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2019-12-11

Guidelines for Recovery Plans for Securities Companies

The Norwegian Financial Supervisory Authority (Finanstilsynet) issued these guidelines to establish simplified recovery plan requirements for securities companies and their parent companies under the Financial Undertakings Act. The document details specific exemptions from standard regulatory articles, allowing for reduced scope in strategic analysis, summaries, and communication plans based on the limited systemic risk posed by these entities. It mandates that plans be approved by the board, submitted by July 1, 2020, and updated every three years or upon significant changes.

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FINANSTILSYNET Postboks 1187 Sentrum 0107 Oslo Circular Guidelines for Recovery Plans for Securities Companies CIRCULAR: 12/2019 DATE: 11.12.2019 THE CIRCULAR APPLIES TO: Securities Companies

Guidelines for Recovery Plans for Securities Companies 2 | Finanstilsynet Contents 1 Introduction 3 2 Legal Basis 4 3 Requirements for Securities Companies' Recovery Plans 4 4 Finanstilsynet's Assessment of Recovery Plans 6 5 Other Instruments Prior to Potential Crisis Management 7

Guidelines for Recovery Plans for Securities Companies Finanstilsynet | 3 1 Introduction This circular applies to securities companies that must prepare recovery plans in accordance with Section 20-5 of the Financial Undertakings Act. According to Section 20-1, first paragraph, letter a of the Financial Undertakings Act, this applies to securities companies covered by Section 9-39, first paragraph, of the Securities Trading Act, which sets a requirement for start-up capital of an amount in Norwegian kroner that corresponds to at least 730,000 euros.1 The same applies to parent companies in groups where such a securities company is included, cf. Financial Undertakings Act Section 20-1, first paragraph, letter b. This circular provides further details on the requirements for recovery plans for securities companies and their parent companies, and Finanstilsynet's follow-up of these. The circular must be read in conjunction with these requirements and guidelines:

Guidelines for Recovery Plans for Securities Companies 4 | Finanstilsynet 2 Legal Basis The overarching requirements for the content of the recovery plan are set out in Financial Undertakings Act Section 20-5, first paragraph. The plan shall specify what measures the undertaking can take to restore its financial position when it has become significantly weakened. The plan shall in particular take into account different situations with severe macroeconomic and financial disturbances that may affect the undertaking, and contain models for the use of measures to restore the undertaking's financial position, and criteria and procedures that ensure that the measures can be implemented at the right time. More detailed rules on the content of the recovery plan follow from the Supplementary Regulation Part 4 Chapter I Section II (Articles 3 to 15). These rules will be discussed below. It follows from Financial Undertakings Act Section 20-5, fourth paragraph, that parent companies in Norwegian financial undertakings must prepare a recovery plan for both the group and the individual group undertakings. Finanstilsynet may, however, also require a Norwegian group undertaking to have its own recovery plan. In financial groups where the parent company has its head office in another EEA state, but has subsidiaries in Norway, it will be clarified in consultation with the parent company's supervisory authorities whether the Norwegian subsidiary should also be required to prepare its own recovery plan. Under Financial Undertakings Act Section 20-7, second paragraph, Finanstilsynet may, in accordance with the principle of proportionality, set simplified requirements for recovery plans for individual undertakings or groups of undertakings. Commission Regulation (EU) 2019/348 sets out quantitative and qualitative criteria for assessing whether an undertaking should be subject to simplified requirements. Finanstilsynet uses these criteria as the basis for its assessment. For securities companies, the regulation gives member states' authorities considerable freedom to exercise discretion in determining the threshold for when simplified requirements can be used. 3 Requirements for Securities Companies' Recovery Plans Finanstilsynet has decided that all securities companies that must prepare recovery plans under Financial Undertakings Act Section 20-5 may follow simplified requirements, which will apply equally to all these undertakings. In this assessment, Finanstilsynet has placed weight on the size, risk profile, complexity, ownership structure and business of Norwegian securities companies, that these undertakings are in little degree interwoven with the rest of the financial system, and that the consequences of a crisis in these undertakings for other undertakings, financial stability, market conditions and the economy in general are expected to be limited.

Guidelines for Recovery Plans for Securities Companies Finanstilsynet | 5 The content of the simplified requirements emerges from a compilation between the Supplementary Regulation Part 4 Chapter I Section II, and the exceptions set out here below. Article 3 specifies what information a recovery plan must cover. For securities companies, it will be sufficient that the plan contains information on governance and a strategic analysis. Article 4 requires a summary of the main content of the recovery plan. Since securities companies can follow simplified requirements, the recovery plan may have a limited scope, and therefore a summary of the plan is not necessary. Article 5 sets out requirements for governance principles. Securities companies do not need to meet all the requirements in the provision, but the recovery plan must as a minimum contain a description of how the plan was prepared, and the undertaking's guidelines for approval of the plan. Furthermore, the plan must describe how timely implementation of recovery options is secured. This must include a description of capital indicators (threshold values) and the internal escalation and decision-making process used when the indicator requirements are met. The plan must also contain a brief description of whether the plan is consistent with the undertaking's overall risk management framework. Article 6 describes the requirements for the strategic analysis, which are further specified in Articles 7–12. Article 7 requires a description of the undertakings covered by the plan. Here, for securities companies, it will be sufficient to describe the undertaking's overall strategy, business model and main business areas, and the most significant internal and external connections. Finanstilsynet assumes that Norwegian securities companies currently do not have critical functions. Regarding Articles 8 and 9 on recovery options and the associated arrangements and measures, it is sufficient for securities companies to prepare one or more recovery options, each of which describes different measures aimed at restoring the undertaking's capital position. The impact analysis under Article 10 may be limited to a financial and operational impact analysis. Under Article 11, the recovery options must include an assessment of feasibility. The assessment must describe any obstacles to effective and timely implementation, and contain a strategy for how such obstacles can be removed. Regarding Article 12, it is sufficient that each recovery option includes a brief assessment of how it will be ensured that the undertaking's business is maintained when the option is implemented. Securities companies do not need to comply with Article 14 on communication and disclosure plans or Article 15 on preparatory measures. The requirement for a recovery plan for securities companies must be fulfilled by 1 January 2020 according to Financial Undertakings Regulation Section 20-11, third paragraph. Finanstilsynet assumes that the same deadline applies to parent companies in groups where a securities company is included, unless the parent company is covered by Finanstilsynet's Circular 10/2019, cf. discussion on page 3. The recovery plan must be approved by the undertaking's board of directors and sent to Finanstilsynet, cf. Financial Undertakings Act Section 20-5, second paragraph. The deadline for submitting the recovery plan to Finanstilsynet is 1 July 2020.

Guidelines for Recovery Plans for Securities Companies 6 | Finanstilsynet The recovery plan must be updated every third year and when changes in the business have occurred that make it necessary to change the plan. The undertakings must send updated recovery plans to Finanstilsynet when requested to do so. Based on the discussion above, the requirement for securities companies regarding recovery plans can be summarized as follows: Financial Undertakings Act Section 20-5, first paragraph Securities Companies with Simplified Requirements Letter a Applies fully. Letter b Applies fully. Letter c Not relevant. Letter d Applies fully. Letter e Applies, but only every third year. Supplementary Regulation Part 4 Article 3 Only No. 2 and 3 apply. Article 4 Does not apply. Article 5 No. 1 Applies fully. Article 5 No. 2 Applies fully. Article 5 No. 3 Applies, but under letter b it is sufficient to state capital indicators. Article 5 No. 4 Applies fully. Article 5 No. 5 Does not apply. Article 7 No. 1 Applies, but at an overall level. Article 8 Applies fully. Article 9 Applies, but limited to measures to restore the undertaking's capital position. Article 10 No. 1 Applies fully. Article 10 No. 2 Does not apply. Article 10 No. 3 Does not apply. Article 11 Applies fully. Article 12 Only No. 1 applies. Article 14 Does not apply. Article 15 Does not apply. Crisis Management Directive, Annex Section A Only No. 4 to 6, 8 to 11, 18 and 20 apply. 4 Finanstilsynet's Assessment of Recovery Plans Under Financial Undertakings Act Section 20-5, second paragraph, Finanstilsynet must within six months assess whether the recovery plan meets the requirements in Section 20-5, first paragraph, whether the planned measures will be sufficient to restore the undertaking's financial position, and whether the plan will allow

Guidelines for Recovery Plans for Securities Companies Finanstilsynet | 7 itself to be implemented quickly and with the least possible harmful effects for customers, other financial undertakings and financial stability. More detailed requirements for Finanstilsynet's assessment of recovery plans follow from the Supplementary Regulation Part 4 Chapter I Section III (Articles 16 to 21). If Finanstilsynet finds significant deficiencies in the recovery plan, the authority must require the undertaking to submit a revised plan no later than within three months. Finanstilsynet may, alternatively, issue more specific orders, as discussed in Financial Undertakings Act Section 20-5, third paragraph. 5 Other Instruments Prior to Potential Crisis Management Finanstilsynet's other instruments prior to potential crisis management are discussed in Financial Undertakings Act Sections 20-11 to 20-14. They are also discussed further in Finanstilsynet's Circular 10/2019 points 5.2 and 5.3.

FINANSTILSYNET Postboks 1187 Sentrum 0107 Oslo POST@FINANSTILSYNET.NO WWW.FINANSTILSYNET.NO

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