FINLAND: An Introduction to Banking & Finance
Economic Outlook and Market Activity
The Finnish economy entered into a recession in 2023, and the Bank of Finland predicts that this recession will persist throughout 2024. The economic downturn is partially attributable to the escalation in inflation rates within Finland and other EU member states between 2021 and 2023, and the subsequent implementation of restorative monetary policy measures. The recent monetary policy measures aiming to curb inflation reduced, to some extent, market activity in the Finnish banking and finance sector in 2023. The European Central Bank Governing Council’s commitment to decreasing inflation to its annual target rate of 2% resulted in consecutive increases in interest rates throughout 2023. These elevated interest rates increased the cost of capital, which generally diminished demand for debt financing.
The economic downturn, in conjunction with rising geopolitical tension, depleted M&A activity in 2022 and 2023, which impaired demand for acquisition financing. At the same time, the decline in household consumption, attributable to higher interest rates, has rendered the revenue streams of corporate borrowers increasingly uncertain and, consequently, corporate borrowers have responded by postponing their investment activities. Therefore, the main factors driving demand for corporate debt in 2023 were mainly confined to fulfilling working capital needs and refinancing existing debt.
On the supply side, the economic downturn exacerbated lenders’ perception of risk, and corporate lenders active in the Finnish market generally tightened their internal loan approval criteria throughout 2022 and 2023. This probably constrained access to bank financing for some companies but, on the other hand, created opportunities for certain alternative lenders to step in. The increased caution exhibited by corporate lenders became notably pronounced in the Finnish commercial real estate sector, in which construction developers filed for bankruptcy at an escalated rate throughout 2023, causing lenders to adopt a more conservative approach towards financing sectors susceptible to cyclical variations. In addition to the tightened loan approval criteria, the shift towards risk-averse corporate lending manifested as higher collateral requirements and more rigorous lending conditions.
Sustainable Finance
Finland is committed to implementing the UN’s 2030 Agenda for Sustainable Development and the Finnish government has outlined a plan to be carbon-neutral by 2035, becoming the world’s first fossil-free welfare society.
Sustainable finance laws and regulations applicable in Finland mainly derive from EU laws, comprising, inter alia, the Taxonomy Regulation, the Sustainable Finance Disclosure Regulation (SFDR), the Corporate Sustainability Reporting Directive (CSRD) and the Green Bond Regulation. While the aforementioned regulations are directly applicable in Finland, the CSRD was implemented into national legislation by amendments, in particular, to the Finnish Accounting Act and the Finnish Auditing Act, imposing reporting obligations in phases, starting with larger corporations.
Generally, the demand for climate and environmentally friendly solutions and innovations is high. The Finnish financing sector is engaged and closely following the sustainability indicators and ESG policies being developed and introduced. Major Finnish banks have committed to the UN’s Principles for Responsible Banking, and their strategy and practice will have to align with sustainability goals and, among others, the Paris Climate Agreement. In practice, these sustainability-related principles are currently applied in the due diligence process as well as to new financial products. For example, green bonds, loans and margin grids are already based on sustainability indicators such as carbon dioxide emission levels. This progress and development will continue, and expertise in the field is increasingly needed. Some guidelines, principles and models already exist, but it still remains to be seen how EU regulation and the Loan Market Association guidelines further develop and shape the finance sector and practices around sustainability-related requirements and recommendations.
Legal Issues Related to the Finnish Banking and Finance Market
Financial assistance/corporate benefit
The Finnish Companies Act contains provisions on financial assistance, unlawful distribution of assets and corporate benefit. The Companies Act prohibits limited liability companies from providing loans, assets or security for the purpose of a third party acquiring shares in the company or its parent company. Furthermore, transactions which reduce the assets of a company or increase its liabilities without any corporate benefit or a sound business reason for the company, could constitute an unlawful distribution of assets.
As Finnish company law does not recognise any group benefit, corporate benefit is always evaluated on a case-by-case basis from the perspective of the company granting loans or security. Pursuant to the Companies Act, the management is obliged to assess whether any corporate benefit or business rationale exists in a particular transaction. However, ultimately, the determination is made by an insolvency administrator and/or the court. In the context of Finnish market practice, in situations where there is ambiguity regarding the applicability of the financial assistance prohibition or the determination of corporate benefit to the company, it is customary to incorporate generic limitation provisions in the finance documents, encompassing both guarantees and security arrangements. Generally, these clauses state that the provision of a guarantee and/or security is conditional upon not violating the financial assistance or distribution of assets provisions of the Companies Act. However, as there is no Finnish case law on such provisions, the significance a Finnish court assigns to such provisions is uncertain.
Floating charges
In Finland, floating charges are commonly used as security in financing transactions. A floating charge covers all movable assets of a company, including all fixed assets (eg, machinery, equipment and trade marks), current assets (eg, raw materials, consumables and finished products and goods) and liquid assets (eg, cash at hand and receivables), save for items that can be separately mortgaged (such as vessels and aircraft) and movable assets already pledged separately. Shares, other negotiable instruments, book-entries and receivables are covered by floating charges but can be pledged separately, irrespective of an existing floating charge.
A new floating charge is created by entering into a pledge agreement and delivering an application to the relevant authority for the registration of a new mortgage note, with instructions to deliver the new mortgage note directly to the pledgee. Alternatively, if mortgage notes over the assets of a company already exist, a pledge is created by entering into a pledge agreement and delivering the mortgage notes to the pledgee. Mortgage notes evidencing a floating charge are bearer notes, hence the transfer of a floating charge is executed by delivering the mortgage note to the secured party. Although not mandatory, it is recommended to register the pledgee as the holder of the mortgage note in the Finnish Floating Charge Register, as registration ensures that the pledgee will be contacted by an administrator or a bailiff in the event of an insolvency or enforcement proceeding.
An original copy of the mortgage note needs to be presented in connection with the enforcement of a floating charge. In an insolvency event, a floating charge entitles the pledgee to 50% of the enforcement proceeds. The priority is limited to the nominal amount of the mortgage note together with the interest and enforcement costs specified in the mortgage note.
Pledge of receivables and bank accounts
Pledged receivables and bank accounts are essential securities in Finland, particularly in project finance. In Finland, both may be created by entering into a pledge agreement between the pledgor as the creditor of the relevant receivable or the holder of the bank account and the pledgee as the creditor against the pledgor. In order to obtain protection against third parties, the bank/the debtor should be notified of the pledge and instructed to withhold payments to the pledgor.
Sometimes, parties agree on a soft pledge, enabling the pledgor to collect the receivables and/or use the pledged bank account until default. In soft pledges, perfection is only completed upon delivery of instructions to the debtor/the bank to withhold payments to the pledgor, thus subjecting the pledge to a claw-back risk due to delayed perfection. Although soft pledges are relatively common, this is something parties should consider when entering into financing arrangements that are, at least partially, secured by a pledge over receivables and bank accounts.
Guarantee for one’s own debt
In Finland, guarantees are often required, and given, for a person’s own debt. This form of guarantee is covered by the Finnish Act on Guarantees and Third-Party Pledges. A guarantee for one’s own debt renders the guarantor liable for the principal debt in the same manner as if it were the principal debtor. Thus, the creditor becomes entitled to demand payment from the guarantor immediately upon the principal debt falling (in whole or in part) due and payable. Contrary to a demand guarantee, a guarantee for one’s own debt is related to the underlying debt obligation and subject to the same defences.
In order to validly enter into a guarantee for one’s own debt, an explicit statement to that effect is required in the guarantee documentation. Guarantees not explicitly identified as for one’s own debt are deemed as secondary guarantees, entitling such creditors to weaker rights. Additionally, guarantee documentation generally includes references to the applicable (and excluded) sections of the Act on Guarantees and Third-Party Pledges.