The current Norwegian legislation does not explicitly provide for securitisation and, in practice, securitisation is currently impossible for Norwegian financial institutions.
Prior to 2016, Norwegian securitisation rules existed but were seen as inflexible and inadequate to promote an active securitisation market in Norway. However, following the implementation of Regulation (EU) 2017/2402 (the Securitisation Regulation) in the EU, the Norwegian Ministry of Finance (MoF) published a legislative proposal on 4 December 2020 to implement the expected corresponding EEA rules into Norwegian law by cross-reference in Norwegian legislation. If passed by the Norwegian Parliament, the proposed legislation will allow Norwegian financial institutions to securitise financial assets under the same legal framework as other European financial institutions.
The Norwegian Parliament is expected to vote on the proposal during 2021 and the legislation may become effective shortly thereafter. The responses below are based on the assumption that the MoF’s legislative proposal is passed without amendments.
Starting Point for Seizure of Assets
Under the Norwegian Creditors Recovery Act an insolvency estate may only seize the assets that belong to the insolvent debtor. In this context, “belong” refers to the debtor’s right of ownership to the asset and not to the right of title in the asset.
Legal, Valid and Binding Transfer Agreement
When an asset is transferred to a special purpose entity (SPE), to secure the isolation of the asset from the originator’s insolvency estate and to secure the bankruptcy remoteness of the SPE, the transfer agreement between the originator and the SPE must be legal, valid and binding. An insolvency estate will for instance not be bound by a pro forma transfer agreement. The transfer agreement may also at a later point be deemed invalid, eg, if it is unreasonably in favour of the debtor’s contracting party, albeit the threshold for this is high under Norwegian law.
Transfer by “True Sale”
A further condition to secure bankruptcy remoteness of an SPE, in regards to securitisation transactions, is that the underlying financial assets are transferred from the originator to the SPE by a “true sale”. Following a “true sale” the SPE becomes the owner of the underlying assets and, subject to legal perfection, acquires the full legal title to the assets. In this case, the assets are protected from the bankruptcy of the originator.
For the transfer of assets in the form of monetary claims to be considered a “true sale”, the substantial risks associated with the underlying claims have to be transferred to the SPE. Most importantly, the credit risk on the debtor must be assumed by the SPE in such a way that the SPE or its creditors do not have any recourse to the originator if the debtor defaults on its obligations.
Another important aspect is whether the originator provides the SPE with economic support, either explicitly or implicitly. Support provided upon the establishment of the securitisation is considered explicit, while support provided at a later stage is considered implicit. Both forms of support may prevent the transfer from constituting a transfer of the substantial risks associated with the assets.
In its legislative proposal, the MoF noted that implicit support which is neither based on the transfer agreement, nor arm’s length principles, is especially problematic in relation to the requirement for transfer of the substantial risks associated with the assets.
There are certain overriding claw-back provisions under Norwegian insolvency law. As a general rule these are applicable if the transaction is considered objectively unfair to the other creditors of the insolvent party. The rules may be invoked by the administrator of the insolvency estate.
Norwegian corporate or similar law is not particularly well suited to facilitate the use of Norwegian SPEs in securitisation transactions. Based on input received in a legislative hearing, the MoF has assumed in its legislative proposal that Norwegian financial institutions will likely prefer to use SPEs registered outside of Norway in securitisation transactions, for instance SPEs registered in Ireland or Luxembourg. As a consequence, amendments to Norwegian corporate or similar law have not been proposed at this point.
The Securitisation Regulation
The Securitisation Regulation lays down a general framework for securitisation and sets certain requirements for SPEs used in securitisation transactions. As outlined in 1.1 Insolvency Laws, it is expected that the EEA rules corresponding to the Securitisation Regulation will be implemented under Norwegian law by cross-reference in national legislation.
Pursuant to the Securitisation Regulation, the SPE must be a corporation, trust or other entity, other than an originator or sponsor, established for the purpose of carrying out one or more securitisations. The activities of the SPE should be limited to those appropriate to accomplishing the securitisation for which it has been established and its structure should allow isolating the obligations of the SPE from those of the originator.
An SPE should not be established in a third country that is listed as a high-risk and non-cooperative jurisdiction by the Financial Action Task Force (FATF) and/or it has not signed an agreement with a member state to ensure that that third country fully complies with the standards provided for the OECD Model Tax Convention on Income and on Capital, or in the OECD Model Agreement on the Exchange of Information on Tax Matters, and ensure an effective exchange of information on tax matters, including any multilateral tax agreements.
Norwegian insolvency law does not recognise a concept of substantive consolidation of affiliated companies for the purpose of insolvency or bankruptcy proceedings. Rather, each legal entity is subject to its own insolvency test, and as a general rule the SPE would therefore not be impacted by the originator’s insolvency under Norwegian law. As mentioned in 1.1 Insolvency Laws, there are certain claw-back provisions under Norwegian law which could apply in the event of an originator insolvency. However, due to the “true-sale” structure and the requirement on the SPE to be a separate entity and capable of holding assets and carrying on business separately from the originator, it seems unlikely that these claw-back rules would be applicable to SPEs in securitisation transactions.
There are no specific requirements to ensure a transfer of financial assets is valid and enforceable by the transferee against the transferor under Norwegian law. However, legal perfection rules must be observed to ensure protection against the transferor’s creditors and in case of transfer of claims the debtor, as further described below.
Legal charges must be established pursuant to the terms of the Norwegian Pledge Act. Certain requirements must be fulfilled for the legal charge to be valid between the parties. Notably, it is not permitted to establish a “floating” charge over all the charger’s assets. Further, the charger may not grant security over less than the charger’s entire ownership in the charged asset.
Ways to Obtain Legal Perfection
Further requirements must be met to achieve legal perfection against the transferor’s creditors, and there are different ways to obtain this depending on the relevant asset.
To obtain legal perfection for assignment of a non-negotiable monetary claim, the debtor has to be notified of the assignment. The debtor may either be notified by the assignee or the assignor.
To obtain legal perfection for the establishment of a floating charge mortgage, the charge must be registered in the relevant register. For instance, a floating charge over the charger’s trade receivables or machinery and plant, or a fixed charge over cars and other vehicles must be registered in the Norwegian Register of Mortgaged Movable Property. Mortgages in assets with designated registers, must be registered in the corresponding register, eg, the Norwegian Land Register for real property.
When a legal charge is assigned together with the underlying secured liability, the general rule under Norwegian law is that the legal perfection requirements for assignment of the secured liability also apply to the assignment of the legal charge, unless otherwise follows from contract or law.
As outlined in 1.1 Insolvency Laws, the securitised financial assets would as a general rule not be part of the originator’s insolvency estate as they do not “belong” to the insolvent originator following a “true sale” transaction. To ensure that the securitisation transaction is bankruptcy remote, it is key that the substantial risks associated with the underlying assets are transferred to the SPE. Further, as explained above, the overriding claw-back provisions in Norwegian insolvency legislation must be kept in mind.
There are no provisions on taxation in the legislative proposal and the MoF does not address the tax treatment of securitisation transactions. Currently, there is not an active securitisation market in Norway and historically the Norwegian securitisation market was very limited and subject to a now-repealed legal framework. Thus, there is little to no previous experience to rely on and no certainty in the tax treatment of securitisation transactions.
Value Added Tax
Financial services are generally exempt from Norwegian value added tax (VAT). The exemption includes the sale of receivables and thus also the transfer of the underlying financial assets from the originator to the SPE.
There is not a stamp duty or other documentary taxes on the transfer of financial assets. There are fees for registering title transfers in the relevant mortgage registers and maximum fees for electronic mass-registration of multiple title transfers.
As outlined in 1.2 Special-Purpose Entity, it is expected that Norwegian securitisations will utilise SPEs registered outside of Norway. Generally, Norwegian income tax would not apply to the SPE’s income derived from the acquired underlying financial assets.
Currently, there is no withholding tax in Norway that may apply to securitisation transactions. As of 1 July 2021, a 15% withholding tax on interest payments to related parties in low tax jurisdictions will apply. Payments to entities genuinely established and conducting real economic activity in an EU/EEA member state will be exempt from the withholding tax.
See 2.1 Taxes and Tax Avoidance.
See 2.1 Taxes and Tax Avoidance.
See 2.1 Taxes and Tax Avoidance.
There is no active securitisation market in Norway for the time being.
The MoF’s legislative proposal does not include any securitisation-specific accounting rules.
In general, the accounting analysis is undertaken independently of the legal analysis. Consequently, a securitisation may for instance be considered off-balance sheet from a legal perspective, but on-balance sheet for accounting purposes.
With regards to the derecognition of the underlying financial assets in the originator’s balance sheet, the MoF’s legislative proposal refers to the International Financial Reporting Standards (IFRS) 9 rules regarding accounting for financial instruments.
As noted, there is no active securitisation market in Norway for the time being. However, it is not market practice in Norway for legal opinions to also address accounting matters.
The MoF’s legislative proposal includes a requirement to inform the debtors under securitised loans of the identity of the SPE, of the servicer, and of the rights and obligations of the SPE and the servicer towards the debtor. The information must be provided no later than three weeks before the loans are sold and transferred from the originator to the SPE. However, the proposal does not afford the debtors any right to object or opt out of the securitisation.
The Securitisation Regulation has certain transparency requirements, under which the originator, sponsor and SPE of a securitisation are required to disclose certain information on the securitisation to the holders of a securitisation position, to the competent authorities and (upon request) to potential investors. The originator, sponsor and SPE of a securitisation shall designate among themselves one entity responsible to fulfil the information requirements (the responsible entity).
Among other things, the transparency requirements shall ensure that the investors have access to the necessary information to perform their due diligence pursuant to the Securitisation Regulation. The disclosure requirement applies to information on among other things:
When complying with the disclosure requirements, the responsible entity shall comply with national and EEA law governing the protection of confidentiality of information and the processing of personal data. Confidential information on customer, original lender or debtor must be anonymised or aggregated.
The European Commission has published Commission Delegated Regulation (EU) 2020/1224, which sets out related requirements and is based on the Final Report on Technical Standards on Disclosure under the Securitisation Regulation published by the European Securities and Markets Authority (ESMA) on 22 August 2018.
In addition to the legislative acts outlined in 4.1 Specific Disclosure Laws or Regulations, Regulation (EU) 2017/1129 (the Prospectus Regulation) has been incorporated in Norwegian law and will be the main source of general disclosure obligations for securitisation transactions undertaken by Norwegian originators.
Pursuant to the Prospectus Regulation, a prospectus shall contain the necessary information which is material to an investor for making an informed assessment of:
The prospectus shall also include risk factors, but only those risks which are material and specific to the issuer and its securities.
The application of the Prospectus Regulation depends on whether the transaction requires a prospectus to be published. This is the case where there is a non-exempt public offering or a listing of the SPE’s securities on a regulated marked.
The MoF’s legislative proposal does not contain specific regulation regarding credit risk retention above and beyond what is set out in the Securitisation Regulation.
To secure a certain degree of alignment between the investors’ and the originator’s interests in a securitisation transaction, the Securitisation Regulation requires that the originator, sponsor or original lender must comply with certain risk retention requirements. In general, a minimum of 5% of the net economic credit risk must be retained.
The Securitisation Regulation includes an exhaustive list of five acceptable risk retention techniques. We expect that many parties will prefer the less complex risk retention methods, ie, first loss exposure (where the parties retain a first loss exposure of at least 5% of every securitised exposure in the securitisation) and vertical slice (where the parties retain at least 5% of the nominal value of each tranche sold or transferred to investors).
The Securitisation Regulation also sets out certain exemptions from the risk retention requirement, eg, in cases where the securities are fully, unconditionally and irrevocably guaranteed by central banks or central governments.
Under the Norwegian Act on Debt Information, Norwegian financial institutions are required to report certain information to an authorised debt registry institution. As the SPE is exempted from the licensing requirement, and thus not considered a financial institution, the MoF’s legislative proposal includes a provision which transfers the reporting requirement to the servicer of the securitized portfolio (usually the originator).
As outlined under 4.1 Specific Disclosure Laws or Regulations, the transparency requirements under the Securitisation Regulation include periodic reporting obligations. Pursuant to Article 7, the responsible entity in a securitisation transaction shall make quarterly investor reports available, or, in the case of asset-backed commercial paper, monthly investor reports.
The activities of rating agencies are regulated in Regulation (EU) 1060/2009 (CRA Regulation), amended by Regulation (EU) 513/2011 (CRA 2) and Regulation (EU) 462/2013 (CRA 3). These regulations provide the regulatory framework for credit rating agencies and are incorporated by reference in Norwegian law. Among other things, credit rating agencies are required to be registered and supervised, and are required to use rating methodologies that are rigorous, systematic, continuous and subject to validation based on historical experience, including back-testing.
Notably, Article 8c in the CRA Regulation requires the issuer in securitisation transactions, to obtain a double credit rating, issued by two different credit rating agencies. Further, the issuer should consider appointing at least one credit rating agency which does not have more than 10% of the total market share.
ESMA is in charge of registration and supervision of the credit rating agencies. In Norway, the Financial Supervisory Authority of Norway (FSAN) is the competent authority regarding compliance under the CRA Regulation.
Norwegian credit institutions and investment firms are currently required to calculate and satisfy their regulatory capital requirements as required under Regulation (EU) 575/2013 (CRR). The regime is being amended through the so-called “banking package” consisting of Regulation (EU) 2019/876 (CRR II), Directive (EU) 2019/878 (CRD V) and Directive (EU) 2019/879 (BRRD II). A proposal for Norwegian implementation of the “banking package” is subject to public consultation until 6 January 2021.
The originator may exclude the underlying financial exposures from the calculation of its risk-weighted exposure amounts and expected loss amounts if:
If any of these requirements are met, credit institutions and investment firms will only be required to hold regulatory capital for the securitisation position they are required to retain pursuant to the Securitisation Regulation. The credit risk on the retained securitisation position is either calculated pursuant to the internal risk-based (IRB) method or the standardised method.
The FSAN may decide on a case-by-case basis that significant credit risk shall not be considered to have been transferred from the originator to the SPE. However, where the originator demonstrates that the reduction of capital requirements implied by the securitisation is justified by a corresponding transfer of credit risk from the originator, the FSAN shall consider the credit risk transferred.
The MoF’s legislative proposal does not include any specific provisions regarding the use of derivatives in securitisation transactions other than what is set out in the Securitisation Regulation.
Norway has implemented Regulation (EU) 648/2012 (EMIR).
The key elements of investor protection are described above and consist of, eg, the asset segregation, bankruptcy remoteness, risk retention and disclosure provisions in the Securitisation Regulation as well as the disclosure requirements in the Prospectus Regulation.
Further, the Securitisation Regulation requires a minimum standard of due-diligence measures from institutional investors before investing in securitisation positions. This includes a comprehensive and thorough understanding of the securitisation position and its underlying exposures. The investor is also required to monitor the positions on an ongoing basis and implement written policies and procedures for the risk management of the securitisation position.
Under Norwegian law, there are no specific rules applicable to securitisations performed by banks as compared to other financial institutions. Norwegian banks will be both permitted to securitise their financial assets and invest in securitisation positions. Consequently, the transactions are regulated under the same legal framework as described above, with the key legal framework being the CRR/CRR II and the Securitisation Regulation.
There are no special rules that apply to the form of SPEs accomplishing securitisations in Norway. As noted above, Norwegian corporate or similar law is not very well suited for SPEs in securitisation transactions and it is assumed that Norwegian financial institutions wishing to use securitisation would utilise SPEs registered outside of Norway, for instance in Ireland or Luxembourg.
There are no specific provisions under Norwegian law which relate to activities that should be avoided by SPEs in relation to securitisation.
Pursuant to the Securitisation Regulation, the SPE may only perform activities appropriate to accomplishing the purpose of carrying out securitisations.
Currently, there is no securitisation market in Norway and thus there are no common ways to provide credit enhancement.
The MoF’s legislative proposal includes a provision that requires entities to notify the FSAN of any implicit credit enhancement in securitisations. Explicit forms of credit enhancement are established at the inception of the securitisation and may include, eg, over-collateralisation and guarantees, while implicit forms of credit enhancement are agreed upon at a later point and may include, eg, the purchase of underlying exposures at above market price and improving the quality of credit enhancements. The MoF has specifically identified implicit support as a potential obstacle to obtaining significant risk transferred.
There is currently no active securitisation market in Norway and thus no government-sponsored entities participate in the Norwegian securitisation market.
The MoF’s legislative proposal does not contain any particular rules preventing securitisation to be carried out by government-sponsored entities.
Norwegian investors already have the possibility to invest in foreign securitisation positions. The impact of the new securitisation framework on the Norwegian capital market is difficult to predict. Generally, the investor base for securitisation positions consists of large and professional market participants, such as financial institutions, pension funds and insurance companies.
As outlined in 1.1 Insolvency Laws, under Norwegian law, bankruptcy-remote transfers require a legal, valid and binding transfer agreement between the originator and the SPE. Further, the transfer must be considered a “true sale”, meaning that the substantial risk on the underlying financial assets also must be transferred to the SPE.
There are no specific requirements to ensure that a transfer of financial assets is valid and enforceable. For a legal charge to be valid it must be established in accordance with the Norwegian Pledge Act. To obtain legal perfection, additional requirements must be met, see 1.3 Transfer of Financial Assets.
As there is currently no active securitisation market in Norway, and as the proposed securitisation framework is not yet implemented, it is not possible to indicate principal provisions in securitisation transactions.
See 5.1 Bankruptcy-Remote Transfers.
See 5.1 Bankruptcy-Remote Transfers.
See 5.1 Bankruptcy-Remote Transfers.
See 5.1 Bankruptcy-Remote Transfers.
See 5.1 Bankruptcy-Remote Transfers.
See 5.1 Bankruptcy-Remote Transfers.
In a securitisation transaction, the issuer is the bankruptcy-remote SPE which acquires the underlying financial assets from the originator, and which issues the notes. The proceedings from the issuance are used to finance the corresponding pool of financial assets acquired from the originator. For further details on SPEs see 1.2 Special-Purpose Entities.
It is expected that the role of original lender, issuer and servicer, or sponsor will be performed by the same entity, typically a bank. Thus, the debtors under the securitised loans will normally be able to keep the original lender as contact person after the securitisation.
Under the Securitisation Regulation, it is required that the sponsor either be an investment fund or a credit institution.
To fund the acquisition of the portfolio, the SPE will issue notes. In this process they are assisted by placement agents and underwriters, normally referred to as arrangers and/or mangers, which are often investment banks. They are responsible for structuring the securitisation transaction, the marketing and may also underwrite the notes. If the originator itself is a bank, it may also act on its own behalf in this role.
The servicer manages the pool of purchased receivables or the underlying credit exposures on a day-to-day basis. To protect the rights of the debtors under securitised loans, the MoF has proposed a provision that requires the servicer of a securitised loan portfolio to either be a bank, a non-banking credit institution or a finance company, when the originator is a financial institution. The requirement ensures that the servicer has the adequate competence to follow up the client relation with the debtors under the securitised loans.
As a general rule, there are no restrictions on the replacement of the servicer with another entity, for example if the servicer does not comply with its contractual obligations. The MoF noted in its legislative proposal that the replacement should be executed in an orderly manner, which amongst others respects the rights and interests of the debtors under the securitised loans and which does not interfere with the reporting obligations under the Norwegian Act on Debt Information.
The servicer is obliged to make the necessary decisions to protect the rights and interests of the debtors under the securitised loans and to secure that the debtors are not treated differently than if the underlying loans had been transferred to a financial institution.
To ensure a sound treatment of complaints from debtors under the securitised loans arising after the transfer of the loans to the SPE, the servicer shall represent the SPE in non-judiciary dispute resolution mechanisms organised by the state.
By subscribing for the issued notes, investors of securitisation positions fund the SPE’s acquisition of the corresponding underlying financial assets. Further, the investors assume the credit risk of the securitised portfolio as the cash flow generated by the portfolio is redirected to the investors.
See 4.14 Entities Investing in Securitisation.
The trustee is appointed to safeguard the noteholders rights and interests and to be their representative. Further, the trustee monitors the conduct of the other parties in the process and the disbursement of cash flow. In an enforcement scenario, the trustee will act on behalf of the noteholders.
Synthetic securitisation means a securitisation where only the credit risk associated with the underlying financial assets is transferred to the SPE and to investors, either by the use of derivatives or financial guarantees. The securitisation is performed without the underlying financial assets being transferred to the SPE by a “true sale” transaction.
Compared to traditional securitisation, synthetic securitisation is both more flexible and faster to implement, mostly due to the fact that the underlying financial assets are not transferred by form of a “true sale” transaction. Thus, the costs related to the transaction may be lower than for a traditional securitisation.
Synthetic securitisations are not specifically regulated in the MoF’s legislative proposal, but will be permitted under Norwegian law, pursuant to the Securitisation Regulation. Synthetic securitisation will be subject to the same regulation as traditional securitisation. Applicable laws depend on the structure of the transaction, amongst other the granting of financial guarantee may require a licence and synthetic securitisations involving the use of derivatives may be subject to EMIR.
There is no active securitisation market in Norway for the time being and thus there is no market practice regarding common financial assets securitised.
Previous Securitisation Framework
Currently, non-financial institutions and ordinary corporates may securitise their financial assets, but the Norwegian securitisation market is in practice non-existing.
Between 2004 and 2016 Norwegian law enabled financial institutions to securitise their loan portfolios by way of “true sale” transactions to SPEs.
Only few securitisations were performed by financial institutions under this regime and only based on auto loan portfolios. Arguably, the complexity and rigidity of the securitisation legal framework and the lack of beneficial treatment of securitisations under the Norwegian capital requirement regime, prevented the securitisation market from developing.
Incentives to Use Securitisation
There are several types of financial assets that are well suited for securitisation transactions in Norway. Notably, commercial mortgages have strict risk-weighted capital requirements and are seldom included in cover pool for covered bonds.
While the risk-weighted capital requirements for residential mortgages in Norway are low, the strict leverage ratio may incentives the use of securitisation.
The MoF’s proposal furthers notes that auto loans, consumer loans and some small and medium-sized business (SMB) loans are suited for securitisation due to their standardised designs.
Traditionally, the Norwegian securitisation market has been very limited. It remains to see if the implementation of the Securitisation Regulation under Norwegian law will lead to changes. Securitisation certainly seems more feasible in practice now than ever before.
There is no active securitisation market in Norway for the time being and thus there are no common structures established for the securitisation of different types of financial assets.
It is not expected that the type of underlying financial assets will determine the general structure of securitisation transactions. Further, the proposed legal framework does not change depending on the underlying financial assets.
Historically, securitisation has played a minor role in the Norwegian capital market. In Norway, lending and other forms of financing by extension of credit are regulated activities and require either a local license or a regulatory "passport" from another EEA jurisdiction. Norwegian financial undertakings without a banking licence can grant loans based on a licence as a non-banking credit institution, or as a finance company.
The purchase of existing loans is also a licensable activity in Norway and thus in a traditional securitisation the Special-Purpose Entity (SPE) acquiring the underlying financial assets is subject to licensing requirements, capital requirements and supervision. This also applies to SPEs in a synthetic securitisation. Furthermore, loans to consumers in Norway may not be assigned to non-financial undertakings (such as SPEs) without the active consent of the consumer debtor.
In practice, this means that Norwegian financial institutions are prevented from undertaking securitisation transactions, unless specific provisions are passed to facilitate securitisation by:
The now-repealed Norwegian Financial Institutions Act was revised in 2004 to allow Norwegian financial institutions to securitise their loan portfolios by way of a "true sale" to SPEs. However, the securitisation rules were cumbersome and difficult to apply in practice, resulting in very few transactions.
The Norwegian Financial Institutions Act was replaced by the Norwegian Act on Financial Undertakings and Financial Groups in 2016. The new act did not provide for securitisation, thus effectively shutting down the already small Norwegian securitisation market.
However, on 4 December 2020, the Norwegian Ministry of Finance (MoF) published a legislative proposal to implement Regulation (EU) 2017/2402 (the Securitisation Regulation) by cross-reference into Norwegian law. The Norwegian Parliament is expected to vote on the proposal during 2021 and the legislation is expected to become effective shortly thereafter. If passed by the Parliament, the proposed legislation will allow Norwegian financial institutions to once again securitise financial assets, this time under a harmonised European legal framework.
Potential Development of the Norwegian Securitisation Market
It remains to be seen whether the implementation of the Securitisation Regulation in Norway will enable the development of a Norwegian securitisation market. As illustrated by the previous Norwegian securitisation framework, provisions providing for securitisation are not in itself sufficient to develop a securitisation market. The framework must also ensure that securitisation is feasible in practice.
As a starting point, the relatively high capital requirements for Norwegian financial institutions may provide an incentive to securitise their loan portfolios if this leads to capital relief for the originating institutions.
The MoF’s legislative proposal has been well received by representatives from the Norwegian financial industry and there are several favourable changes compared to the previous securitisation framework.
Aspects hindering the development of the market
Arguably, the complexity and rigidity of the previous securitisation framework and the lack of beneficial treatment of securitisations under the Norwegian capital requirement regime prevented the provisions from being used in practice. Further, the transfer of loans was subject to a tacit consent requirement from the debtors under the securitised loans. Each individual debtor had to be informed by the financial institution of the contemplated securitisation and had a minimum of three weeks to reject the assignment. The MoF has not proposed a corresponding provision in its legislative proposal, but instead has proposed a duty to inform the debtors ahead of completing the sale of loans to the SPE.
The fee structure for registration in the Norwegian Mortgaged Movable Property Register has also been proposed for amendment, so that it does not represent an obstacle to securitisation. Further, the new provisions provide for synthetic securitisation alongside traditional securitisation.
Further Regulation Is Anticipated
Pursuant to the EEA Agreement, an EFTA EEA state like Norway shall implement EU regulations with EEA relevance law without amendments other than the necessary formal adjustments related to the EEA context. In order for Norway to comply with its obligations under the EEA Agreement, it is not always sufficient to simply implement EEA legislation. Consequential amendments to existing Norwegian legislation may also be required to ensure fulfilment.
Amendments relating to securitisation
The MoF’s legislative proposal implements the Securitisation Regulation by reference, but with few amendments to existing Norwegian legislation. On several occasions in its legislative proposal, the MoF expresses doubt as to whether further national regulation is necessary or advisable. Partially, this can be explained by the fact that it is difficult to predict to which extent and in which form securitisation will be utilised by financial institutions in Norway. Further, there is little precedence or previous experience to rely on.
For instance, the MoF notes that Norwegian corporate or similar law is not suited for registering SPEs in Norway. Nonetheless the legislative proposal does not include amendments in this regard. The reason being that the MoF - based on input from Norwegian financial institutions received in a legislative hearing – has assumed that Norwegian financial institutions would prefer to use SPEs registered outside of Norway in securitisation transactions.
Consequently, the MoF did not find it necessary to detail the requirements for a Norwegian SPE to be exempt from the licensing requirement. Instead, the proposal is that the MoF at a later point may issue regulations detailing requirements for exemption from the licensing requirement, eg, that the SPE does not issue notes on a continuing basis.
The MoF follows the same approach on several occasions, eg, by proposing that the MoF may issue regulations further detailing the securitisation framework regarding the risk retention requirement, the transparency requirement, re-securitisation, the substantial transfer of risks associated with the underlying assets, the activities of the servicer, what information debtors under the securitised loans are required to receive, etc.
Arguably, in order to secure the optimal functioning of the Norwegian securitisation framework and sufficient predictability for Norwegian financial institutions, the legislative proposal should be comprehensive and not leave key elements to be detailed at a later point. However, if a Norwegian securitisation market develops, it should be expected that MoF may issue detailed regulations in several of the above-mentioned areas.
Financial Assets Suited for the Norwegian Securitisation Market
The MoF’s legislative proposal notes that is difficult to predict to which extent securitisation will be utilised by Norwegian financial institutions. Previous experiences from European countries show that a securitisation framework itself is not sufficient to develop a sizeable securitisation market. Especially in the Nordic countries the use of securitisation has been limited.
In general terms, Norwegian financial institutions are solid and have vast access to capital compared to many European countries. Thus, Norwegian financial institutions are less incentivised to use securitisation transactions as a financing tool. Currently, covered bonds are the preferred tool for the funding of Norwegian banks and the Norwegian covered bond market is one of the largest covered bond markets in Europe. At the time of writing, Norwegian issuers have issued cover bonds backed by residential mortgages for a total value of NOK1.041 billion, equalling over 43% of total residential mortgages in issue in Norway (the Norwegian cover pools almost solely consist of residential mortgages).
Benefits of securitisation
Still, there are several benefits of securitisation which may lead Norwegian financial institutions to use securitisation instead of, or in addition to, covered bond funding. In particular, the possibility of transferring the credit risk on the underlying financial assets to the investors in the securitisation with a corresponding reduction of regulatory capital costs for the originating institution may incentivise the use of securitisation.
Although the risk-weighted capital requirements for residential mortgages in Norway are low, the regulatory leverage ratio applicable to Norwegian financial institutions is strict compared to other European countries and may incentivize the use of securitisation by Norwegian originators.
Commercial mortgages are also well suited for securitisation. The risk-weighted capital requirement is strict and only a small part of commercial mortgages is currently included in the cover pools of Norwegian covered bonds.
The MoF further notes that auto loans, consumer loans and some small and medium-sized business (SMB) loans are suited for securitisation due to their standardised designs.
In 2015, the Norwegian Parliament advised the Norwegian government that it would look further into the possible introduction of a Norwegian withholding tax on interest. The MoF’s proposal on withholding tax was finally proposed and passed in late 2020, but was far more limited than many market participants originally feared.
As of 1 July 2021, a 15% withholding tax on interest, royalties and certain lease payments to related parties in low tax jurisdictions will be introduced in Norway. Payments to entities genuinely established and conducting real economic activity in an EU/EEA Member State are exempt from the withholding tax. Parties are considered to be related if there is at least 50 per cent direct or indirect ownership or control between them. A company is considered resident in a "low tax country" if the general corporate income tax on the company's total net income is less than two thirds of the tax that would have been imposed on the company had it been resident in Norway.
The implementation of further rules on withholding tax is currently not anticipated.
The "Banking Package"
In its legislative proposal the MoF notes that the same EU capital requirement regime will apply for Norwegian financial institutions as for EEA institutions. The present capital requirement regime in Norway is based mainly on Directive 2013/36/EU (CRD IV) and Regulation (EU) 575/2013 (CRR), and is currently being amended through the "banking package", which consists of Regulation (EU) 2019/876 (CRR II), Directive (EU) 2019/878 (CRD V) and Directive (EU) 2019/879 (BRRD II). The proposal for implementation of the "banking package" in Norway is subject to public consultation until 6 January 2021.
As of 1 January 2020, Norway is no longer able to apply the Basel I Capital Floor pursuant to the Basel II accords to the capital requirements. The MoF has proposed certain measures to avoid a reduction of capital requirements for Norwegian financial institutions as a result of this. Among other things, the systemic risk buffer applicable to banks' credit exposures will be increased from 3% to 4.5%, starting in 2021 for the larger banks and from 2023 for the smaller ones.
Compared to other European countries, the regulatory leverage ratio in Norway is strict and may create more incentives to use traditional securitisation. Synthetic securitisation will not have an impact on the regulatory leverage ratio as the underlying financial assets remain on the originator’s balance sheet after the securitisation.
The COVID-19 Pandemic
The market turmoil following the COVID-19 pandemic, coupled with the measures implemented by authorities worldwide and in Norway to contain it, has created significant crises both in the real economy as well as in the financial sector. As of January 2021, there is still uncertainty regarding future developments and the effects of the pandemic on the economy. The Norwegian authorities have taken significant measures to mitigate the adverse economic effects of the pandemic, eg, introducing a guarantee scheme for bank loans to enterprises, several extensive economic stimulus packages and temporary amendments to the tax legislation.
Currently, the pandemic has not led the Norwegian authorities to impose restrictions on financial institutions that would directly affect securitisation transactions. The Financial Supervisory Authority of Norway proposed to introduce a regulation restricting banks’ dividend distribution in order to maintain their robust capitalisation, but this was rejected by the MoF which instead urged Norwegian banks to refrain from dividend distribution or share buybacks in 2020. It is expected that the MoF will prolong the recommendation for at least parts of 2021.
There is still uncertainty regarding the development of the pandemic and the introduction of further measures affecting the use of securitisation transactions in Norway cannot be ruled out.