Finanstilsynet supervises fund management companies and managers of alternative investment funds’ compliance with the Securities Funds Act and regulations thereto. Supervision is risk-based and largely geared to ensuring that consumer interests are protected. In the supervision of managers of alternative investment funds (AIF managers), priority is given to managers of funds targeting retail investors.
Facts about managers and mutual funds
At the end of 2021, 29 fund management companies were operating in Norway. In addition, there were two Norwegian branches of foreign management companies. 20 management companies were also licenced to provide individual portfolio management. At the end of 2021, the companies managed 434 mutual funds under licence from Finanstilsynet. UCITS funds – Undertakings for Collective Investments in Transferable Securities – constitute the largest share of Norwegian mutual funds.
Net subscriptions in Norwegian management companies’ mutual funds rose from NOK 54 billion in 2020 to NOK 140 billion in 2021, of which equity funds accounted for NOK 63 billion and fixed-income funds for NOK 45 billion. Of the overall net subscriptions in mutual funds, Norwegian private individuals accounted, directly or indirectly through defined-contribution pension plans, for NOK 69 billion in 2021, compared with NOK 39 billion in 2020. Norwegian private individuals' net equity fund subscriptions came to NOK 48 billion, while net subscriptions in fixed-income funds totalled NOK 15 billion.
Assets under management for Norwegian private individuals increased from NOK 548 billion in 2020 to NOK 710 billion in 2021, of which NOK 484 billion was invested in equity funds, NOK 159 billion in fixed-income funds and NOK 65 billion in balanced funds. Total assets under management were up from NOK 1 493 billion in 2020 to NOK 1 809 billion in 2021, of which equity funds represented NOK 1 037 billion, fixed-income funds NOK 660 billion and balanced funds NOK 97 billion. (Source: Norwegian Fund and Asset Management Association)
At year-end 2021, 50 Norwegian licensed AIF managers were subject to ordinary supervision by Finanstilsynet. In addition, 184 AIF managers featured in Finanstilsynet’s registry, which is 30 more than a year earlier. Registered managers, who manage alternative investment funds (AIFs) 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 497 Norwegian AIFs and 27 foreign AIFs.
Supervision, monitoring and control
Reporting of breaches of investment limits, etc.
Each quarter, management companies report breaches of investment limits etc. to Finanstilsynet. Depositaries also report identified breaches. Finanstilsynet follows up the reporting as part of its ongoing supervision of the management companies. The reported breaches in 2021 were largely due to operational errors, lack of market data or fluctuations either in the mutual fund market or in the funds' investments.
Apart from a single incident (delayed settlement due to failure to add a swing factor) that had consequences for most of the relevant manager's funds, there were fewer breaches in 2021 than in 2020. The management companies thus continued the trend from the years prior to 2020, with fewer deviations in their fund management activities.
Common Supervisory Action on costs
In 2021, Finanstilsynet participated in a pan-European supervisory survey of costs and fees of UCITS funds under the auspices of ESMA, a so-called Common Supervisory Action (CSA). The main objective of the CSA was to survey whether investor documentation clearly states the costs and fees incurred and whether funds are charged with undue costs. The Norwegian part of the CSA included a total of 60 mutual funds managed by six management companies. The management companies were asked to provide relevant written policies and procedures showing the costs that were directly or indirectly charged to the funds.
The CSA addressed how management companies determine the costs and follow up these as part of their compliance and control procedures. Costs paid to third parties were also assessed in relation to conflicts of interest. Finanstilsynet will follow up the results of the CSA in 2022.
Developments in prices of mutual funds in consequence of new models for funds and fund distribution
The EU's revised securities trading legislation introduced much stricter requirements for investment firms’ right to accept consideration from parties other than the customer. As a consequence, the traditional business models for distributing mutual funds have to be changed. In order to follow up previous supervisory activities and initiatives, Finanstilsynet initiated a comprehensive survey to examine how the changes in pricing models affected management companies, distributors and end customers, respectively.
The survey measures, among other things, the extent to which management companies' reduced distribution costs are passed on to unit holders in the form of lower management fees. This includes measuring the level of and developments in inducements, investment platform fees and the pricing of net unit classes. The impact on clients' holdings is an important part of this calculation.
The survey measures price developments over the years both before (2014–2017) and after (2017–2021) the rule change to identify whether a possible price reduction is stronger than the price trend. The survey includes 13 distributors and 12 management companies and specifically targets mutual funds, balanced funds and index funds. The results of the survey are scheduled to be published in early 2022.
Survey of compliance with the anti-money laundering legislation
Finanstilsynet followed up the survey of fund managers' compliance with key requirements of the anti-money laundering (AML) legislation. The survey was initiated in 2020 and comprised a total of 215 entities. The answers showed significant variations in the basic level of compliance, and registered AIF managers were overrepresented in the group with the most fundamental deficiencies. The survey will, along with information obtained through the entities' reporting of their AML efforts in 2021, form the basis for further investigation of selected entities’ compliance at on-site inspections. A summary report of the survey findings will be published in early 2022.
Supervision of individual firms
Finanstilsynet conducted an on-site inspection at the depositary AIF-Depository focusing on the firm's compliance with the requirements to be met as a depositary for alternative investment funds. In its inspection report, Finanstilsynet criticised the firm for inadequate procedures. Aspects highlighted in the report included restrictions on the types of funds for which the firm may act as depositary, the importance of having procedures in place to ensure that these restrictions are observed, and key obligations concerning assets registered in securities accounts.
Finanstilsynet conducted an on-site inspection at ODIN Forvaltning AS. Key themes at the inspection were the firm’s compliance with the Anti-Money Laundering (AML) Act, the firm’s procedures for determining fees, and the use of reference indices in fixed-income and balanced funds. The inspection included supervision of the firm's IT systems.
Finanstilsynet levelled criticism at the firm for inadequate customer due diligence measures, as set out in the AML Act, for a large number of existing customers, for deficient procedures for determining fees, and for inadequate information about the use of reference indices. Finanstilsynet also followed up other firms in 2021 on the grounds of inadequate information about returns measured against indices that were not sufficiently relevant.
Finanstilsynet conducted on-site inspections at Arctic Alternative Investment Management AS and Njord Alternative Investments AS in 2021. The work on these inspections will be concluded in 2022.
Work on sustainability – survey of sustainable investments.
Finanstilsynet carried out a survey of fund managers’ work on sustainability. The survey covered the assessments underlying the firms’ management activities and the information provided about environmental, social and governance factors. The results were published in a report in April 2021. The survey showed that there are major differences in how far the individual companies have come in their sustainability efforts.
Business assessments – blank cheque companies (SPACs)
The emergence of blank cheque companies (special purpose acquisition companies – SPACs) as an investment structure received much attention in 2021. SPACs have several similarities with private equity funds, a type of fund regulated by AIF legislation. It is Finanstilsynet’s understanding that SPACs may come under the definition of an alternative investment fund (AIF) pursuant to the Act on the Management of Alternative Investment Funds (AIF Act) and that, upon establishing a SPAC, an overall assessment must be made of the individual investment structure, taking the conditions set out in the AIF Act into account.
During 2021, Finanstilsynet considered a number of individual cases of unauthorised activity in the mutual fund area. The cases concerned whether the structures qualify as AIFs.
Fund management companies
- Finanstilsynet granted no new licences to engage in mutual fund management in 2021, and no management companies were granted an extended licence.
- In 2021, Finanstilsynet granted licences for the establishment of 23 new mutual funds, while nine funds were liquidated or closed. Over the course of the year, Finanstilsynet gave a number of approvals to change mutual fund rules.
- The management companies have had to change their models for fund distribution as investment firms, as distributors of mutual funds, have had to make adjustments in order to comply with the requirements for the acceptance of inducements. Finanstilsynet also granted a number of approvals for the introduction of so-called net unit classes in mutual funds where the management fee is generally lower than for other unit classes. Net unit classes are designed for investors subscribing through distributors who do not receive inducements from management companies.
- During 2021, Finanstilsynet received several enquiries as to whether a distributor or possible sub-distributors may offer their fund clients net unit classes if the distributor receives an investment platform fee from the management company for making the funds available on the distributor's trading platform. The fee had to be paid regardless of whether the distributor's clients invest in the fund through the platform. Finanstilsynet emphasised that there will be no form of payment from the management company to the distributor for net unit classes. It is therefore Finanstilsynet’s understanding that a model based on net unit classes would preclude management companies from paying investment platform fees to the distributor. Finanstilsynet concluded that sub-distributors will also not be able to offer their clients net unit classes if the sub-distributor trades through a distributor who receives an investment platform fee from the management company.
- According to the Act on Defined-Contribution Pensions, fund management companies may offer defined-contribution pension schemes, including the new individual pension account scheme that entered into force in 2021. In consequence of amendments to the Act on Defined-Contribution Pensions, Finanstilsynet has noted that management companies also wish to offer clients individual pension accounts. Finanstilsynet authorised management companies to offer defined-contribution pensions with an individual pension account as an ancillary activity pursuant to the Securities Funds Act. Finanstilsynet concluded that the rules on unit classes in mutual funds provide no basis for establishing a separate unit class with reduced management fees exclusively for subscriptions through individual pension accounts. On the other hand, Finanstilsynet granted permission to the establishment of a mutual fund reserved for clients who have chosen a management company as their individual pension account provider. As there are restrictions on the range of persons who may subscribe units in such funds, the funds will be established as domestic mutual funds, not as UCITS funds.
- Oslo Børs discontinued the calculation of government bond indices at end-January 2021. As a consequence, several mutual funds were required to switch to other indices and amend their fund rules where reference had previously been made to the government bond indices. This was relevant for mutual funds where performance-based management fees were calculated with reference to an index. The amendments to the fund rules were approved, and Finanstilsynet granted dispensation from the requirement in the Securities Fund Act for a unit holders’ meeting to include references to indices produced by, among others, Nordic Bond Pricing.
- A number of UCITS funds established in other EEA states have been passported for marketing in Norway. The majority of such funds are established in Luxembourg and Ireland. Some Norwegian fund managers have also announced that they will passport mutual funds for marketing in other EEA states.
Managers of alternative investment funds
- In 2021, Finanstilsynet granted licences to five new AIF managers. Four applications were either rejected or withdrawn while under processing. Applications from four companies for a licence to manage alternative investment funds and one application for a licence to manage mutual funds were under processing at year-end 2021.
- Finanstilsynet granted 16 licences for the marketing of AIFs to retail investors in 2021. Finanstilsynet does not approve the fund per se but reviews the fund documentation, placing particular emphasis on whether the information is clear and not misleading, especially with regard to costs and risks. The fund structures and fee models are often complex and confusing and will be an unsuitable investment alternative for a large number of retail investors.
- In 2021, Finanstilsynet granted 117 permits for the marketing of AIFs to professional investors in Norway where either the manager, the fund or both are established outside the EEA. This is almost twice as many as the previous year. A number of AIFs established in other EEA member states have announced that they will passport their funds for marketing to professional investors in Norway. This is true above all of funds established in Luxembourg and Ireland.
- Finanstilsynet considered a notification from Storebrand Asset Management AS that the firm had acquired 100 per cent of the shares of two Danish property investment managers, Capital Investment AS and CI AM Aps. The firms continue their operations as subsidiaries of Storebrand Asset Management AS.
New mutual fund regulations – EuVECA and EuSEF
With effect from 1 August 2021, the pan-European regulations on venture capital funds (EUVECA Regulation) and on social entrepreneurship funds (EuSEF Regulation) entered into force in Norway and were incorporated into the AIF Act. The amending regulation has thus far not been implemented in Norwegian law.
The new rules concern regulation of products in the AIF area and include placement rules and eligible investment requirements for funds using the designation EuVECA or EuSEF. The new rules allow registered AIF managers to market such cross-border funds through a notification system. Registered AIF managers are also given the opportunity to market EuVECA and EuSEF funds to retail investors on specific terms. In addition, the regulations set out requirements for registered AIF managers who wish to manage the new fund types.
Finanstilsynet received eight applications from managers wishing to manage EuVECA funds. Two applications were rejected after being deemed incomplete, while one application for the management of two EuVECA funds was approved. Five applications were under consideration at the end of 2021. All applicants were either registered AIF managers or applied for first-time registration. Finanstilsynet received no applications in 2021 from managers wishing to manage EuSEF funds.
Marketing of AIFs established in third countries to professional investors in Norway
During 2021, Finanstilsynet processed five applications to market AIFs established outside the EEA to professional investors in Norway.
Notification of revocation of marketing permit due to inadequate reporting
AIF managers shall, for each AIF marketed in the EEA, periodically report specified information. The reporting obligation also applies to AIF managers that are established outside the EEA and licensed to market their funds in Norway. Finanstilsynet revoked nine licences for the marketing of AIFs in Norway in 2021. All revocations concerned managers registered outside the EEA and were due to non-compliance with the reporting obligation.
Appeal against decision on continued registration as a registered AIF manager
Finanstilsynet considered one appeal from a registered AIF manager against the decision on continued registration in Finanstilsynet’s registry. A key consideration behind the decision was whether the firm met the criteria for being defined as an alternative investment fund and was thus obliged to be registered in Finanstilsynet’s registry. The appeal was sent to the Ministry of Finance for decision.
Consultation document on cross-border distribution of funds, etc.
Finanstilsynet prepared a consultation document on the implementation of new pan-European regulations on cross-border distribution of funds etc. in Norwegian law. The regulations are intended to remove restrictions on cross-border sales and marketing of mutual fund units. The regulations will also promote harmonised investor protection in the EEA and the coordination of rules for UCITS funds and AIFs. In addition to the rules intended to facilitate cross-border activities, the consultation document contains a proposal to regulate market soundings for AIFs and the discontinuation of marketing in an EEA state. The regulations principally concern the duties of the supervisory authorities.
Consultation document on liquidity management in AIFs
Finanstilsynet has prepared a consultation document on a minor change to the AIF Act. The relevant provision regulates exemptions from liquidity management requirements for certain types of funds. In the consultation document, Finanstilsynet proposes greater harmonisation of the wording of the Act with similar pan-European rules in the Alternative Investment Fund Managers Directive (AIFMD).
Adoption of regulations on supplementary rules to EuVECA and EuSEF
With effect from 1 August 2021, it became possible to establish European venture capital funds and European social entrepreneurship funds in Norway. In this connection, supplementary rules were set out in regulations to the AIF Act.
Supplementary rules on European long-term investment funds (ELTIFs)
Pan-European rules on long-term investment funds have been incorporated in the AIF Act. These provisions have not yet entered into force in Norway.
In the EU, supplementary rules on long-term investment funds have also been adopted. Finanstilsynet has informed the Norwegian market about the supplementary rules and asked for comment. Once new rules on ELTIFs in the AIF Act have entered into force in Norway, Finanstilsynet will adopt supplementary rules corresponding to those implemented in the EU.
Supplementary rules to the regulation on money market funds
Pan-European rules on money market funds have been implemented in Norwegian law through amendments to the Securities Funds Act and the AIF Act. These provisions have not yet entered into force in Norway.
In the EU, supplementary rules on money market funds have also been adopted. Once new rules on money market funds have entered into force in Norway, Finanstilsynet will adopt supplementary rules corresponding to those implemented in the EU.
Upcoming regulations on sustainability risk – for management companies and managers of alternative investment funds
In 2021, the EU adopted supplementary pan-European rules on sustainability risk. The rules apply to management companies and managers of alternative investment funds. According to the new rules, sustainability risk shall be taken into consideration in the organisation and operations of mutual fund management companies and AIF managers. Sustainability risk shall be an integral part of risk management on a par with other risks and be integrated in investment decisions. The rules, which are EEA relevant, will apply in the EU from 1 August 2022. Finanstilsynet has informed the market about the new legal acts and how the rules can be implemented in the Securities Funds Regulation and in the regulations to the AIF Act.