FI’s 2016 Annual report

A year of resolution

The past year was not only my first full year at FI, it was also FI's 25th anniversary. FI is quite young if you compare it to many other authorities, but it has still spent a quarter of a century in an area that has undergone massive development, in particular when it comes to the technology used to produce and distribute financial services. A few financial crises have also passed and, in particular in the wake of the most recent crisis, the fundamental rules on the financial markets changed.

Luckily, 2016 featured more discussions about technological and structural changes than financial crises. The major financial firms have begun to review their business models given the new regulations and new challenges, and new firms are entering the market, such as the "fintech" companies, that are hoping to grab their share of the market for financial services, for example via automated investment advice. These changes present both opportunities and risks for we consumers, who are buying financial services, but they also present challenges for regulation-issuing bodies and supervisory authorities.

For FI, 2016 marked the year that we successfully reached a resolution in a number of important issues. For example, the regulations regarding amortisation requirements for new mortgages went into force at the beginning of the summer. It is now our job to monitor and analyse the effects of the requirement, which affect the day-to-day finances of many Swedish households and thus even the economy at large.

The new Solvency II regulation for the insurance industry went into effect after almost ten years of preparation within the EU. The first reports from the new regulations showed that all companies met the solvency capital requirement. Solvency II does not include occupational pension providers, which meant that FI needed to review its traffic-light model, one of our most important supervisory tools for the insurance sector. Following an analysis and discussion, FI decided not to change the model.

FI does intend, however, to gather more information from insurance firms to ensure that they have control of their risks. Along the same lines, FI focused on the effects of the low interest rates on insurance undertakings. Stress tests and other indicators show good resilience, but these issues will require attention even in the future, given that interest rates may continue to stay at low levels.

Sweden has increasingly become the regional centre for banking and financing activities in the Nordic region. In 2016, Nordea started a process to change its subsidiaries in Denmark, Finland and Norway into branches of the Swedish bank. This change required authority decisions from all of the involved countries. The decision in Sweden lay under the purview of FI, which granted Nordea authorisation to continue. The other countries granted their authorisation as well, and the change was implemented with the start of the new year.
FI's decision was based on the fact that Nordea already had centralised operations that integrated many of the company's functions and systems. The parent bank and subsidiary banks were thus already closely interconnected from a financial operations point of view. A default in one part of the Group would thus entail a considerable risk for default in the other parts of the Group. Branchification allows the legal structure to better agree with the actual control within the bank, thus reducing complexity, which in the long run should reduce operational risk.

However, there are still a number of challenges facing both FI and Nordea. FI must take on greater supervisory authority, which requires more resources, and Nordea needs to reorganise its operations to match the new legal structure.

Every five years the International Monetary Fund (IMF) reviews the regulations, supervision, etc., of the Swedish financial system to ensure that they live up to international guidelines. It was time for this review in 2016. The project was huge, and a rather large number of working hours were spent answering IMF's questions and commenting on their opinions. Both Sweden and FI did well in the final report, even if IMF had quite a few opinions. For example, IMF stated − like it has done during previous visits − that FI needs more resources for supervision and that it needs a clearer mandate with regard to macroprudential supervision.

New market abuse regulations were also introduced in 2016. These new regulations not only introduce new requirements but also cast a wider net, for example with regard to who is considered a related party and who must report securities transactions to FI. New last year was also FI's more investigative role. This means that we must develop new ways of working, and expand our cooperation with the Swedish Economic Crime Authority. An important assignment in 2017 will also be to provide additional information about the changes that will result from this regulation.

I think that we already today communicate a lot with the market, but the demand for information from us continues to be high. FI needs to have clear, broad communication with the market so more people understand our assignment and our role. A dialogue with the industry is an important part of this assignment. In 2016, for example, we visited and spoke at roughly 70 external events. We also held 14 FI Forums about new regulations and FI's position on various matters, including everything from detailed information about reporting in the insurance industry to what is happening in the fintech sector. In the future, we will communicate more about the observations we make during our supervision and have more of a direct dialogue with the firms' management teams.

As a result of new assignments, FI has become a larger and more complex organisation. We need to continuously consider how we best can organise the operations so we are using our resources well. We must become even better at working as an integrated authority and utilise the authority's aggregate competence in our various working procedures. In this way, we will produce better regulations and conduct more supervision from the same amount of work.

Another guiding principle in our work is to take an analytical approach to everything we do. This applies to the analysis of macroprudential threats to stability in the economy, the capital requirements must be placed on banks to achieve financial stability and how we work to achieve a high level of consumer protection and safeguard the integrity of the securities markets through effective market supervision. We are publishing some of these analyses in individual reports under the FI Analysis series. For example, in 2016 we wrote about the effects of a leverage ratio requirement and a debt-to-income ratio as well as vulnerability indicators in the insurance sector.

As part of my job at FI, I spend most of my days with different experts. Since FI is a knowledge organisation, many of our employees are attractive in the workforce and particularly in the financial market. As a result of this, FI has a high employee turnover rate. We will continue to work to make FI a more attractive employer. We should be a workplace that not only offers junior employees a first step in their career but also takes advantage of senior employee's competence. I want employees to be able to develop their competence and feel that their skills are valued within FI. This means making it possible to pursue a career at FI as either a manager or a specialist, but it is just as important to ensure that everyone working at FI is proud that they are able to contribute and make a difference at one of Sweden's most important authorities.

Establishing the playing rules for the financial sector and making sure these rules are followed is truly an important task. FI affects how the economy and the financial sector develop in the short-term and the long-term, as well as the conditions for individual consumers to manage their personal finances and their financial security.

The coming year will be an exciting one that will probably be influenced by Brexit, economic policy measures in Europe and the new presidency in the USA. New political conditions also mean greater uncertainty about the development of both the economy and the financial markets. The financial system is global and what is happening in London and New York is therefore important for Sweden. These developments must be managed at the same time as large banks and insurance companies, low interest rates and high indebtedness in the housing sector require attention from FI at home.

The coming year at FI promises to be just as rich and challenging as 2016. My employees and I promise to continue to do our best to reach our goals.

Erik Thedéen
Director General

Year in Brief

JANUARY
Solvency II regulations enter into force after many years of preparation.
Start of FI's 25th anniversary year.

FEBRUARY
FI report advocates a ban on commissions.
Supervision report on banks and credit market companies.

MARCH
Memorandum on new methods for banks' risk weights and capital requirements.
Report with the Swedish National Economic Crimes Bureau on false invoicing.
FI and the Center for Asymmetric Threat Studies publish a report on the financing of terrorism.
Report on climate changes and financial stability.
Supervision report of the Swedish securities market.
FI raises the counter-cyclical capital buffer.
Brochures about money laundering for currency exchangers made available in Swedish, English, Arabic and Persian.

APRIL
Annual mortgage report.
FI presents new rules regarding amortisation requirements for mortgages.

MAY
Presentation of the annual supervision report on consumer protection.
FI grants Nordea authorisation to restructure its Nordic subsidiaries into branches.
Supervision report on insurance undertakings.
First Stability Report of the year.
FI Analysis on the macroeconomic effects of a debt-to-income ratio.

JUNE
Referendum on Brexit – advance preparation and follow-up.
New rules for market abuse.
Amortisation requirements go into effect.

JULY
Stress tests from EBA, shows that Swedish banks are resilient.

AUGUST
Educational initiative on personal finances for new residents in Sweden.
Decisions on stress test methodology to set the capital planning buffer.

SEPTEMBER
FI warns consumers about dishonest firms.
Categorisation of Swedish credit institutions for 2017.
FI Analysis on vulnerability indicators within the insurance sector.
FI concludes total risk and capital assessments for the four major banks.

OCTOBER
Proposed new traffic-light model is submitted for consultation.

NOVEMBER
Two reports on sustainability and the financial market: one report on the role of financial supervision and one report on the sustainability work of financial firms.
International award ceremony for educational initiatives related to personal finances hosted by Sweden/FI.
FI Analysis on how the leverage ratio as a minimum requirement reduces banks' capital buffers.

DECEMBER
Second Stability Report of the year.
FI submits for consultation a proposed method for managing flowback risks in the capital adequacy regulations.
European stress tests show that Swedish insurance undertakings are well-equipped both prior to and after stressed scenarios.
Roundtable discussions with fintech firms.
New consensus within the Financial Stability Council regarding forms of collaboration related to financial stability and crisis management.
FI publishes information that the traffic-light model will not be changed.