commissions)ECG (Enlarged Contact Group on Supervision of Collective Investment Funds) ESC (European Securities Committee)CESR (Committee of European Securities Regulators)Nordic meetings

Accounting and auditing ARC (Accounting Regulatory Committee)EU’s Accounting Contact CommitteeEU Committee on Auditing Nordic meetings

Money launderingFATF (Financial Action Task Force on Money Laundering)EU’s Contact Committee on Money LaunderingNordic meetings

EFTAEFTA Working Group on Financial ServicesEFTA Working Group on Company Law

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


61

Why regulate and supervise the financial system?

Financial market stability has received a great deal of attention inrecent years. Many countries, including most of the Nordic ones,have experienced banking crises. It has become clear to all thatwidespread problems in the financial sector can entail heavy costsfor society and for the consumer, and that a properly functioningfinancial market with strong financial institutions is a preconditionfor a sound economy. Stability and confidence in the financial sys-tem are therefore a central aim of regulation and supervision.

While appropriate regulation and effective supervision of bankingand other financial activity are at centre-stage, regulation andsupervision of securities markets and the insurance business arealso important for securing stability and confidence. Throughsupervision of banks and other credit institutions, investment firmsand insurance companies, a watch is kept on institutions’ compli-ance with the rules and on institutions’ management and control oftheir business and risk. Regulation and supervision of auditors and

external accountants is designed to ensure that the informationprovided by the institutions is correct.

The second main goal of regulation and supervision is to protectconsumers and other users of financial services. Much of this pro-tection is provided through regulation and supervision of the sol-vency of financial institutions that manage their clients’ assets –whether in the form of bank deposits, insurance policies or invest-ments in securities – and various types of public guarantee sche-mes, such as deposit guarantee schemes.

A very important aspect of consumer protection comprises regulati-on and supervision of intermediary functions performed by invest-ment firms, management companies for securities funds, insurancebrokers, estate agents, debt collection agencies etc. Here the objectiveis to prevent misuse of client assets along with other behaviourthat promotes the interests of an intermediary at the expense ofuser interests.



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The Banking, Insurance and Securities Commission of Norway

KredittilsynetØstensjøveien 43P.O.Box 100 BrynN-0611 OsloNorway

Tel. +47 22 93 98 00Fax +47 22 63 02 [email protected]


Documents

Annual Report 2002 - Universitetet i Bergen · Vesta Forsikring sold off by Nordea Group Vesta Forsikring AS was a non-life insurance company and the parent company in the Norwegian