EN
OPINION OF THE EUROPEAN CENTRAL BANK
of 18 September 2002
at the request of the Finnish Ministry of Finance
on a draft proposal concerning a revision of the Act on the
Financial Supervision Authority
(CON/2002/23)
1. On 22 July 2002 the European Central Bank (ECB) received a request from the Finnish
Ministry of Finance for an opinion on a draft government proposal concerning a revision of theAct on the Financial Supervision Authority and certain other related acts (the proposal). Theproposal intends to replace the existing Act on the Financial Supervision Authority(Rahoitustarkastuslaki 503/1993)  by a new Act and, as a result, make technical amendments to
the other acts . 
The new Act would explicitly state the objective and duty of the Finnish Financial Supervision
Authority (FSA), which are lacking in the existing Act. It would also amend and supplement theprovisions concerning the operating methods of the FSA in order to take into accountsubstantial changes taking place in financial markets and in the supervision thereof. Inparticular, the competence to grant or withdraw the operating licences of some supervisedentities would be transferred from the Ministry of Finance to the FSA. The proposal would alsowiden the existing powers of the FSA to impose sanctions on supervised entities. According to
the proposal, the revised operating methods as well as new powers regarding sanctions wouldhave to be reflected in the rules concerning decision-making and management of the FSA whichare therefore revised.  
2. The ECBs competence to deliver an opinion is based on Article 105(4) of the Treaty
establishing the European Community and on the sixth indent of Article 2(1) of CouncilDecision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank bynational authorities regarding draft legislative provisions
1, as the proposal contains provisions
on rules applicable to financial institutions insofar as they materially influence the stability offinancial institutions and markets. In accordance with the first sentence of Article 17.5 of theRules of Procedure of the European Central Bank, the Governing Council of the ECB hasadopted this opinion. 
                                                     
1 OJ L 189, 3.7.1998, p. 42.
23. The objective of the FSA. The definition of the objective of the FSA in the new Act would not
change the existing status of the FSA as an entity operating in connection with Suomen Pankki.
According to the proposal, the objective of the FSA would be the  maintenance of public
confidence in the operation of financial markets . The ECB would like to recall in this context
Suomen Pankkis responsibility concerning contributing to the reliability and efficiency of theoverall financial system in Finland, according to Section 3 of the Act on the Bank of Finland(Laki Suomen Pankista 214/1998 ).
The ECB welcomes the fact that the proposal contains for the first time an explicitly stated
objective of the FSA. This would usefully increase transparency and improve market perceptionof the functioning of the FSA. However, the ECB would like to note that the exact formulationof the objective could be very important regarding such perception of how it operates. From thisperspective, the ECB would like to make tw o observations. First, the objective should
preferably contain a direct reference to the maintenance of financial stability, in addition to themaintenance of confidence in the financial system. It is important to emphasise the maintenanceof financial stability, since this conveys the idea that the objective is not to ensure the operationof all individual financial institutions in all eventualities, but the overall stability of the financialsystem. This would emphasise the importance of effective market discipline (including possiblefailures of entities in these markets) and the responsibility of financial institutions themselvesfor adequate risk management. These considerations reflect internationally approved views onthe objectives of financial supervisors
2. Second, the objective as proposed could give the
impression that the FSA is the only authority in Finland contributing to financial stability and
confidence in the financial system. Hence, the proposal could state that the objective of the FSAis to maintain, for its own part and in cooperation with other relevant authorities (includingSuomen Pankki), stability and confidence in the financial system. 
4. Licensing powers of the FSA. The proposal woul d amend and supplement the rules concerning
the operating methods of the FSA. In particular, the proposal would grant the FSA the
competence to grant or withdraw the operating licences of credit institutions, investmentservices companies and pawnbrokers. Under the existing Act on the Financial SupervisionAuthority this competence belongs to the Ministry of Finance. While the transfer of suchlicensing powers to the FSA would significantly enhance its competence, a number of othersupervised entities operating in the securities markets would continue to be licensed by theMinistry of Finance. It would remain the competent authority to license, inter alia, banking anddeposit guarantee funds, investor compensation funds, the stock exchange, clearing companiesand the central securities depository. 
                                                     
2 See especially the Core Principles for Effective Banking Supervision issued by the Basel Committee on Banking
Supervision (September 1997). For instance, the principles state that [ s]upervision cannot, and should not, provide
an assurance that banks will not fail. In a market economy, failures are part of risk-taking .
3The ECB welcomes the proposal that licensing and supervision responsibilities be combined
and allocated to the FSA. This supports the effective conduct of supervision as the control ofmarket entry and of on-going businesses are held by the same authority, which can alsowithdraw licences as an ultimate sanction
3. However, the ECB would like to note that the
reasons for maintaining the separation in the licensing and supervision of some entities, asmentioned above, are not very clearly stated in the proposal. Apart from ensuring effectivesupervision, having all licensing powers regarding different, but closely linked, securitiesmarket participants allocated to a single authority could also enhance the level playing field.When separation exists, cooperation between the licensing authority and the supervisor has to beassured. 
5. Sanctioning powers of the FSA. In order to streng then the efficiency of supervision by the FSA
and shift its emphasis towards early intervention and more pre-emptive measures, the proposal
would widen the range of sanctions available to the FSA to include, in addition to existingsanctions, a public reprimand, a public warning and an administrative fine. A publicreprimand would be issued if a supervised entity is in breach of an act, regulation or guidelineapplicable to it, for example if a supervised entity does not fulfil its reporting obligations to theFSA. A public warning would be issued if this conduct is repeated or if a public reprimand wasnot deemed sufficient. An administrative fine of up to 50 000 EUR could under certaincircumstances be imposed in addition to a public reprimand or warning. 
The ECB very much welcomes the enhanced sanctioning powers of the FSA, as they also forman integral element of effective supervision
4.
6. Decision-making bodies of the FSA. The proposal  would also revise the existing provisions
concerning decision-making and management of the FSA to ensure that its operation is in line
with its new powers. The proposal includes an amendment to the effect that the Director
General of the FSA would cease to be a member of its Board. The Director General wouldattend Board meetings as a permanent expert advisor without any voting rights. The DirectorGeneral would be responsible for managing the FSA and ensuring that it performs its dutiesefficiently and economically in accordance with its guidelines. The Board of the FSA would setits aims and orientations, adopt guidelines, instructions and interpretations on matters that aresignificant in principle. In addition, the powers of the Board would be strengthened in relationto the core supervisory activities of the FSA, including the new powers contained in theproposal. The Board would, for example, decide on granting licences and imposition ofsanctions. The oversight of both the Director General and the Board remains with theParliamentary Supervisory Council, the role of which would be somewhat strengthened by theproposal. 
                                                     
3 See also Principles 2 and 3 of the Core Principles for Effective Banking Supervision (op. cit.).
4 See also Principle 22 of the Core Principles for Effective Baking Supervision (op. cit.).
4The ECB supports the more clearly specified and strengthened decision-making structure of the
FSA as regards the strengthening of the role of the Board in steering its general functioning.However, the ECB would like to note that in light of the enhanced powers of the Board of theFSA and its revised composition it might be appropriate to insert an explicit provision accordingto which the members of the Board of the FSA are required to act in their personal capacity. 
In addition, the ECB would like to note that it should be ensured that the Board has adequateexpertise to carry out its decision-making tasks. In view of this consideration, maintaining thestatus of the Director General as a full member of the Board is likely to increase the quality ofthe decision-making process. It could also increase the acceptance and credibility of thedecisions in the market place and possibly also the commitment of the FSA to implement thedecisions. 
7. The ECB confirms that it has no objection to the competent national authorities making this
opinion publicly available at their discretion. 
Done at Frankfurt am Main on 18 September 2002.
The President of the ECB
[signed]
Willem F. DUISENBERG