Strategic objectives of the Estonian Financial Supervision Authority for 2007-2010
GROWTH IN THE PROPORTION OF PREVENTIVE SUPERVISORY METHODS
1.1. Cross-border supervisory capability
It is important that we sign and substantiate agreements with other supervisory bodies about cross-border financial institutions whose market share is of systemic importance in Estonia or who operate under the supervision of the Financial Supervision Authority in the home country. Cooperation agreements are generally signed within the framework of the group-based Memorandum of Understanding (MoU)
Over 90% of the Estonian financial sector consists of subsidiaries or branches of EU financial institutions, and there is an increasing trend (primarily due to the insurance sector) of establishing European trading companies. Therefore, the objective of the activities of the Financial Supervision Authority is to cooperate with the supervisory authorities of other countries and actively participate in designing supervisory practice in the European Union. In situations where risks are taken in other countries on the basis of capital located in Estonia, it is especially necessary to work out an efficient supervision framework, which could assist in adequately analysing the risks taken in other countries. The objective is to hold regular meetings with the financial supervision authorities from other Nordic and Baltic countries with the intermediate target of integrating the Financial Supervision Authority into the risk appraisal process of financial groups in these countries.
In situations where the majority of essential decisions concerning the development of the Estonian banking sector are made outside Estonia, the Financial Supervision Authority must possess information about the financial situation in the home country of the relevant banks. Also, the Financial Supervision Authority is obliged to forward information to the financial supervision authorities in the relevant countries of origin concerning risks and developments in Estonia. Thus, it is essential to try to restrict the establishment of disguised subsidiaries that according to the law are subsidiaries, while the management and decision-making is implemented outside Estonia, and the supervision responsibility remains inside Estonia.
It is essential to make group-based cooperation agreements with foreign supervision authorities (primarily the Swedish financial authority) for the supervision of banking groups of systemic importance in the context of the Estonian banking market. The operations fixed in the cooperation agreements must ensure a better exchange of information than before and provide mutual obligations concerning not only forwarding information but also further procedures in foreign supervision.
1.2. Capability to settle crisis situations
In cooperation with the Ministry of Finance and the Bank of Estonia, it is important to develop a domestic crisis management cooperation agreement; specifying the cooperation procedures possible within the framework of international MoU-s, developing case-based guidelines for the treatment of cases that may have a serious impact on the financial market.
The Estonian banking sector is very concentrated and the large banks operating in the market constitute supervision objects of systemic importance. Accordingly, it is essential to have a domestic crisis management framework in which all parties recognise their roles and the domestic legal environment also ensures fulfilment of these roles. The Financial Supervision Authority still considers the domestic cooperation agreement important as one of the means for developing a legal environment that facilitates crisis management. In the first stage, it is necessary to sign a cooperation agreement in the field of banking and in the following stages expand the corresponding cooperation agreement to cover the insurance sector and securities brokerage.
Because of the current situation where banking groups are primarily international and increasingly operate according to business models with a different legal structure and different business lines, there is an increasing need to agree on cross-border cooperation procedures for crisis management.
1.3. The competence of the employees of the Financial Supervision Authority to implement risk-based supervision
We recognise the need to work out a system to map training needs and carry out training in order to implement risk-based supervision.
Continuous change in supervision regulations and paradigms means increasing requirements for professional and vocational skills. Thus, for example, supervision principles are changing because of the introduction of Basel2/CAD3.The norm-based supervision model is being increasingly replaced by a principle-based supervision model. The latter means a more individual subject-based approach in which assessments and requirements are designed separately for every financial institution according to its risk profile, specialist activities, etc. Changes in the supervision environment can bring about a larger number of disputable decisions than before. In order to be ready to find comprehensive arguments for positions taken and ensure the quality of administrative decisions, the planning and implementation of a more systematic and target-oriented training regime is necessary.
1.4. Application of IT facilities for supervision
IT solutions should be introduced to decrease the workload and personnel risks in the supervisory process. Core projects include ATMOS and RAS. ATMOS - the automated analysis module for detecting market abuse cases - is being developed on the basis of the information system on security transactions and information collected about parties to deals. RAS - the risk assessment model - uses standardised input parameters to assess the risk of subjects.
Systems similar to ATMOS are in use in most EU financial supervision authorities with the objective of systematically mapping operations on the stock market in order to detect potential market abuse cases. The introduction of ATMOS is divided into two stages. In the first stage, the necessary preconditions for the system and the necessary control connections are mapped, and in the second stage the corresponding IT-solutions are created.
The Estonian financial market is very concentrated, the larger banking groups have become very large and, in addition to banking services, also offer insurance, security brokerage and administration services. In such a situation, it is essential that such large financial groups be kept under close scrutiny. The most essential risks must be identified and prioritised not only in banking but also in other fields of finance. The development of the risk assessment model (RAS) is driven by the need to assess and compare the risks of different supervision subjects more systematically and thereby ensure timely supervisory procedures. The main objectives of the RAS model are the following: 1) systematic assessment of the supervision subject according to a formalised framework; 2) ordering the subject's risks in order of importance with the aim of focusing our main resources on the most important risks; 3) systematic comparison of risk profiles and the quality of risk management; 4) planning and timely launch of supervisory procedures.
RAS offers an effective opportunity to assess the risks of the whole financial group in a more complex and systematic way, and as a result plan further supervisory activities. In the first stage of RAS (in 2007), the objective is to develop a description of the model and, in the second stage (in 2008), to apply an information technology solution.
1.5. The role of the Financial Supervision Authority in working out norms
The role of the Financial Supervision Authority in working out norms and regulations at the state level must be specified. In cooperation with the Ministry of Finance and the Bank of Estonia, a core plan will be devised in the first half of 2007 on developing norms for the financial sector for the years 2007-2010, which will include a more precise allocation of the work and resources required of the different parties. It is assumed that the capability of all partners, involved in developing such norms, as a whole must increase.
The purpose of the activities of the Financial Supervision Authority is primarily to carry out the supervision of the subjects referred to in the Financial Supervision Authority Act, article 2, forming the basis for building up the finance schedule of the Financial Supervision Authority. Generating legislation is first and foremost a state function, which should be separated from the executive supervisory function.
The Financial Supervision Authority must increasingly participate in forming the supervisory practice and policies at the international level. Without increasing the number of employees in the organisation, the Financial Supervision Authority can actively participate in international cooperation, and consult in the formulation of legislation. The objective of the authority is to be consultant in the process of formulating domestic legislation and assessing the possible impact of legal norms on the financial sector.
1.6. The efficiency of the supervisory process of the Financial Supervision Authority
It is important - to intensify the analysis process, taking into consideration the characteristics of the financial market and the ownership structure, and also involving the assessment of cross-border risks; to make supervisory enforcement more effective via procedural organisation and domestic cooperation; to integrate the supervision of the prevention of money laundering and financing terrorism into the process of supervising operational risks in the financial sector; and to reinforce domestic cooperation with the Estonian Competition Board to ensure free and more effective competition on the financial services market.
1.6.1. Formerly, the Financial Supervision Authority primarily concentrated on analysing the risks of financial supervision subjects. The Financial Supervision Authority now desires to expand its range of analytical activities according to current developmental trends and services provided in the financial sector, also considering the activities of enterprises registered in the European Union to provide cross-border services via freedom of establishment. For example, in insurance, the volume of cross-border services accounts for up to 20% of the indemnity insurance market. The largest market members in the financial sector are subsidiaries of foreign companies and the financial market is very concentrated, the business lines have exceeded the framework of the juridical structure and new members are coming onto the market. As a result, the analytical process must be changed in order to consider the characteristics of such a market and determine the focus of the analysis according to its systemic importance. The analysis must also consider cross-border risks resulting from the owners' activities, since the relationships between the subsidiary in Estonia and its parent company abroad are not limited to capital placement, but are directly dependent on the parent company financially and commercially.
1.6.2. From the viewpoint of the Financial Supervision Authority, misconduct in the financial sector must be a misdemeanour enabling significant and effective (monetary) sanctions. The maximum rate for sanctioning misconduct must be abolished in the Penal Code Implementation Act and the rates for monetary fees significantly increased, also involving physical persons.
1.6.3. Effective prevention of money laundering and ensuring the reliability of the financial sector is extremely important. Both the legal and internal risk assessment framework applied by subjects of financial supervision must create a system that avoids the use of the financial sector for money laundering and financing terrorism.
1.6.4. Initial analysis of the Financial Supervision Authority refers to the fact that in the case of some financial services (for example the third pillar pension fund) there may occur market failures in the effective operation of free competition resulting from the market's relatively small size, very high concentration, as well as the peculiarities of regulation and other factors. To ensure effective price competition, it is essential to make the cooperation of the Financial Supervision Authority primarily with the Estonian Competition Board and the Ministry of Finance more effective in order to increase the efficiency and transparency of the financial market.
INCREASING THE TRANSPARENCY OF FINANCIAL SERVICES AND RAISING CUSTOMER AWARENESS
2.1. Pro-active communication
The development of the consumer website www.minuraha.ee as an active and attractive web-based information and training environment
The Financial Supervision Authority must become a clear leader of opinion in the field of financial services, and the information environment offered must become a unified training and consulting centre for consumers. The complexity and mutual intertwining of financial services more clearly highlights the need to raise consumer awareness and create an independent consulting function to promote a better understanding of the nature of financial services. In cooperation with the market, the Financial Supervision Authority has planned to develop products that ensure comparability of different financial services. The Financial Supervision Authority wishes to highlight risks inherent in the provision of financial services or products similar to them (e.g. SMS-loans) and explain these to consumers.
2.2. Standards for providing the service
Applying the higher standard of due diligence to service providers while presenting and clarifying the conditions of the service according to the principle of comprehensibility and adequacy
When providing financial services it is essential to raise the service providers' obligation of diligence when establishing and maintaining customer relationships. Accordingly, the Financial Supervision Authority wishes to create a standard for providing financial services so that the service provider could find out the consumers' actual expectations related to the service offered and suggest a corresponding solution. Here the emphasis is on applying the standard to investment, savings and insurance products.
2.3 Efficient settlement of disputes in the financial sector
Participation in devising alternative solutions for pre-court settlements of consumer disputes
The use of financial services concerns the property interests of the majority of the Estonian population. In addition, some financial services are obligatory by nature (e.g. traffic insurance, second pillar pension scheme).
The numbers of different kinds of financial services are increasing rapidly and combined services are increasingly being offered. Consumers often lack the relevant professional skills and specialist training in the field in order to comprehensively evaluate all necessary factors, and in specific disputes the user of the service is clearly a weaker party.
A pre-court dispute body would ensure a less expensive and more effective solution for the customer and would thereby correspond to the justified interests and expectations of the consumers. It is an international custom and practice to use pre-court bodies in settling disputes arising in the course of consuming financial services.
COMPETITIVENESS AND ATTRACTIVENESS OF THE ESTONIAN FINANCIAL SECTOR AT THE INTERNATIONAL LEVEL
3.1 The efficiency of licence applications and procedures for dealing with queries concerning subjects under financial supervision - establishing and introducing operational standards and corresponding working processes
The Financial Supervision Authority as a small organisation is definitely less bureaucratic and more effective in processing different licence applications compared with organisations fulfilling the same function in the Nordic countries, for example. It continues to be important that the organisation exploit this advantage and thereby maintain a favourable environment for financial market activities.
3.2 An optimal accountability burden
Researching opportunities to decrease the accountability burden on market participants and according to the results introduce new reporting forms
The objective is to achieve an optimal accounting load domestically as a whole - meaning that market participants should not have to duplicate reporting by collecting similar data for different institutions. By establishing accountability for the following periods, the Financial Supervision Authority acts on the principle that establishing and collecting reports is carried out primarily for supervisory purposes. In defining accountability, the increasing need to harmonise the concept of accountability with that of other member-states in the European Union should be considered primarily for the following reasons: 1) the need for data exchange between external supervision authorities is increasing since financial groups have become international; 2) resulting from the cross border nature of the market, similar approaches to accountability will help to decrease the reporting burden of the market participants.
3.3 The Financial Supervision Authority in explaining norms must adopt an adequate, suitable, moderate and practical approach when applying the rights of discretion and defining indeterminate legal conceptions. To that end the level of information provided to subjects must be enhanced and unified by means of developing guidelines and methodologies for these norms.
The transition from norm-based supervision to principle-based supervision for capital supervision means establishing a larger number of supervisory instructions and methodologies targeted at providing the subjects with the necessary knowledge of the basis and methodology of assessment of the supervision subjects by the supervisory authority. Devising and establishing guidelines on the basis of Basel2/CAD3 are essential for achieving this objective.
3.4. The growth of the Financial Supervision Authority's influence within the framework of cooperation between European supervision authorities.
Ensuring the representation of the Financial Supervision Authority at CESR, CEBS and CEIOPS Level 3 work groups of systemic importance for the Estonian financial market; improving coordination within the authority and domestically in order to better prepare and defend Estonia's positions; training the employees of the Financial Supervision Authority to improve the ability of the Financial Supervision Authority to participate in debates in the European Union.
The Financial Supervision Authority wishes to contribute more to the activities of Level3 committees, primarily in those fields that concern Estonia the most. When such corresponding competence is available, the Financial Supervision Authority is ready to fulfil the role of leader and coordinator of work groups at Level 3. The Financial Supervision Authority cooperates actively with the Nordic financial supervision authorities (Basel II, Solvency II).
4.1 Open and motivating personnel policy
Describing comparable staff, working out a clear and comprehensive scheme for assessing personnel, developing a career model for specialists, establishing a transparent salary policy
In response to the need to make the average salary level in the Financial Supervision Authority comparable with the level of the Estonian financial sector, the description of staff within the authority has commenced.
The objective is to make the personnel mutually comparable and enable us to carry out in-company analyses of employees. Consultants in the field have been involved in working out descriptions of personnel and are in charge of carrying out a comprehensive assessment of each position. According to the results of the assessment it will be possible to establish concrete criteria enabling the specialists to move from one level to another when they fulfil the criteria. The general salary policy and employee awareness of which competence is considered necessary to fulfil work tasks will become more transparent as a result of this assessment. Through these changes a career model can be created for the personnel at the Financial Supervision Authority who want to connect their career with the organisation in the
4.2 Open working culture
The improvement of information exchange through more direct management and a clearer culture of feedback; minimal application of the policy of disclosing decisions taken about supervisory subjects in cases of misconduct; devising broader market communications for the Financial Supervision Authority, which would ensure adequate information for consumers in the financial sector and consider the fundamentals of operating in the financial sector; improving the ability to present assessments intended for the public about the market, market participants and services provided according to competence and reasonableness; and devising an analytical overview of the entire financial sector intended for the public.
In order to ensure the preventive character of the decisions made by the Financial Supervision Authority about misdemeanours, the Financial Supervision Authority acts according to the principle that any decision made by the authority is public if the management does not decide otherwise. The Financial Supervision Authority wishes to become a clear leader of opinion in matters concerning the financial sector. In order to achieve this, the organisation plans to disclose assessments of the activities in the field of finance, focusing on ensuring the operation of an honest and effective market. The Financial Supervision Authority regularly analyses activities in the field of finances primarily from the microviewpoint and uses the corresponding analysis as an input in the supervision process. The analysis includes, to a large extent, data and conclusions that cannot be considered confidential according to the special acts of the Financial Supervision Authority and financial sector, and that attracts the broader interest of the public at large. Accordingly, the Financial Supervision Authority wishes to regularly publicise their analyses, in accordance with the established confidentiality requirement.