Recent news on Financial Regulation

Below is a summary of recent major Swedish and EU financial regulatory developments of interest to market participants.

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New requirements for currency exchange and other financial operations

From 1 January 2024, new requirements will apply for those who want to engage in currency exchange or other financial operations (which consist of the management of, or trading in, virtual currency, or certain other activities in the Banking and Financing Business Act (Sw. Lag om bank- och finansieringsrörelse (2004:297)), by amending the Currency Exchange and Other Financial Operations Act (Sw. Lag (1996:1006) om valutaväxling och annan finansiell verksamhet).
The proposed changes aim to prevent money laundering in financial institutions and mean, among other things, that more operators than today will be subject to the registration obligation. On 10 October 2023 the SFSA published new regulations and general guidelines regarding this matter.

The main changes introduced in the new act are:

• More operators will be subject to the registration obligation. Anyone who conducts or intends to conduct activities in the form of professional currency exchange or other financial operations must apply for registration with the SFSA even if the activity is not carried out to a significant extent.
• Changed business orientation. A registered financial institution must apply for a new registration with SFSA when changing its business orientation. That is, when changing from currency exchange to other financial operations and vice versa, as well as when changing between different forms of other financial operations.
• New requirement for suitability. A general requirement for suitability is introduced for those who conduct currency exchange or other financial activities, are part of the management of a financial institution, have a qualified holding in such an institution or are part of the management of a company that has a qualified holding in the institution. This means that the SFSA will be able to make a more nuanced suitability assessment where the person’s general law-abidingness, experience and judgment are taken into account. The annual suitability test of owners and management is removed.
  
• Obligation to report changes. A registered financial institution must report changes in the circumstances that the institution has stated in its application for registration to the SFSA as soon as possible.
• Sanction fees. The SFSA will be able to decide on a sanction fee for those who do not provide requested information to the SFSA or who conduct registration-required activities without applying for registration.
  The transactional provisions provide that anyone who already conduct activities that were not previously subject to registration requirements can continue until 31 March 2024. Those subject to the new registration obligation must apply for registration with the SFSA no later than 1 April 2024.

The SFSA adheres two new guidelines from EBA

The SFSA has notified the European Banking Authority (“EBA”) that it will adhere to EBA’s guidelines on amending the guidelines EBA/2021/02 on customer due diligence and the factors credit and financial institutions should consider when assessing the money laundering and terrorist financing risk associated with individual business relationships and occasional transactions (the ML/TF Risk Factors Guidelines). The SFSA will also follow the guidelines on policies and controls for the effective management of ML/TF risks when providing access to financial services.

The main changes introduced in the new guidelines are:

• an annex is added to the previous ML/TF Risk Factors Guidelines, which contains measures that should be taken under the anti-money laundering regulations, when a customer is a non-profit organization; and
• the guidelines on policies and controls for the effective management of ML/TF risks when providing access to financial services, complement EBA’s guidelines on risk factors and specify in more detail the policies, procedures and controls that credit institutions and financial institutions should have in place to prevent and effectively manage risks for money laundering and terrorist financing in accordance with Article 8.3 of Directive (EU) 2015/849, including measures relating to the provision of a basic payment account in accordance with Article 16 of Directive (EU) 2014/92.

The SFSA adheres to the guidelines on MiFID II product governance requirements

On 3 August 2023, ESMA published revised guidelines on MiFID II product governance requirements. The revised guidelines replace the previous version of the guidelines issued by ESMA, which began to apply from 3 January 2018 and take account of recent regulatory and supervisory developments. The revised guidelines can be found here and started applying on 3 October 2023. The SFSA has informed ESMA that they will adhere to the 2023 guidelines, and the document will have the status of general guidelines.

The main amendments introduced in the revised guidelines concern:

• the specification of any sustainability-related objectives a product is compatible with;
• the practice of identifying a target market with a clustering approach for cluster of products instead of per individual product;
• the determination of a compatible distribution strategy where a distributor considers that a more complex product can be distributed under non-advised sales; and
• the periodic review of products, including the application of the proportionality principle.

The guidelines apply in relation to the manufacturing or distribution of financial instruments and structured deposits.

Please contact us if you have any queries about the requirements for manufacturers and/or distributors of financial instruments under MiFID.

The SFSA review how fund managers comply with the new EU regulations on sustainability

The SFSA will investigate how sustainability risks and information is integrated by fund managers in their business. More specifically, the SFSA will investigate the compliance of rules relating to the integration of sustainability risks, sustainability-related information and risks for green washing, by fund companies and managers of alternative investment funds (AIF managers) that market funds to non-professionals. The examination follows the previously announced prioritized supervision areas for 2023 by the SFSA. Further information on the examination can be found here (in Swedish).

The SFSA identifies that high-risk financial products are offered to consumers

The SFSA has reviewed 13 insurance providers and what type of financial products they offer to consumers and found that high-risk financial products are offered to consumers. The review addresses whether insurance providers’ proposals are influenced by commissions, and how and to what extent high-risk financial products, such as certain structured products, are presented to consumers. The SFSA’s stresses that insurance providers need to present information about their products in a comprehensible way and consider the consumer’s needs and situation. Lastly, the review by the SFSA addresses the risk for conflict of interest with respect to the compensation models used and has earlier concluded that there should be a governmental review of the matter. The review of insurance providers will serve as a basis for the SFSA’s continuous supervisory work, and their press release can be found here (in Swedish).

The use of ESG related language in the EU fund industry has increased according to ESMA

On 2 October 2023, the European Securities and Markets Authority (ESMA) published an article on the use of environmental, social and governance (ESG)-related terms in the names and documentation of EU funds. In the study, ESMA found that the share of EU UCITS investment funds with ESG words in their names has increased from less than 3% in 2013 to 14% in 2023. The article also highlights that fund managers tend to prefer using generic language such as “ESG” or “Sustainable” rather than more specific words, which can make it more difficult for investors to verify that the fund portfolio is in line with the name of the fund.

ESMA’s report can be accessed here.

The Swedish Consumer Agency has reviewed fund marketing materials containing environmental claims

The Swedish Consumer Agency has reviewed 15 investment firms’ marketing materials containing environmental claims and concludes that despite an improvement from their previous review in 2020 there are still shortcomings among the reviewed firms. One of these shortcomings is the lack of use of marketing labels for posts on social media that rely on affiliate links (affiliate links mean that influencers get paid by the amount of views or purchases made on the investment firm’s website). It is stressed by the Swedish Consumer Agency that investment firms must explain in what way their funds are sustainable and the explanation should be provided in connection to a statement about sustainability. It is further stated that marketing through influencers should be clearer regarding the associated risks. For further information on regulation regarding sustainability and marketing of funds, please feel free to contact us at Cirio. The review can be found here (in Swedish).

The Joint Committee of the three European Supervisory Authorities (EBA, EIOPA and ESMA – the ESAs) has published its report on the extent of voluntary disclosure of principal adverse impacts under the SFDR

The Joint Committee of the three European Supervisory Authorities (EBA, EIOPA and ESMA – the ESAs) has published a report to the European Commission on the extent of voluntary disclosure of principal adverse impacts on sustainability factors (PAI) by investment decisions by financial market participants and how this is reflected in the companies’ due diligence processes. The SFSA has participated in the report and concludes that there are room for improvement among the Swedish financial market participants and call on all financial market participants to read the report. The report can be found here.

The Swedish Consumer Agency criticizes consumer credit intermediaries

The Swedish Consumer Agency and the SFSA have a shared supervision of consumer credit institutions and consumer credit intermediaries. The Swedish Consumer Agency has selected six companies that have received the most complaints in the last two years and examined how these companies conduct their business.

The examination showed that certain intermediaries completely disregard the consumers’ wishes. One example is when a consumer is clear about wanting to become debt-free as quickly as possible, yet the credit intermediary still argues for the consumer to choose a longer loan term than they desire.

In addition, it has come to the Swedish Consumer Agency attention that several intermediaries have used marketing measures that are blacklisted according to the Swedish Marketing Act (Sw. Marknadsföringslag (2008:486)). Among other things, individuals calling from the company falsely claimed that the call does not pertain to any sales or that the consumer is not expected to make any purchases.

In light of the above, the Swedish Consumer Agency assumes that the companies now take heed of the criticism and make voluntary corrections. The authority will follow up the review with individual supervisory cases to ensure that the deficiencies have been rectified.

The SFSA has examined if authorised mortgage institutions have initiated their regulated activities

According to the Mortgage Business Act (Sw. Lag (2016:1024) om viss verksamhet med bostadskrediter) a company which has received authorisation pursuant to the act must initiate their regulated business within six months from receiving such authorisation.

The SFSA has examined if certain mortgage institutions have started to conduct their regulated business. The result of two examinations have now been published and in one case the SFSA deemed that the company had not started to conduct their business, which led to the revocation of the authorisation.

In another case the SFSA issued a warning instead of a revocation of the authorisation since the SFSA deemed that the mortgage institution had a credible plan for how they would initiate their regulated activity.

The abovementioned examinations highlight the importance of initiating the regulated activity that a company has applied for as soon as possible when the authorisation has been granted – or at least to have a credible plan for launching the business.