Mutual funds and collective investment schemes
Published: 30 March 2021
A mutual fund is a regulated savings product offering a high degree of investor protection through legislation. Finanstilsynet supervises management companies’ compliance with the Securities Funds Act and regulations thereto. Supervision is risk-based and largely geared to ensuring that consumer interests are protected, so that mutual funds can be suitable savings products for retail investors.
About managers and mutual funds
At the end of 2020, 29 fund management companies were operating in Norway. In addition, there were two Norwegian branches of foreign management companies. 20 of the management companies were also licensed to provide the investment service ‘management of portfolios of investments in accordance with mandates given by investors on a discretionary, client-by-client basis’. At the end of 2020, the companies managed 415 mutual funds under licence from Finanstilsynet. UCITS funds – Undertakings for Collective Investments in Transferable Securities – constitute the largest share of Norwegian mutual funds.
Net subscription in Norwegian management companies’ mutual funds increased from NOK 47 billion in 2019 to NOK 54 billion in 2020. Of this, fixed-income funds accounted for NOK 41 billion, while equity funds and balanced funds accounted for NOK 14 billion. Of the overall net subscriptions in mutual funds, Norwegian private individuals accounted, directly or indirectly through defined-contribution pension plans, for NOK 39 billion in 2020, compared with NOK 15 billion in 2019. Norwegian private individuals' net mutual fund subscriptions were mainly in equity funds in 2020. Net subscriptions in equity funds came to NOK 34 billion, while net subscriptions in bond funds and balanced funds represented NOK 5 billion and NOK 0.5 billion, respectively.
Assets under management for Norwegian private individuals were NOK 548 billion, of which NOK 348 billion was invested in equity funds, NOK 145 billion in bond funds and NOK 55 billion in balanced and other funds. At year-end 2020, total assets under management came to NOK 1 493 billion, of which equity funds represented NOK 776 billion, bond funds NOK 624 billion and balanced and other funds NOK 94 billion. (Source: Norwegian Fund and Asset Management Association)
At year-end 2020, 47 Norwegian licensed AIF managers were subject to ordinary supervision by Finanstilsynet. In addition, 159 AIF managers featured in Finanstilsynet’s registry, against 129 a year earlier. Registered managers, who manage alternative investment funds with total assets below certain thresholds, are exempt from most of the requirements of the Act on the Management of Alternative Investment Funds (AIF Act), but cannot market the funds to retail investors or across borders according to the notification rules. The AIF managers manage 434 Norwegian alternative investment funds and 25 foreign alternative investment funds.
Supervision, monitoring and control
Fund management companies and AIF managers
Supervision is risk-based and largely geared to ensuring that consumer interests are protected, so that mutual funds can be suitable savings products for retail investors. Finanstilsynet is still monitoring whether adequate discretion is exercised in the management of equity funds. After a previous thematic inspection, Finanstilsynet ordered DNB Asset Management AS to implement corrective measures in 2015. The Supreme Court passed a judgment on 27 February 2020, stating that the management of the mutual fund DNB Norway had been inadequate. Some 180 000 unit holders were given a price reduction.
Alternative investment funds are less homogeneous and include a range of different funds with varying risk profiles. Many of these are marketed only to professional investors. Supervision of these funds also focuses on consumer protection.
Extraordinary follow-up due to the Covid-19 pandemic
As a result of the Covid-19 pandemic and the sharp stock market decline in March, the mutual fund market was subject to close monitoring. Finanstilsynet maintained daily contact with the Norwegian Fund and Asset Management Association, depositaries and major market players. Emergency response plans were designed to enable quick responses in extraordinary matters, such as applications for suspension of valuations and redemption rights in mutual funds. Finanstilsynet endorsed suspensions of nine mutual funds. Eight of these had to be suspended for shorter periods due to lack of price information from suspended listed foreign funds in which they had large holdings. Several of the funds had to be suspended several times for the same reason. The mutual fund Forte Kreditt had to be suspended in March due to serious liquidity problems. Finanstilsynet approved the liquidation of the fund in 2020. The management company was subject to supervisory follow-up. See more information below.
In a step to monitor the liquidity situation, Finanstilsynet initiated extraordinary weekly reporting from the largest management companies in March 2020. The reporting encompassed 85 per cent of the market and included data on developments in total assets, subscriptions, redemptions and the use of liquidity tools. Corresponding data were reported to the European Securities and Markets Authority (ESMA) twice a week. Finanstilsynet also collected data on the use of currency-hedged investments in mutual funds. During a certain period, increased margin requirements as a result of the depreciation of the Norwegian krone contributed to a tight liquidity situation for some currency-hedged funds.
In 2020, Finanstilsynet was in close dialogue with ESMA on how to handle the situation in the European mutual fund market and follow up supervisory reviews. As a result of the pandemic, and based on a statement from ESMA, Finanstilsynet issued a statement on the procedure to be followed if the publication of annual and semi-annual reports for mutual funds was delayed. No issuers reported delays beyond deadlines. For contingency purposes, Finanstilsynet also prepared a draft proposal for changes in the rules for unit holder meetings without physical presence. The proposal was sent to the Ministry of Finance.
Reporting of breaches of investment limits, etc.
Each quarter, management companies report any breaches of investment limits etc., to Finanstilsynet. Depositaries also report identified breaches. A significant number of breaches were reported in the first two quarters of 2020. During the first quarter, Finanstilsynet registered a doubling from the first quarter of 2019, while there was a 35 per cent increase in the second quarter compared with the year-earlier period. The increase mainly took place during a two-week period around the end of March/beginning of April in reflection of the market and currency fluctuations caused by the pandemic. The breaches were only occasionally of a long-time nature. No deviations or violations of laws or regulations were reported as a result of operational matters at the management companies. In the third quarter, no deviations that were directly related to the pandemic and the resulting market turmoil were reported.
Inducements and restructuring of fee models
Finanstilsynet’s review of investment firms’ compliance with the stricter rules on inducements has shown that a large proportion of the firms are changing their payment models, whereby fees are paid directly from clients and no longer in the form of inducements from the management companies. As a result of this change, the management companies will have no or significantly lower distribution costs. As an extension of the review, Finanstilsynet has monitored the management companies' adaptations. In April 2020, Finanstilsynet sent an identical letter focusing on the management companies’ duty to ensure that no unnecessary costs are incurred for mutual funds and unit holders. At the same time, Finanstilsynet stated a clear expectation that the disappearance of distribution costs must result in a recalculation of management fees to the benefit of the mutual funds and unit holders. During 2020, Finanstilsynet spent a lot of work on following up the companies’ adaptations, which included approving new mutual fund unit classes.
Survey of sustainable investments
There has been a significant increase in the offering of investment products that are marketed as sustainable, so-called ESG products, in recent years. Green funds in particular are actively marketed. This trend, viewed in light of the anticipated Norwegian rules for implementing EU rules on sustainable finance, was the reason why Finanstilsynet initiated a review at the end of 2020 of the work on sustainability carried out by management companies and AIF managers. The review encompasses both the companies’ handling of investment products that are marketed as sustainable and the information they provide to the general public, at entity level as well as at product level. The review is expected to be completed in March 2021 and will provide statistical information for use in the further work in this area.
Survey of compliance with the anti-money laundering legislation
In 2020, Finanstilsynet initiated a survey of how management companies and AIF managers comply with the anti-money laundering (AML) legislation. The survey, which encompasses both licensed and registered AIF managers, comprises a total of 215 entities. The survey provides an overview of compliance with key requirements and will be followed up through supervision in 2021. The answers show significant variations in the level of compliance, and registered AIF managers are overrepresented in the group with the most fundamental deficiencies.
All ordinary inspections also include compliance with the Anti-Money Laundering Act and Regulations.
Joint European Supervision Investigations (CSA)
In 2020, Finanstilsynet carried out a thematic inspection of UCITS funds’ liquidity. The thematic inspection was part of a Common Supervisory Action (CSA) under the auspices of ESMA. Finanstilsynet took a closer look at the management companies’ liquidity management, how they analyse the liquidity of investments and their ability to handle redemptions, as well as how the companies' boards of directors are informed of liquidity risk in mutual funds. Due to the market turmoil resulting from the pandemic, a special survey of the liquidity of large credit and real estate funds was also carried out, including whether the liquidity situation and asset valuation in the first half of 2020 were in accordance with the requirements. The survey, which included both management companies and AIF managers, was also conducted as a CSA under the auspices of ESMA. Finanstilsynet will follow up the results from the surveys in 2021 and will prepare a report presenting its key findings.
Liquidation of the alternative investment fund Tri Pluss AS
Finanstilsynet has made investigations concerning the alternative investment fund Tri Pluss AS after the manager decided to liquidate the fund in 2020 on the grounds that it had no depositary. On 9 October 2017, Finanstilsynet decided to revoke the licence to manage the fund. The fund appealed the decision and has, with some limitations, been able to continue its operations in accordance with a decision on deferred implementation until the complaint had been processed. Finanstilsynet has objected to the manager's liquidation plan and, among other things, demanded that the unit holders receive the value of their units at the time of liquidation.
On 12 November 2020, the Ministry of Finance confirmed Finanstilsynet’s revocation decision. The Ministry agreed with Finanstilsynet that Tri Pluss AS had not protected investor interests in accordance with the requirements of the conduct of business rules, and that the revocation was a necessary response to the serious and systematic violations uncovered through supervision. As a result of the decision, the fund must either be liquidated or transferred to a new manager during a six-month liquidation period. The Ministry of Finance’s decision is based on the assumption that Finanstilsynet will review and endorse the manager's liquidation plan.
Orders for corrective measures – internal partnerships
In 2020, Finanstilsynet considered a number of cases concerning the organisation of licensed activities through internal partnerships. A licence to operate as a manager of alternative investment funds can only be granted to firms that are organised as limited companies or public limited companies. In Finanstilsynet’s opinion, organising such activities through an internal partnership with an AIF manager as principal, where the licensable activities are available to and carried out by the internal partnership, is contrary to the organisation requirements of the law. Finanstilsynet has therefore issued orders for corrective measures to the relevant firms. The decisions have been appealed to the Ministry of Finance.
Supervision of individual firms
Finanstilsynet’s on-site inspection at Norse Forvaltning AS was concluded in 2020. The inspection focused on the firm’s practices for charging redemption fees. The fees were not cost-based nor used to compensate the funds for transaction costs in connection with redemptions. The firm changed its practices after Finanstilsynet had made critical comments.
Finanstilsynet conducted an inspection of how the mutual fund Forte Kreditt was managed based on matters revealed in connection with the suspension of the unit holders' redemption right in March. The inspection focused on the management company's liquidity management, equal treatment of unit holders and valuation. The inspection showed that Forte Fondsforvaltning AS was ill-prepared to face relatively large redemption requirements. When selling the fund's assets, the company failed to maintain a liquidity profile in keeping with the redemption rules. Moreover, no measures were taken to ensure equal treatment of unit holders. The fund's portfolio did not meet the liquidity requirements, and the valuation practices were inadequate. Forte Fondsforvaltning AS carried out organisational changes in the form of an executive management reshuffle.
Two on-site inspections of AIF managers were carried out, both addressing compliance with the AML legislation.
Other supervision activities
Periodic reporting is an important element in the supervision of both management companies and AIF managers. In 2020, Finanstilsynet revealed one violation of the capital requirements among AIF managers and sent notice of a possible licence revocation. Own funds were brought into compliance with the requirements within the deadline set in the notification. No further follow-up was thus needed. No violations of the own funds requirements were uncovered among management companies in 2020. Overall, management companies enjoy strong profitability.
The systems for periodic reporting from AIF managers and reported data were further developed in 2020, and the quality of the data was improved. A new Altinn form has been prepared for use by registered AIF managers.
The survey of information on and use of government bond indices in fixed-income funds was described in the annual report for 2019. Finanstilsynet followed up this as part of its supervision of individual firms in 2020.
Finanstilsynet held seminars and speeches in 2020 where various topics of importance to the firms were on the agenda, including a webinar in October on Finanstilsynet’s new circular on outsourcing and upcoming regulations on sustainable finance. Finanstilsynet also gave a lecture aimed at the mutual fund industry about its duty to ensure that no unnecessary costs are incurred for mutual funds and unit holders in connection with the investment firms' adjustments to the requirements for the acceptance of inducements.
Fund management companies
Finanstilsynet granted two new licences to engage in mutual fund management in 2020, and one management company was granted an extended licence.
In 2020, Finanstilsynet granted licences for the establishment of 15 new mutual funds, while 13 funds were liquidated or closed. Over the course of the year, Finanstilsynet gave a number of approvals to change mutual fund rules. Among other things, changes were approved in the investment profile of some mutual funds that seek to continue to invest in UK financial instruments after Brexit. The changes related to Brexit were implemented according to a simplified procedure. Several mutual funds introduced net unit classes designed for investors subscribing through distributors who do not receive inducements from management companies. Finanstilsynet assumes that these unit classes will grow in significance in the period ahead due to new and tighter requirements for investment firms’ access to receiving inducements.
A number of UCITS funds that are established in other EEA states have been passported for marketing in Norway. The majority of such funds are established in Luxembourg, Ireland, the United Kingdom and the Nordic countries. Some Norwegian managers have announced that they will passport mutual funds for marketing in other EEA member states.
Managers of alternative investment funds (AIFs)
In 2020, Finanstilsynet granted ten new licences to AIF managers and extended the licences of one AIF manager. Finanstilsynet rejected one licence application. Applications from four companies for a licence to manage alternative investment funds were under processing at year-end 2020.
The number of applications to market AIFs to retail investors was somewhat higher than in 2019, and Finanstilsynet granted 18 such licences in 2020. Many AIFs catering to the mass market are structured as feeder funds to a single master fund which is effectively closed to retail investors due to a high minimum subscription amount. Fund structures and fee models are often confusing. Finanstilsynet does not approve the fund per se, but reviews the fund documentation, placing particular emphasis on how costs and risks are presented. In 2020, Finanstilsynet granted 62 licences to market AIFs to professional investors in Norway where either the manager, the fund or both are established outside the EEA. A number of AIFs established in other EEA member states have announced that they will passport the funds for marketing to professional investors in Norway. This is true above all of funds established in Ireland, the United Kingdom or Luxembourg.
Finanstilsynet has granted Argentum Business Management AS permission to act as depositary for certain closed alternative investment funds and consented to Northern Trust acting as depositary for Norwegian mutual funds through a newly established branch in Norway.
Brexit – consequences in the mutual fund area
The transitional arrangements that regulated the relationship between the EU/EEA and the UK in the period following the UK's exit from the EU were lifted on 1 January 2021. As a result, the UK actually left the single market, one result being that firms established in the UK can no longer use the rules in the UCITS Directive and the AIFM Directive as a basis for providing cross-border activities into Norway. This applies to both the marketing of funds and cross-border services.
With effect from year-end 2020, all previous notifications concerning mutual funds and firms associated with the UK were rescinded. A total of 489 funds (UCITS and AIF) provided by 217 managers were removed from Finanstilsynet’s registry.
Norwegian mutual fund legislation allows funds established in a country outside the EEA (third countries) to be marketed in Norway subject to permission from Finanstilsynet. As UK-based mutual funds and firms now have no legal basis in the EEA/EU for being passported for marketing in Norway, Finanstilsynet has made the necessary arrangements to grant a marketing permit through a simplified application process in specific cases. Finanstilsynet received simplified applications for a total of 16 mutual funds provided by seven managers. Finanstilsynet’s work related to Brexit is also described in the report on international co-operation.
Other supervised sectors:
- Banks and other financing activity
- Insurance and pensions
- The securities area
- Financial reporting enforcement – listed companies
- Prospectus control – transferable securities
- Mutual funds and collective investment schemes
- Investment firms
- Securities market conduct
- Infrastructure in the securities area
- ICT and payment services
- Money laundering and financing of terrorism
- Consumer protection
- International cooperation
- Current topics