2022 was an extraordinary and pivotal year in many ways. Russia’s invasion of Ukraine in February 2022 changed the geopolitical situation and at the same time initiated changes in the global economy and the financial sector.

The immediate effect of the outbreak of war was an increase in various threats such as cyber risks. Digitalisation has permeated financial services, which increases vulnerability to cyber risks. In the FIN-FSA, we reacted to the threat of a deteriorating cyber security situation immediately in the spring in close cooperation with other authorities. We also improved our own preparedness. Even though extensive cyber security incidents have not occurred as a result of the geopolitical situation, preparations must be continued. The backup arrangement created in 2022 to secure daily payments is an important addition to safeguarding the vital functions of society also in exceptional circumstances.

Due to the situation in Ukraine, the EU has imposed sanctions on Russia since 2014. Last year, sanctions were increased further. A Government proposal adopted in February 2023 clarifies the FIN-FSA’s role with regard to how we supervise financial sector entities’ compliance with sanctions.

As a result of the war, energy availability deteriorated and prices rose. Together with the Energy Market Authority, the FIN-FSA supervises the electricity derivatives market, where a sharp rise in electricity futures prices gave rise to significant threats to the functionality of the market. The instability of the electricity derivatives market extensively impacted financial markets, society and business activity.

In the capital markets, Russia’s invasion of Ukraine had a significant impact on, among other things, the issuing of listed companies’ future outlooks and therefore the FIN-FSA’s supervision of compliance with the disclosure obligation. The exceptional circumstances were also reflected in, for example, the real estate sector, where heightened risks were identified in Europe.

Focus on households’ debt-servicing capacity

The strong acceleration of inflation that began in 2022 has directly tightened the financial position of households due to increased energy and other living costs. In addition, the effort to curb inflation through interest rate hikes is further increasing the expenses of many households.

The FIN-FSA’s macroprudential decisions have focused on households’ debt-servicing capacity and affordability calculations. Even at the beginning of 2022, testing affordability with a 6% interest rate was criticised as too severe, but now the debate is about whether this is sufficient. In the autumn, the FIN-FSA revised its recommendation on affordability testing and, from the beginning of 2023, a recommendation came into force according to which all debt-servicing costs of housing loan borrowers should, as a general rule, be no more than 60% of the borrower’s net income. This is the ‘stressed’ debt-service-to-income (DSTI) ratio, the calculation of which takes into account all of an applicant’s debt-servicing costs. The stressed servicing costs should be calculated with a maturity of no more than 25 years and an interest rate of at least 6% (except for loans with long-term interest rate hedges and fixed-rate loans). After the extended period of low interest rates, this can be viewed as an adjustment to the new normal.

Legislation that will come into force at the beginning of next July is also aimed at curbing household indebtedness. It includes many important changes: the terms of corporate loans will be clarified, the loan periods of housing loans will be limited, and consumer credit providers will be supervised by the FIN-FSA. The legislative package entering into force does not, however, contain a debt ceiling, which the FIN-FSA also deems to be justified. A new working group established by the Ministry of Finance will examine possible additional means to curb indebtedness. At the same time, an important project on the positive credit register is moving forward.

Banks must be prepared for the fact that credit losses are usually realised with a delay after a negative turn in the economy. In our inspections and thematic evaluations, we have found extensive shortcomings in the classification of banks’ problem loans. The correct classification of problem loans is particularly important in the current exceptionally uncertain economic situation. In the management of credit risks, it is important for the bank to identify problem customers in good time. Incorrect classification may, at worst, also distort the bank’s capital adequacy figures.

Operating environment risks have increased

Public debt has become a hot topic in the run-up to the parliamentary elections. We know from experience that a loss of confidence in the sustainability of public finances has a negative impact on operating conditions for financial system entities. Finland’s financial sector has so far been solvent and strong, so there is no immediate concern with regard to its crisis resilience.

Operating environment risks remain high, however. In their capital management processes, entities must prepare for weaker economic development than the baseline scenario. The stress scenarios used in capital management processes must be updated to reflect the current situation, as even the baseline scenarios are weaker than they looked a year ago.

Profit distribution policy is a key element of capital management. Profit distribution should be scaled such that, as the economic situation tightens, entities have adequate buffers in case of the potential realisation of risks.

Importance of supervised entities’ good governance underlined

Good governance involves knowing the rules and enforcing them. The effectiveness and coverage of internal control have been a particular focus of our supervisory attention.

The FIN-FSA has highlighted the importance of fulfilling governance requirements throughout the financial sector. In the insurance sector, in particular, we have also highlighted the requirement for competence and experience in key positions and the importance of risk management in an uncertain economic situation. To improve dialogue, we have increased the number of meetings with supervised entities.

Regulation and guidance on combating climate change have been at the centre of our work for several years now. This has significantly impacted the disclosure obligations of entities operating in the capital markets, and supervision and guidance were increased in the year under review. The quality of data available to entities varies considerably and, to some extent, there are still difficulties associated with reporting of ESG risks. It is important that we are able to ensure the quality of data and its analysis as efficiently as possible.

Prevention of money laundering has been a strategic project in the strategy period 2020–2022. The FIN-FSA now has an effective supervision strategy for prevention of money laundering. Applying its themes, a number of inspections have already been conducted and administrative sanctions have been imposed based on their findings. After legislative updates enter into force, we will publish new guidance for the sector.

Prevention of money laundering and supervision must be risk-based and proportionate to ensure access to services and the capacity to function in modern society. Legislation and supervision, moreover, do not prohibit risk-taking in this area, but adequate means are required to manage risks. It could be an easy solution to refuse the provision of services to customer groups for whom the risk is high, but in terms of the implementation of basic services, it may be the wrong course. Supervised entities should assess customer relationship risks comprehensively and take into consideration both risk-increasing and risk-mitigating factors. In addition, they should assess on a case-by-case basis how customer relationship risks can be managed. Customer due diligence procedures should not lead to unreasonable blocking of the use of banking services. When evaluating the appropriateness of restrictive measures, supervised entities should also take into account any special reasons why a customer has difficulties in providing the required information. Refusal to provide services should be the last resort, where it not be possible to manage customer relationship risks in another way, for example by restricting services.

Digitalisation impacts access to financial services and is an integral part of them. Digitalisation only attracts our attention when there are problems with digital services or we are unable to use them for one reason or another. Access to financial services is a necessity for everyone, because it is practically impossible to live and work in Finland without banking and insurance services.

Proactive and predictable supervisor

We renewed the FIN-FSA’s strategy in 2022. Our personnel participated extensively in the preparation of the strategy at its various stages: analysts made a comprehensive operating environment analysis, a number of experts were involved in all of the preparatory working groups, and all FIN-FSA personnel had the opportunity to provide feedback via surveys at different stages of the process.

In the coming years, in line with our new strategy, we will build the FIN-FSA into a proactive and predictable supervisor. This means that, as a supervisor, we have to recognise changes in the operating environment and anticipate the implications for our supervisory responsibility. We are also consistent and predictable in our own actions towards supervised entities. For example, at the beginning of this year, we published our inspection and thematic assessment plan in order to improve predictability. In supervision, the focus is on economic uncertainty and long-term changes in the operating environment. At the same time, we are ready to change our inspection and thematic assessment plan if changes in the operating environment so require this.

Alongside predictability, our new strategy for 2023–2025 emphasises flexibility and use of digitalisation, but we must particularly remember that the FIN-FSA’s work is done by people. The strategy has therefore expertise-oriented management as one of its themes: supervision by healthy, motivated and well-managed FIN-FSA employees.

I would like to thank all FIN-FSA personnel for a year that passed in a more turbulent operating environment than usual, and I hope that together we can build the FIN-FSA into a proactive and predictable supervisor.

Helsinki, 13 March 2023

Tero Kurenmaa