After years of debate and deliberation, the Finnish government has decided that the supervisory authorities for the financial and insurance sectors will merge. Preparations to establish a new structure, which will be up and running by January 2009, are already under way. The merger is good news for the pensions industry, which has been critical of the present insurance supervisory authority.

“I know many who have been critical about the lack of understanding, particularly of new assets, of the present supervisory authority,” says Matti Leppälä, director at Tela, the Finnish Pension Alliance. “There have been different interpretations of investments from the financial and insurance supervisors, which has created frustration. Some see the banking sector’s supervision as more up-to-date.”

Ilmarinen’s chief investment officer Jussi Laitinen also says there have been problems. “The authority has had a hard time keeping up with developments in the financial market, in particular with regard to market risk and technical development. A larger organisation with more resources will have a better chance of keeping up with any changes.”

Advantages of the merger

Cost efficiency, more resources and access to better staff are seen as the main advantages of the merger. “Gathering the competency for the supervision of market and financial risk in one place is a good thing, especially with Finland being such a small country,” says Mr Laitinen. “A merger will also make it a more attractive place to work and enable the authority to get better access to good staff.”

The Ministry of Finance and the Ministry of Social Affairs and Health appointed a working group in June to draft a proposal for how the new supervisory organisation will be organised. The government’s main reasons for a merger were the challenges from changing and increasing risks as well as new solvency requirements and new international accounting standards.

It is already decided that the authority will operate in connection with the Bank of Finland, but details of the organisation are yet to be finalised.

“The main issues are what synergies can be found between the two structures, to decide on the organisation and size of the authority and to establish the legal powers of the new authority, which are not identical at the moment,” says Erkki Sarsa, secretary of the working group and senior controller at the ministry of finance. The working group, chaired by minister and former CEO of OKO Bank Group Antti Tanskanen, is assigned to make the authority as effective, efficient, impartial and independent as possible.

Ambitious timetable

The working group is aiming to have its proposals finished by the end of January and made public in early February, although Mr Sarsa admits this is ‘ambitious.’ After a public consultation, the legislative proposals will be handed over to the parliament in April with the aim of having the new legislation in place by September.

The role and position of pensions insurance is the most difficult part to deal with, according to Tela’s Mr Leppälä. It is also not entirely clear what role the ministry of social affairs and health, which currently has responsibility for the pension insurance sector, will play.

“We want the legislation for the two sectors to remain the responsibility of the two different ministries,” says Satu Huber, managing director for the Federation of Finnish Financial Services (FK).

A number of proposals to merge the supervisory authorities have been put forward over the past 10 years. The reason why nothing has been decided for so long has been put down to a lack of political will. Other Nordic countries have already had a joint supervisory authority for their financial market and the insurance and pensions industry for a number of years.

Changing products

“Changing the structure for the supervisory authority is also related to the changes in investments. The financial products are very different today from what they were 10 years ago,” says Mr Leppälä. The new investment and solvency regulations, brought in early this year, have also enabled funds to take on more alternatives and equities.

Ms Huber at FK welcomes the merger. She thinks there will definitely be synergies from the move, especially with the changes in investments and the larger non-domestic allocation.

“The opinion from the industry has been that the supervisory authorities should merge and that having separate authorities is a waste of resources,” she says.

But not everyone has always been in favour of a merger and there have been concerns. “There has been some uncertainty about how any problems within the banking sector would contaminate the insurance sector,” Mr Leppälä says.

Another fear, according to Ilmarinen’s Mr Laitinen, has been how the social aspect of pension firms would be taken into account.

But Mr Leppälä adds: “The view of the industry has changed. There is now a new generation of leaders, who perhaps look at matters differently.”

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