The Goal of Securitisation
The goal of a securitisation transaction is to create a large pool of otherwise illiquid financial assets, such as consumer loans or trade receivables, and package that pool into an investable financial instrument so that the investors in the instrument are paid interest and principal from the proceeds of the pool of assets and only exposed to the risk of the assets, as opposed to being paid by the party that originated the financial assets and exposed to the credit risk of the whole business of the originator.
If the underlying assets are of a good quality, securitisation enables originators to obtain funding at beneficial terms compared to other sources, such as bonds or bank loans, where the investors are required to consider the credit risk of the whole business.
Securitisation can also be used for risk and capital management purposes by optimising the balance sheet and regulatory capital requirements of the originator and refocusing portfolio exposure to, for example, certain types of assets or geographical locations.
Successfully achieving these objectives requires the pool of assets to be segregated from the originator’s assets and safe from the reach of the creditors of the originator, even if the originator becomes insolvent. In practice, segregation is accomplished by the originator selling the assets to a securitisation special purpose vehicle (SSPE) established specifically for the transaction to purchase and hold the assets and issue the instrument.
Risk in Insolvency of the Originator
If the originator becomes insolvent and is placed in insolvency proceedings, all transactions it concluded before the insolvency proceedings are reviewed carefully by the insolvency officer for any weaknesses that would enable the insolvency officer to demand the return of assets to the insolvency estate.
Under Finnish insolvency laws, the legal grounds for such demand for return primarily consist of sham transactions and transactions at undervalue, as well as so-called claw-back grounds, where transactions concluded during a specified period before insolvency may be revoked if they meet certain objective criteria set out under law. Claw-back grounds include improper preference of a creditor over other creditors, payment by unusual means and delayed granting or perfection of security.
In addition, where a transaction’s true factual nature does not correspond to its supposed form, the form may be ignored and the transaction may be recharacterised to fit its true nature. Recharacterisation may result in the counterparty of the transaction having to return all or some of the assets that it received from the insolvent party.
How to Avoid the Risk
To avoid the securitisation transaction falling into any of the above-described traps, the transfer of assets should be structured so that the transfer of assets away from the originator is legally valid and enforceable even if the originator becomes insolvent and so that no aspect of the asset transfer can be avoided, revoked or recharacterised under insolvency laws to the detriment of the SSPE and investors. To ensure that the transaction is not recharacterised as a secured loan transaction, the transfer of assets from the originator to the SSPE should meet the requirements for a legal true sale.
Furthermore, the SSPE should be established as a separate, independent entity free of external liabilities to mitigate the risk of the SSPE itself being subject to insolvency proceedings.
A final layer of investor protection is typically created by the SSPE granting security over the pool of assets in favour of the investors. Such security should also be legally valid and enforceable and not subject to a claw-back risk if the SSPE becomes insolvent.
The SSPE should be an “orphan” entity, meaning that it is separate and independent from the originator’s group structure. Such independence is typically achieved by using a charitable trust or foundation to establish the SSPE and hold the shares in the SPE. It is not possible to set up a trust in Finland. A typical structure in Finnish transactions is an Irish trust, which is established specifically for the transaction and wound up at the end of the transaction.
SSPE Legal Form and Jurisdiction
If the SSPE is established in Finland, it can be either a limited liability company or a limited partnership. There are few Finnish SSPEs and their use in practice is limited to certain types of private transactions. For commercial purposes, in Finnish securitisation transactions, it is common to set up the SSPE in an offshore jurisdiction like Ireland or Luxembourg that:
The SSPE is typically a limited liability company or designated activity company managed by an independent corporate services provider.
The SSPE’s exposure to external liabilities should be limited to achieve bankruptcy remoteness, meaning that the SSPE and its assets should be safe from bankruptcy proceedings. The SSPE should be established specifically for the transaction and not have any business activities or liabilities beyond the securitisation transaction. Its only function is to purchase the securitised assets, issue the notes to fund the purchase of assets and passively hold the assets for the duration of the transaction. The SSPE should not have any employees. Limited recourse and non-petition provisions are included in the constitutional documents and transaction documents to safeguard the SSPE against legal action and insolvency filings that could jeopardise the transaction. However, the effectiveness of such provisions may be limited by general principles of law with respect to a Finnish SSPE.
In Finland, there is no legal consolidation of an SSPE or its assets in the insolvency of the originator as such, but transactions with related parties are scrutinised more closely and subject to longer claw-back periods than transactions between unrelated parties. For this reason, it is preferable for the SSPE to be unrelated to the originator. In private securitisation transactions, the parties will sometimes take a conscious risk to deviate from one or more aspects that ensure the bankruptcy remoteness of the SSPE – for example, by using an SSPE held by the originator group and not an orphan SSPE.
To ensure that the transfer of assets is valid and enforceable against the originator’s creditors and insolvency estate, the transfer must be perfected and meet the requirements for a legal true sale.
The perfection measures required for a valid and enforceable transfer of assets depend on the type of financial assets in question. Generally, an undisclosed transfer of receivables is not effective other than between the parties. Therefore, a timely notice to the underlying obligor is always required for a perfected transfer of receivables. There is also a general requirement that control of the assets is vested with the transferee for a perfected transfer of assets. Accordingly, a redirection of payments is necessary to ensure perfection of the transfer and that the incoming collections are not commingled with the assets of the transferor. In practice, a new collection account is typically opened in the name of the SSPE to receive collections, and other transaction parties are appointed to manage the collections.
For a legal true sale, it is generally required that the transaction seeks to irrevocably transfer title to and risk of the assets to the SSPE and not, for example, to create a secured financing transaction that is meant to be unwound once the financier has received payment. There is no specific legislation on true sales; the criteria are discussed in legal doctrine, but not in a clear or definitive manner. A true sale is assessed as a whole, considering all relevant facts and circumstances of the transaction either supporting a true sale or speaking against it. Legal opinions are typically obtained to confirm the validity and enforceability, and to assess the true sale nature of a transaction. Due to the lack of definitive rules, the Finnish true sale opinion is a reasoned or discussing opinion.
Legal opinions will typically address certain aspects of insolvency laws that are critical to the assessment of the bankruptcy remoteness of the transaction, such as rules on the avoidance or revocation of transactions in the insolvency of the originator.
There is no transfer tax on the transfer of receivables, assuming that the receivables do not qualify as securities for transfer tax purposes.
There are no stamp, registration or similar taxes in connection with the execution of securitisation transaction documents.
Finnish corporation tax is assessed in accordance with territorial limitations, such that a company may only be assessed to Finnish corporation tax to the extent that it is:
In addition, a non-Finnish resident company that does not have a branch or permanent establishment in Finland may be liable to Finnish income tax on certain Finnish source income, subject to the provisions of an applicable double tax treaty.
Neither a permanent establishment nor any other charge to Finnish income tax would generally be expected to arise for the SSPE solely as a result of purchasing Finnish receivables and appointing a servicer to service them. In public securitisation transactions, it is common to seek an advance tax ruling confirming that no permanent establishment will arise for the SSPE in Finland as a result of the transaction.
Withholding tax is generally not levied on any payments on receivables to a non-Finnish resident purchaser.
Certain goods and services are excluded from VAT, such as financial and insurance services. The purchase of receivables would generally qualify for this exemption.
Servicing and debt collection are generally subject to Finnish VAT at the standard rate (currently 24%). However, services that are not deemed to be supplied in Finland for VAT purposes are not subject to Finnish VAT. With respect to certain types of collateral assets, the SSPE may be liable for VAT in Finland for the realised profit margin in connection with an enforcement action against the underlying debtor.
It is common for the transaction parties to seek customary tax opinions and for such opinions to be qualified by standard assumptions and qualifications – for example, to the effect that the tax authorities may change their interpretation or application of the provisions of law or regulations in the future.
The off-balance sheet treatment analysis of accounting and the legal true sale analysis have many features in common and the conclusions are frequently the same, but not always. The lawyers advising the transaction parties will conduct their analysis based on the transaction documents and applicable legal rules, and the seller’s and purchaser’s accountants will conduct their own analysis following the applicable accounting rules. Accordingly, it is possible to reach off-balance sheet treatment without a legal true sale and vice versa.
The lawyers advising on a securitisation transaction are usually required to opine on the legal true sale nature of the transaction. As there are no definitive rules on what constitutes a legal true sale, the opinion is a reasoned or discussing legal opinion.
Detailed and specific disclosure requirements are contained in EU Securitisation Regulation (Regulation (EU) 2017/2402 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, as amended – the “EU Securitisation Regulation”), and its delegated rules and regulatory guidelines and technical standards.
The due diligence and transparency provisions of the EU Securitisation Regulation impose obligations on originators, SPEs and sponsors to provide detailed disclosure, and on investors to seek such disclosure. The disclosed information includes the prospectus or transaction summary, transaction documents, initial and ongoing loan-level data and information on certain exceptional events affecting the securitisation transaction throughout the life of the transaction.
This is not applicable in Finland.
The EU Securitisation Regulation requires the originator, sponsor or original lender to retain a material net economic interest in the securitisation transaction of not less than 5%, on an ongoing basis. The regulation sets out the permitted methods for risk retention, which include retaining 5% of the first loss tranche or 5% of randomly selected exposures that would otherwise have been part of the securitisation. The national competent authorities, including the Finnish Financial Supervisory Authority (FIN-FSA) in Finland, are tasked with supervising the satisfaction of the risk retention requirement, and non-compliance will trigger administrative sanctions.
The EU Securitisation Regulation imposes periodic reporting requirements on loan-level data on a quarterly basis for transactions that are not asset-backed commercial paper programmes, and on a monthly basis for transactions that are. Sometimes, the parties will voluntarily agree on a more frequent reporting interval than required under the regulation – for example, if the investor itself is an asset-backed commercial paper conduit subject to the more frequent reporting interval. The European regulatory authorities issue technical standards and guidance on the form and contents of reporting and the national competent authorities, including the FIN-FSA in Finland, are tasked with supervising the satisfaction of the reporting requirements.
The EU Credit Rating Agencies Regulation (Regulation (EU) No 462/2013 amending regulation (EC) No 1060 on credit rating agencies) and its delegated rules and guidelines regulate the activities of rating agencies in the European Union, including Finland. Any firm that is established in the EU and carrying out credit rating activities without being registered with the European Securities and Markets Authority (ESMA) is operating in breach of the regulation and will be subject to supervisory measures and fines. Any firm that is registered with and certified by ESMA to act as a rating agency but fails to comply with the ongoing requirements of the regulation may be subject to an investigation resulting in public notices, fines and withdrawal of registration.
The capital, liquidity and risk rules that apply to credit institutions and investment firms are set out in Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (the EU CRR) and its related directives, implementing domestic legislation, regulations and guidelines. Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance (“Solvency II Recast”) and its implementing domestic legislation, regulations and guidelines set out the capital and liquidity rules that apply to insurance undertakings.
The treatment of securitisation positions under capital, liquidity and risk rules is regulated by these pieces of legislation in detail, including the calculation of regulatory capital to be held with respect to securitisation exposures.
The use of derivatives under the EU Securitisation Regulation is limited to hedging the SSPE’s interest and currency risk. The key piece of legislation that applies to the use of derivatives by SSPEs in securitisation transactions is Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories, as amended and recast (the “EMIR Recast”). The EMIR Recast contains requirements to report detailed information on each derivative contract to trade repositories and make the same available to supervisory authorities, and generally to clear all standardised OTC derivatives contracts centrally through a central securities depository, or to apply risk mitigation techniques.
The EU Securitisation Regulation provides that securitisations may only be sold to retail clients subject to a suitability test. Furthermore, the mandatory provisions of the EU Securitisation Regulations regarding investor due diligence, reporting, risk retention and a ban on resecuritisation are all designed to protect investors and promote stability in the securitisation market. The provisions of the EU MiFID, EU Market Abuse Regulation, Prospectus Regulation and other applicable securities markets legislation must also be taken into account when selling securitisations. In addition, Finnish consumer protection legislation on the sale of financial instruments may become applicable. The national competent authorities, including the FIN-FSA in Finland, are tasked with supervising compliance with the investor protection provisions. Penalties for non-compliance include prohibition on operations, administrative fines, or criminal liability in certain cases.
The Finnish act on credit institutions (610/2014, as amended, implementing the EU CRR and CRD regime in Finland) regulates certain aspects of banks securitising their assets. Furthermore, the Finnish promissory notes act (622/1947, as amended) contains provisions that regulate, for example, transfer perfection requirements and the underlying debtor’s right to make payments or set off their receivables. Many of such provisions apply regardless of whether the seller is a bank or other financial institution or not, but some of the rules are different for banks and other financial institutions compared to non-financial originators.
Finland is a covered bond jurisdiction. The Finnish act on mortgage banks and covered bonds (151/2022) regulates the licensing of mortgage banks in Finland and the issuance of covered bonds by Finnish mortgage banks. The act sets out requirements on certain operational matters and structures of covered bonds and their permitted collateral. It also regulates the disclosure requirements to investors and the treatment of covered bonds in the insolvency of the mortgage bank.
In Finnish transactions, the SSPE is usually established offshore in an EU jurisdiction that is commonly used for SSPE structures. Where the SSPE is a Finnish entity, the legal entity is generally formed as a limited liability company, although it has been suggested in literature that a limited partnership might also be suitable. In Finland, the companies act does not specifically cater for special purpose entities, but it is possible to include provisions in the SSPE’s articles of association regarding its purpose and, for example, winding-up. Limited recourse and non-petition provisions may also be included in the articles, but their enforceability is limited.
Where the SSPE is established in Finland, it should avoid such activities that would trigger licensing or registration requirements – for example, taking deposits or other repayable funds or originating new loans. Penalties for conducting activities without an appropriate licence or registration include prohibition of activities and administrative fines imposed by the relevant supervisory authority, usually the FIN-FSA.
It is common to combine different methods of credit enhancement – eg, subordination, over-collateralisation and cash reserves – in a manner that is proportionate to the transaction, so that the credit risk of the underlying assets is still foremostly transferred to the SPE. An excessive use of credit enhancement may adversely impact the true sale assessment and off-balance sheet treatment.
Historically, Finnish government and municipality-sponsored entities actively participated in the securitisation market, but there has been no notable market activity by publicly sponsored entities since the mid-2000s.
Investors in Finnish securitisation transactions are typically large European institutions or their affiliates.
The asset purchase agreement is the primary document to effect a bankruptcy-remote transfer of assets. It typically contains the transfer and perfection mechanics, the purchase price, the eligibility criteria, representations and warranties relating to the business of the seller and the purchaser and the underlying assets, possible repurchase mechanisms (which need to be limited in scope to achieve a true sale), covenants, indemnity for breach of representations and covenants, the conditions and mechanism for further purchases, jurisdiction and dispute resolution. It is common for the asst purchase agreement to be governed by the laws of the jurisdiction where the assets are located and for dispute resolution to occur under the courts of that same jurisdiction.
The seller’s warranties typically relate to the seller as a corporate entity on the one hand and to the securitised assets on the other hand. The seller warrants through corporate warranties that it has the legal and factual ability to enter into the contemplated transactions. The seller’s warranties relating to the assets typically relate to the quality of origination, the eligibility and quality of the assets and underlying debtors and certain tax matters.
The purchaser also typically gives certain corporate warranties, but these are more limited than the seller’s warranties and generally relate to its corporate powers and tax presence in Finland.
If the parties wish to achieve a simple, transparent and standardised (STS) securitisation under the EU Securitisation Regulation, certain additional warranties are given to cover the matters required for the assets and the transaction to meet all STS requirements.
Breach of a corporate warranty, if not remedied, could result in a default by the breaching party and an early termination or amortisation of the transaction. Breach of eligibility criteria and asset warranties will typically result in an obligation to repurchase and replace the affected asset.
The specific perfection measures required for a valid and enforceable transfer of assets depend on the type of assets to be securitised. In Finland, an undisclosed transfer of receivables is not effective other than between the parties. Therefore, a notice to the underlying debtor is always required for a perfected transfer of receivables. The underlying debtors should also be instructed to make payments to the transferee instead of the transferor. A general requirement for a perfected transfer of assets is that control of the assets is vested with the transferee. It is also important to ensure that the incoming collections are not commingled with the assets of the transferor. In practice, a new collection account is usually opened in the name of the SSPE to receive collections. If the securitised assets are receivables secured by collateral, the related collateral should generally also be transferred to the transferee.
The parties agree in the asset purchase agreement and the relevant security documents on the nature and timing of perfection measures. If the party required to complete a perfection measure fails to do so, certain other transaction parties are usually authorised to complete such measures on their behalf. Unlike in certain other jurisdictions, in Finland perfection measures should always be taken without delay. Accordingly, it is not feasible to delay perfection until a trigger event in transactions involving Finnish assets.
Typically, the SSPE’s activities will be limited by negative covenants in the debt documents that restrict it to the role of a securitisation special purpose entity. The covenants in the asset purchase agreement generally relate to maintaining the seller’s and the purchaser’s ability to comply with their respective obligations under the asset purchase agreement. A breach of covenants, if not remedied, may result in an early termination or amortisation of the transaction.
The main document governing servicing is the servicing agreement. The SPE and the security agent appoint the servicer in their respective roles to carry out its tasks during the transaction. The servicer’s primary tasks include:
The servicing agreement also contains provisions on servicer default and termination and replacement of servicer.
The principal defaults and their effects in securitisation documentation are slightly different for each transaction party, but generally the default is triggered by insolvency, a ratings downgrade or failure to comply with transaction documents. If the SPE defaults, the notes become payable, transaction security becomes enforceable and the transaction switches to post-enforcement priority of payments. If the servicer defaults, it is replaced by the back-up servicer. If the originator defaults, any revolving period ends and the seller is no longer able to sell further assets to the SPE.
The principal indemnities in a securitisation relate to the seller indemnifying the SPE against any breach or misrepresentation by the seller. These indemnities are typically included in the asset purchase agreement. However, to achieve a true sale, it is crucial that the seller does not indemnify the SPE for any losses resulting from the inability or unwillingness of the underlying debtor to make payments.
The various external service providers, including in particular the agent and security trustee, will typically demand that they receive customary indemnities against any claims that arise from them performing their respective servicers.
The “issuer” can be understood to refer to the SPE as the actual entity that issues the debt, usually in the form of notes. The SPE’s role is limited to purchasing the assets and issuing the debt to finance the purchase. The SPE does not have any employees and it does not conduct any other business activities beyond the securitisation transaction. It is wound up when the transaction ends.
In the wider transaction context, the “issuer” can also refer to the originator, who begins the entire transaction to obtain funding, manage capital or risk, or both. The originator engages all the other transaction parties to assist it in the transaction. The originator typically has many additional roles, such as subordinated lender, servicer and risk retention holder. The originators in Finnish transactions are typically non-bank lenders (such as auto financing companies or unsecured consumer lenders financing their portfolios) or industrial companies (financing trade receivables) seeking to obtain funding at beneficial terms compared to bond markets or leveraged financing.
Under the EU Securitisation Regulation, a sponsor is a credit institution or an investment firm, other than an originator, that establishes and manages a securitisation transaction that purchases exposures from third party entities. Finnish securitisation transactions are typically led by the originator and there is no sponsor.
The main adviser in a Finnish securitisation transaction is usually the arranger or lead manager, which usually helps the originator engage all other advisers (including agent, trustee, cash manager, swap counterparty, legal advisers in all jurisdictions, corporate services provider, listing agent, rating agencies, verification agent and securitisation repository), structure the transaction and sell the transaction. In a public transaction, there is typically more than one such adviser, in which case they are called joint lead managers. In a private transaction, it is common for the arranger or its affiliate to also be the original noteholder or lender.
The servicer needs to have the requisite experience and operational readiness to take care of the portfolio, including monitoring and reporting collections and loan-level performance. The servicer acts as the interface with the underlying debtors, since the SPE does not have any employees. The servicer sends notices of transfer to the underlying debtors at the commencement of the transaction and in connection with any additional portfolio sales. The servicer also manages debt collection, with the help of an external debt collection agency where required.
Generally, the originator is appointed to act as the servicer for seamless customer service and cost efficiency reasons. The parties agree in the transaction documents that the servicer manages the receivables portfolio essentially as it would manage its own, unsecuritised portfolio, but on behalf of the SPE. However, the transaction documents usually provide for a back-up servicer or back-up servicer facilitator to step in if the servicer defaults, to ensure continuing operations. Back-up servicers are typically debt collection agencies.
Investors are usually large, international institutions. Pursuant to the EU Securitisation Regulation, the investors are obliged to conduct due diligence on the securitisation transaction prior to investing. The investors generally act as passive holders of the notes, but in certain situations they may be called upon to vote on certain matters, such as amendments to the main transaction documents or enforcement actions.
Agents and security agents or security trustees manage the practical relationship between the SPE on the one hand and the investors on the other hand.
The agent usually receives the reports to be distributed to investors and the SPE primarily communicates with the agent while the transaction is ongoing.
Finnish law does not have the concept of trust or trustee and, from a Finnish law perspective, the security trustee acts as an agent and representative of the secured creditors. The security agent or security trustee enters into the transaction security documents as representative of the secured creditors and holds the security assets on behalf of the secured creditors.
Synthetic securitisation is permitted under the EU Securitisation Regulation. The EU Securitisation Regulation sets out the rules for synthetic securitisation.
Securitised assets include various types of financial assets, such as equipment finance receivables, unsecured consumer loans, trade receivables and whole businesses.
All securitisation transactions are generally governed by the EU Securitisation Regulation. There is no specific Finnish securitisation law. The rules regarding the transfer of receivables are generally governed by the Finnish promissory notes act and related legal principles, precedents and doctrine. As there is no specific securitisation legislation that would steer or confine the market to a specific structure, there is some diversity in structures. However, generally, private transactions are structured in a less complicated manner than public transactions, with the latter being much influenced by existing public transaction structures.
Introduction of Securitisation in Finland
When it was first introduced to the US and global markets, securitisation was rather quickly embraced by Finland, like extreme winter sports and sports car racing: boldly, head-on and with decent success.
The first issuers of securitisation transactions in the markets were publicly sponsored. These transactions by municipal and government bodies were structured like private transactions, although it was common to have publicly guaranteed elements, which resulted in very favourable ratings and rates on the senior tranches. Government-sponsored securitisation of social housing loans through the popular Fennica series was also one of the key tools to rehabilitate the public balance sheet in preparation for Finland joining the European Monetary Union.
The government and municipal-sponsored deals were soon joined by private originators of financial assets ranging from trade receivables and corporate and consumer loans to whole businesses and paper and forest assets. Although deal volume and size did not nearly rival those of larger economies, it can be said that the market was active from the early 1990s to late-2000s, until the global financial crisis. However, bank originators were conspicuously absent from that market, for reasons discussed below.
Post-Crash – the Lead Into the Current Market
Despite its dubious reputation as the irresponsible instrument that caused the crash in 2008, securitisation soon reared its head again in Finland in the aftermath of the global financial crisis. As many former banking relationships had been through some choppy waters and many of those ships had sunk without hope for meaningful salvage, traditional Nordic-style relationship banking held less sway, and the market was on the lookout for alternative and diversified sources of financing.
Many non-bank lenders and corporates found an exciting opportunity to obtain funding at attractive rates through private securitisation transactions and, in one case, an auto lender utilised a successful annual public asset-backed securitisation (ABS) series that has continued for a decade. That series was recently joined in the market by another popular auto warehouse and ABS series, finessing the structure and issuing both private and public transactions even more frequently while raising some EUR3 billion over just two years. Bank originators were still nowhere to be seen.
Drivers Behind Legislative Development
Securitisation has never been subject to specific domestic legislation in Finland, which has been both a blessing and a curse for the development of the market. The lack of a clear legislative framework for securitisation is perhaps one of the main reasons why prudentially supervised issuers like credit institutions have had a difficult time tapping the market. At the same time, that same lack of legislation has provided the flexibility that enabled non-bank lenders and corporates to come up with innovative deal structures.
Initially, there was both pull and push for credit institutions to enter the market – banks were both curious on their own accord and driven by external circumstances to explore securitisation as a tool for capital management.
In Finland, the 1980s were a time of monetary and economic liberation, culminating into a wild era of casino economy. Lending and borrowing from domestic and international sources had been deregulated and the domestic currency was maintained at an artificially strong level. Domestic banks’ balance sheets were becoming bloated, and the prudential regulator was beginning to take issue. With the introduction of Basel I in 1988, domestic banks were forced to look at ways to manage capital adequacy. Many plans to launch real estate mortgage-backed securitisations (RMBS) were promptly put underway, some of them progressing all the way to agreed form. However, since there was no clear legislation in place, every single one of these plans was ultimately abandoned due to structuring difficulties or escalating disagreement with authorities – the financial supervisory authority, but also the tax authority.
At the turn of the 1990s, as the housing bubble burst, the market fell into a depression worse than that of the 1930s. Securitisation was not to blame, nor was it blamed; on the contrary, the government saw securitisation as a potential tool to help the economy recover.
Consequently, the Ministry of Environment’s Housing Department set up a task force that issued a discussion paper on the need to update domestic legislation to enable and facilitate securitisation transactions. The outcome of that discussion paper was that there are in fact no obstacles to securitisation in the current legislative framework and, therefore, there is no need for any legislative change. However, the discussion paper did call for the financial supervisory authority to set out guidance to make securitisation clearer and easier. The guidelines were issued a few years later. Updates to the Basel framework resulted in additional guidance on the capital requirements in connection with securitisations in 2006. These guidelines remained the primary source of guidance until the introduction of the EU Securitisation Regulation and its entry into force in 2018.
EU Securitisation Regulation
After the global financial crisis, regulators and pundits across Europe and the world spoke out about reining in the detrimental effects of unchecked securitisation activity, with the discourse in Europe ultimately resulting in the EU Securitisation Regulation.
In Finland, securitisation was never a dirty word, as outcomes for investors were generally quite positive during and after the crisis. Nonetheless, the outcome of the global developments was that there was now a firm legislative framework for many aspects of securitisation that became directly applicable law in Finland. Through the introduction of the EU Securitisation Regulation, securitisation turned from something that was a little complicated and obscure into something that was relatively simple, standardised and transparent.
Legislative Status Quo in Finland
Today, the EU Securitisation Regulation and its delegated acts and regulatory guidelines issued by pan-European authorities are the main rules that govern securitisation in Finland. Although it is undisputed that securitisation is a specific instrument that serves a specific purpose with the EU Securitisation Regulation as the main legal source, the questions relating to the effectiveness of asset transfers and security take are based on traditional domestic legislation governing asset transfers and security take generally, and general insolvency legislation forms the parameters and perimeters for bankruptcy-remote structures and transactions.
The concept and definition of a “true sale” remains mostly a topic of academic legal doctrine, which is both theoretical and complicated, with some of it being outdated as well as conflicting. Further uncertainties that arise from general companies law and tax law – which are suitable for most economic activity, but not specifically designed to cater for securitisation – create additional pressure that drives many structures to other EU jurisdictions that are more familiar to investors and have normative certainty.
Of course, as described above, this has been the case for the entire history of securitisation in Finland and has not prevented market participants from successfully completing many securitisation transactions that withstand the tides of cyclical movements. The government bodies have time and time again concluded that the legislative status quo is acceptable. Nonetheless, the lack of a clear and suitable legislative framework creates transaction costs and execution uncertainty. Seeing the practical hurdles and finding ways to cross those hurdles, it is easy to say that the further development of the Finnish securitisation market would be served by specific legislation that addresses the issues that the EU Securitisation Regulation is unable to address due to a lack of EU competency under the EU constitutive treaties.
Competition From Covered Bonds
In the early 2000s, the first iteration of the Finnish Act on Mortgage Banks was introduced to regulate the issuance of covered bonds. Although covered bonds do not offer the same capital management opportunities as securitisation, because the cover pool remains on the bank’s balance sheet, their clarity and ease – and consequently relatively low transaction costs – made covered bonds the go-to instrument for mortgage banks. The trend continues and Finland, with the other Nordic countries, is a strong covered bonds jurisdiction. Nonetheless, the ongoing tightening of prudential and regulatory requirements has already led to some Nordic banks tapping the securitisation market, and further forays are expected.
What’s in the Market Now and Next?
Nowadays, unsecured consumer loans and trade receivables are typically securitised privately, and the transaction structure is typically less complicated than in public deals. The public deal space currently consists of auto ABS transactions; the prevalence of auto ABS is explained by the availability of good quality assets and the fact that there is already industry precedent paving the way for new issuances.
The availability and quality of assets is explained by geopolitical circumstances: Finland is a sparsely populated country with a large land mass, and personal transportation is a necessity in most parts of the country. Finns are notoriously good at paying their auto debt and it is said that a Finnish consumer would rather lose the house than the wheels in front of it, and there may be some truth to this as auto finance default rates are low compared to European and global levels. However, as the instrument is becoming more familiar to originators and investors, it is not all about auto any more and it looks likely that more issuers and a larger variety of assets will be coming into the market.
The current interest and geopolitical climate mean that it may be a while before we see another public ABS. However, warehousing structures have emerged, with issuers collecting momentum and getting ready behind the scenes for a public issuance, if and when the market opportunity may again occur. Publicly available precedents show the way for new first-time issuers. Fully private transactions with no intention for a public ABS exit will, however, remain popular for smaller portfolio sizes due to a lack of commercial feasibility for a public transaction.
Simple, transparent and standardised (STS) transactions were first introduced by the EU Securitisation Regulation on the true sale side and expanded into the synthetic transaction space by the 2019 amendment. Seeking the STS label is an investment made by the originator to show the quality of the transaction, and can shave off a significant number of basis points from the pricing of deals. In Finland, the first STS transactions were issued quickly after the entry into force of the regulation and have caught on in both public and private deals.
Synthetic securitisations are not yet common in Finland, but more are expected to be seen after the first few examples. Synthetic securitisations are used for capital and risk management purposes by transferring the risk of the underlying exposures to a counterparty by derivative or other instruments without a true sale of the assets. Nordea Bank has explored synthetic risk sharing transactions in several Nordic jurisdictions, and in 2022 entered into a multibillion-euro STS-labelled synthetic risk sharing transaction covering corporate loan exposures across Denmark, Finland, Norway and Sweden.
ESG will be a topic of increasing importance in future transactions, with a primary focus on the “E”, which stands for environmental. Earlier in 2022, the EBA released a report on developing a framework for sustainable securitisation, including an update on the sustainability-related disclosures and due diligence requirements for securitisation products. The work seeks to conform the EU Securitisation Regulation into the sphere of the broader European environmental, social and governance regulatory development.
While this important work is ongoing and encompasses a multitude of issues ranging from ethical and philosophical to practical and quantitative, practical ripples are starting to be seen in actual transactions. For instance, in recent Finnish auto ABS transactions, investors have expressed an appetite for voluntary disclosure of environmental performance data even before final regulatory guidance on the reporting of such data.
Although the EU Securitisation Regulation imposes obligations on issuers to provide loan-by-loan reporting on environmental performance, the current loan-by-loan templates by the European Securities and Markets Authority are ill equipped to present such data other than for certain very limited data fields. Accordingly, in the absence of updated reporting templates, issuers have been forced to find ways to report such data to investors in other, voluntary formats but nonetheless following the spirit of the regulation.