The sector’s interest calls for
moderation in regulation and taxation
The financial sector is one of the most regulated and supervised sectors – as it should be. Trust is the key productive factor in the sector, and trust can be enhanced with appropriate regulation and supervision.
Most of the regulation affecting the Finnish financial sector comes from the EU. The sector’s interest can be most effectively represented at the source of policymaking, and that is why Finance Finland (FFI) focuses especially on EU-level lobbying.
The EU has several financial sector reforms on its agenda. The Commission’s digital strategy contains significant new regulatory proposals that have direct relevance for the sector. With responsible utilisation of the digital economy, the sector can provide better and more affordable services for the society. In our lobbying we want to emphasise that the new regulation in the European Digital Strategy must not stand in the way of new business models, but rather enable them.
Regulatory projects on sustainable finance are one of the most important elements on the EU’s agenda. Money has the potential to steer activities towards a greener and more sustainable future. FFI supports the goals of sustainable finance but notes that the markets must retain their flexibility to enable different models of sustainable finance. Because regulation has long-term impact on investment, it must be carefully prepared and based on adequate impact assessment.
Strong effort is being made to prevent money laundering both nationally and in the EU. We actively promote better information exchange between the sector and the authorities. Financial sector entities must be given the right to exchange information on suspicious transactions, and legislation needs to become clearer and simpler so that customer relationships do not needlessly become complicated.
Risk sharing is increasing in the banking union – and also making its way into the insurance sector
The banking union has been in operation since 2014, and its development continues. The Finnish financial sector supports the aims of the banking union: increasing stability in the financial markets and creating a level playing field. Expanding risk sharing in the banking union has been discussed in the EU, but FFI firmly believes that risk reduction should come first. Every member state’s own banking system and every individual bank must reach a healthy financial situation before risk sharing can be increased with new mechanisms.
The Finnish Government has stated that the completion of the banking union must be based on the extensive implementation of the bail-in principle. The costs to taxpayers should be minimised in the event of a banking crisis.
Risk sharing is trying to make its way over to the insurance sector as well. The EU has reopened discussions on the necessity of an insurance guarantee schemes (IGS) directive. Finland took a critical stance to this idea the last time it was discussed in 2015.
The directive could force Finland to make changes to the IGSs of statutory non-life insurance policies, especially to those that cover statutory workers’ compensation insurance. The schemes currently provide a claimant with full cover also when the policy is from a foreign insurance company.
Funding an IGS in the concentrated Finnish life insurance market can only be possible with the help of taxpayers. The bankruptcy of a large or even medium life insurer could therefore endanger other life insurers and thus cause instability in the national market.
The EU agenda also includes the review of insurers’ solvency regulation, i.e. Solvency II. We hold the view that its risk-based approach must be preserved, and the principle of proportionality must be defined in more detail. The review must not result in unnecessarily stricter solvency regulations, which could hamper the promotion of sustainable and long-term finance.
Predictability of taxation is even more important
Tax policies must be predictable. A predictable operating environment increases companies’ confidence to engage in economic activity in Finland. Going back and forth between policies in corporate and investment taxes must be avoided. Taxation must be neutral as well – for example, different forms of investment must be taxed equally. Taxation must support private ownership and wealth creation as well as citizens’ capacity to prepare financially for old age. Income disparities are moderate in Finland, and tax debate should not be adversarial.
Taxation must be as clear and simple as possible. Several overlapping taxes on the same activities must be avoided, because they blur the picture of a company’s overall tax burden. Finland must remain an attractive target for international capital, and we should not quickly dismiss the effect of taxes in global markets. This will become even more important once the COVID-19 pandemic is over.
Financial transaction tax could hit pension assets
The financial transaction tax (FTT) was proposed in the aftermath of the financial crisis at the turn of the millennium. The topic has now resurfaced in discussions in the EU. While the FTT would be a source of funding for the EU, Finland would gain no direct fiscal benefit from it. According to our estimates, the tax would reduce the volume of several financial instruments and thereby weaken market liquidity. It could also reduce the value of domestic securities.
FFI opposes the financial transaction tax, because it would make the countries that do implement the tax less attractive for international market participants and investors. This would drive trade away from the EU.
Moreover, the FTT would inevitably affect the pension system by reducing the growth of assets therein. This would happen even if the pension funds themselves were not included in the scope of the FTT. Having to further raise insurance premiums is in no way desirable for our pension system.
Financial sector has not required taxpayer support
The Finnish financial sector faced the COVID-19 pandemic from a stable financial standpoint and was able to support its customers in many different ways. Together with our member companies, we have worked throughout the pandemic in close cooperation with the government and authorities. The healthy business operations of banks, insurance companies and employee pension insurers combined with post financial crisis regulation have enabled the sector to do its part in carrying the Finnish society over the pandemic.
Finnish banks have not needed to resort to taxpayer money during financial crises. The sector has operated responsibly and maintained its stability in the ebb and flow of the global economy.
The financial sector can continue to efficiently provide financing, insurance cover and investment services to companies and households as long as it is not weighed down by new regulatory burden. This is especially important now as Finland is striving to enter a period of new growth and prosperity as soon as the coronavirus pandemic is over.
We now need to avoid imposing new capital requirements or other financial burdens on financial sector companies. The Finnish financial sector has long been one of Finland’s most significant taxpayers. Currently the financial sector’s annual tax footprint equals the costs of the country’s entire transportation network.
Moderation is now required especially when it comes to the implementation of Basel III, which is discussed in the EU this year. Basel III threatens to raise banks’ capital requirements substantially: the Finnish Financial Supervisory Authority (FIN-FSA) estimates these requirements in Finland will rise by 15–20% on average. New regulation must be implemented in a way that takes the special characteristics of EU’s financial markets into account. The capital requirements should genuinely reflect risks, and their growth must be kept in check.
Over-indebtedness must be curbed and housing finance promoted
The over-indebtedness of households is a growing concern. Improving Finns’ financial literacy at all levels of education is key to tackling excessive debt. For many years, FFI has been lobbying for a national strategy for financial literacy, and excellent progress was finally made during this parliamentary term. Under the lead of the Bank of Finland, the strategy was completed in January 2021 and now awaits practical implementation. The financial sector wants to take an active role in improving citizens’ financial skills. Another way to mitigate over-indebtedness is a positive credit register.
This year, the Finnish government will be discussing a set of macroprudential proposals, which will affect mortgage legislation, for example. FFI takes a critical stance towards any measures that weaken banks’ lending capacity and the mobility of workforce. The proposed limit on the loan-to-income ratio should take first-time home buyers better into account.
FFI has also issued joint comments on the macroprudential proposals with the largest Finnish employee associations. These include the Central Organisation of Finnish Trade Unions (SAK), the Confederation of Unions for Professional and Managerial Staff in Finland (Akava), and the Finnish Confederation of Professionals (STTK). A joint plea was made to the Finnish government to reassess the legislative proposals on housing loans with the new context of the coronavirus pandemic. A smoothly functioning housing market is one of the requirements for revitalised economic growth, as it enables people to relocate to areas where jobs are available.
Employee pension system must be preserved – possible merging must not cause additional costs to the private sector
Finland has a unique statutory employee pension insurance system, which must be preserved. Its decentralised model of implementation must be kept in place, and its regulation must remain in national control even if the EU strengthens its social dimension.
The Ministry of Social Affairs and Heath is also considering further development of the pension system for self-employed persons (YEL) to better serve the needs of modern working life. FFI holds it important that employee pension insurance companies, as the providers of this type of insurance, continue to enjoy a high level of trust among their customers, and we actively work towards this goal.
In the context of statutory insurance lines, employee pension and non-life insurance companies provide a public service, and therefore fall under the scope of regulation of public administration. The Ministry of Social Affairs and Heath is currently assessing which duties related to statutory insurances can be legally outsourced.
The Ministry of Social Affairs and Health has initiated projects concerning automated decision-making and reform of the Act on the Openness of Government Activities (621/1999). FFI emphasises that the special characteristics of insurance business must be appropriately taken into account when deciding on regulation mainly targeted for the authorities.
Reform of personal identity codes must be implemented in a cost-efficient manner
The reform of the Finnish personal identity codes is a significant project for banks, insurance companies and employee pension insurers. Financial sector companies are in a key position when it comes to personal identification: more than 90% of strong authentication, for example, is conducted using online banking credentials. We appreciate the Finnish government involving financial sector experts in this project.
We agree that the new personal identity codes should not include gender information, but the reform should be implemented in a cost-efficient manner that does not require existing codes to be reassigned. In other words, the old codes would retain their format but the encoded gender information would no longer be parsed.
FFI appreciates the government’s decision to carry out the reform in parts. The sufficiency of available unique personal identity codes and the issue of gender neutrality can be tackled as separate problems, and therefore a comprehensive single reform is not necessary and should not be planned.
Finance Finland’s mission is to build an operating environment where our members can responsibly create well-being in the society.