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In Search of the New Normal
18 Jun 2018 Despite market actors' and central banks' valiant efforts to divine the future trends of interest rates, the only key discovery still remains that past rules governing their behaviour no longer apply. With new rules still unwritten and the future legal and economic environment shrouded in uncertainty, businesses deciding upon their financing structures have been presented with an extraordinary conundrum. These are the key takeaways from the seminar on the future of interest rates organised by D&I on 14 February 2018. With an aim to presenting an audience of industry and business figures with a concise view of present macroeconomic trends, insight was provided by Mr Olli Rehn, former European Commissioner for Economic and Monetary Affairs and current member of the Board of the Bank of Finland, as well as by Mr Risto Murto, President and Chief Executive Officer of Varma Mutual Pension Insurance Company. A primer on the future deductibility of interest expenses was also provided by Mr Kai Holkeri, Partner and Head of Tax & Structuring at D&I. Economizing the Economy With inflation in the Eurozone having remained conspicuously low for several years even after the peak of the financial crisis, the ECB has continued to pursue a policy of record-low interest rates and quantitative easing in the form of asset purchases. While the central bank's active role is to be credited in the recent recovery of the financial system and the overall economic uptick, it is still all but clear whether – and if, when – the economy at large can be trusted to keep inflation at target levels without the ECB's intervention. None of this, however, is to say that the economy has not recovered on a sound basis. Given that the recent Finnish recovery – current estimates indicate growth of three per cent in the year 2017 – is largely based on reliable investment expenditures and export demand while Eurozone lending to both households and businesses has seen a healthy acceleration without reaching pre-crisis levels, it can be said with confidence that the market has finally begun to find its feet again. Nevertheless, until such time that European business and finance have hit their stride without need for the crutch of cut-rate money from the central bank, market participants will need to continue paying close attention to the ECB's monthly intentions. Deducted Interest in Interest Deductions Presented with this scenario of both cheap cash abound and potential economic boom in the horizon, one would assume that businesses would be quick to join the growing ranks of borrowers hungry to finance their investments. European regulation, however, has found itself a sizeable spanner in these future works, as the European Union's Anti-Tax Avoidance Directive (ATAD) is to obligate the Union's Member States to limit the deductibility of interest expenses. Provisions in the ATAD extend far beyond the initial goal of curbing tax base erosion and profit shifting (BEPS) in multinational corporations, mandating Member States to also reduce the deductibility of interest expenses even to third parties. "The winning formula may just be to make the very best of the abnormal." The rationale of regulating such external debt without any tax planning aims has been called into question, and rightly so. Alas, businesses navigating the present uncharted economic waters amid simultaneous legislative turmoil have no choice but to get used to perpetually rethinking their financing conventions and business models. With signs of the new normal still awaiting discovery, the winning formula may just be to make the very best of the abnormal.  
Ban on Coal, What Next?
23 Apr 2018 Finnish Government Plans to Ban Coal and Redirect State Aid for Renewable Energy The Finnish government plans to ban coal in energy production in 2029. The government prepares a EUR 90 million incentive package for energy producers to voluntarily commit to phase-out of coal by 2025. The incentives package would be financed by lowering the annual production level proposed for the planned tendering scheme for renewable electricity from 2 TWh to 1.4 TWh. The tendering processes are expected to be tough also due to large amount of partly developed projects. Ban on Coal and Compensation for Energy Producers The Ministry of Economic Affairs and Employment pronounced on 10 April 2018 that the use of coal in energy production will be prohibited by law in 2029, a year earlier than stated in the energy and climate strategy. In connection with the ban the government would introduce an incentives package designed for cities to phase out coal already by 2025 to support investments in energy technologies to replace coal. Half of the package would be reserved for renewable heat and power (CHP) and the other half for other technologies needed in the conversion from coal. The government supports renewable CHP also in order to ensure the security of supply in peak load conditions. The planned ban is part of Finnish government's efforts to reduce greenhouse gas emissions to mitigate climate change. According to Minister Tiilikainen, phasing out coal-based energy production would enable Finland to significantly reduce the emissions from heating. The ban and the incentives package have already raised criticism of inefficient climate policy, as the use of coal is expected to phase out during the early 2030s without government intervention. Industry representatives have demanded that the government should focus its efforts to ensure efficient operation of the emissions trading scheme (ETS). Prices of district heating are expected to rise in cities where coal is used for heating (mainly metropolitan area and Vaasa and Turku). This may further lead to increased demand of alternative heating solutions, such as heat pumps.  Furthermore, prices of alternative fuels (such as wood and gas) may rise. The ban must comply with the requirements of protection of private property and the incentives package must comply with the EU state aid rules. The incentives package could be seen as a way for the government to decrease the likelihood of compensation processes or the potential amounts payable. Further details concerning the ban and the incentives package are expected during the autumn. Support for Renewable Energy Is Redirected from Electricity to Heat The incentives package will be financed by lowering the required annual production level proposed for the tendering scheme for renewable electricity, from 2 TWh to 1.4 TWh. According to Minister Tiilikainen, "Redirecting support from renewable electricity to renewable heating is justified on the grounds that while nearly 80 per cent of electricity production is already emission-free, only 36 per cent of district heating uses renewable energy sources.” The planned temporary support scheme for the production of renewable energy is expected to move forward. Production aid would be granted for 1.4 TWh of new renewable production in technology-neutral auctions to be held during 2019 and 2020. The temporary scheme has been considered a transition to a subsidy-free system. After the scheme has been approved in the Parliament, it must be notified to the EU Commission to check compliance under the EU state aid rules. The expected aggregate amount of the proposed new production aid for renewable electricity is 100 million euros in 10 years whereas the current costs of the feed-in tariff scheme is approximately 245 million euros annually. Although being technology-neutral, we expect that the new scheme will attract mostly wind power projects and especially larger wind farms. There are already partly-developed wind power projects available with necessary land use planning completed or construction permits granted by municipalities corresponding to an annual production capacity of approximately 7.3 TWh. Investors should carefully review the legal validity of the plans and permits relating to a particular project. The large number of potential projects means that the competitive bidding process will be tough. Investment Aid for Biofuel and New Technology In addition to the production subsidies, discretionary energy investment aid would continue to be granted. Investment aid would be paid primarily for projects commercializing new energy technology such as electricity storage, integration of variable production into the electricity system and arctic offshore wind power. Investment aid would also be granted to new biofuel production facilities. The government strives to cut the import of oil to half from the current level by increasing the local production of biofuels which would require investments of approximately 1.5 billion euros to new production facilities. The investments depend heavily on the final wording of the EU renewable energy directive (RED II) currently under negotiation.
FSA imposes maximum fine for violation of investor protection rules
14 Mar 2017 On 7 March 2017, the Finnish Financial Supervisory Authority ("FSA") fined four investment service providers for violation of investor protection rules. The biggest fine was EUR 1 million which is the maximum amount that can be imposed by the FSA. Failures in obtaining information and ensuring suitability The FSA had inspected the investment service providers' conduct in their marketing of investment products to persons over 70 years of age. The FSA found several instances of non-compliance with the current MiFID 1 rules, mainly concerning failure to verify the suitability of the investment advice to the client and to obtain and document information on the clients' economic situation, investment experience, knowledge and objectives. The FSA placed particular emphasis on the marketing of structured products and found, for example, that structured products with maturity of six years had been sold without documenting the clients' investment horizon. Also, structured products without capital protection had been sold to persons with low risk tolerance. Conflict of Interest One of the investment service providers had utilized a computer-based model portfolio in giving investment recommendations to clients. Based on information concerning the client, the system provided a recommended diversification of investments and a corresponding product recommendation. The computer system produced virtually always a recommendation to sell all current investments and invest the proceeds to products offered by the investment service provider in question. This computer system was considered to have created a clear conflict of interest that had not been identified and therefore reasonable measures to prevent such conflict of interest had not been undertaken. Thinking ahead under MiFID 2 Under MiFID 1 as well as MiFID 2, which will become effective as of the beginning of 2018, investment firms are required to ensure that the recommended products are suitable and appropriate to their clients. MiFID 2 will bring about enhanced obligations in this respect. As part of the suitability assessment, investment firms will be required to obtain information on the client's ability to bear losses and the client's risk tolerance. There will also be new requirements to provide the clients with a statement on suitability and to maintain records of the appropriateness assessment including any warnings given to the client. Under MiFID 2, disclosure of potential conflicts of interest to clients – as opposed to taking steps to prevent or manage them – will be a measure of last resort. D&I Key Insight It is to be expected that investment firms' compliance with investor protection rules continue to be scrutinized.  As part of their MiFID 2 preparations, we recommend that firms review not only procedures for obtaining client information but also any elements in their operating model which may favour products of the same group. In case any such potential conflicts of interest are identified, firms should ensure that they are properly addressed and included in the firm's conflict of interest policy.
Creating Precedents
2 Dec 2016 MAR is the buzzword on everyone's lips. Companies have worked hard to be ready for EU Market Abuse Regulation which (in)conveniently entered into force in early July. MAR aims to preserve market integrity through EU wide uniform legal framework. Executives are integral actors in the securities market. Executives can put the procedures brought by MAR into service to contribute towards strengthening of investor relationships while building the file for the authorities. Key Changes Brought by MAR MAR regulates inside trading, disclosure of inside information and market manipulation. MAR is directly applicable in all EU member states and the rules should be the same everywhere. The intended uniformity is suffering from inconsistent translations as relates to managers trading. A recent correction by the EU solves the discrepancy and confirms that the Finnish translation has been correct all along. The duty to report transactions may arise also merely on the basis of managerial duties in a company without a requirement of also holding any ownership stake. It still remains somewhat blurry how the reporting duty should be interpreted. The authorities are working on guidelines which hopefully bring final clarity. Increased process and documentation requirements and the threat of significant administrative sanctions In line with the present practice of EU law making, MAR brought increased process and documentation requirements and a threat of significant administrative sanctions. The Finnish Securities Market Act ("SMA") has been amended to introduce the sanctions and the powers of the authorities. The maximum sanctions can rise to EUR 5,000,000 million for an individual and EUR 15,000,000 or 15% of annual turnover for a company. Key changes brought by MAR from an operative point of view are: Heightened duty to disclose inside information. Matters in preparatory phase become subject to disclosure obligation earlier than under the previous rules. Three specific criteria for postponing the disclosure obligation. Postponing is allowed if and as long as all of the criteria are in place. The fulfilment has to be duly documented and constantly monitored. Financial Supervisory Authority must be immediately informed on postponed disclosure once inside information is disclosed to the public. Public insider lists are no longer kept. Issuers must maintain non-public permanent and project insider lists. Three-day reporting obligation on managers' trading. Applies also to their closely related persons and influence entities. The scope of reporting is widened with respect to the types of transactions and kinds of securities. Even derivatives and futures are included.   Creating Precedents When does something "have impact on the value of the securities of the company"? What is "significant" in the circumstances where the company operates? What are the strategic aspects that need to be considered when disclosing information to the investors and to the market? MAR creates the requirement to draw concrete conclusions as to what constitutes inside information at the point of each disclosure / delay of disclosure and document these conclusions. Here, as in all communication, consistency is the key. The first documented decisions that are being made can build the bedrock for the future. Investor strategy is an important factor to be kept in mind in all public communication. The strategic goals in relation to the kinds of investors the company seeks to attract and the "investor experience" that the company aims to give have to be duly reflected. MAR compliance is an opportunity to reinforce the company's investor relations strategy. Opportunity to actively create precedents that the future disclosure decisions of the company will be measured against MAR provides an opportunity to actively create precedents that the future disclosure decisions of the company will be measured against. You can develop, document and ingrain, internally and also to investors and other interest groups, clear definitions for the key terms which are grounded not only on the contents of MAR but also reflect the specific features and circumstances of your company. This of course is not new as such, but has a new twist. Disclosure policies need to provide clear guidelines for the definition of inside information and disclosure process to enable proper precedents to be created. In order to create such proper precedents, your internal thinking may need to go a few steps deeper to find what is core for the company. When the core is pellucid, the decisions in the hectic day-to-day life stay on course. Otherwise, the regular scrutiny which the Financial Supervisory Authority is obligated to conduct under MAR easily catches on unintentional inconsistencies.  
Creditor-friendly on Corporate Benefit
3 Nov 2015 In its ruling of 7 July 2015, the Helsinki Court of Appeal adopted a new interpretation of the requirement of corporate benefit when a subsidiary grants security for the debts of its parent company. This interpretation is wider than the prevailing market view and may imply enhanced possibilities for lenders to obtain collateral from the borrower's group companies. In this recent case [HHO 7.7.2015 (S 14/2893)], a mutual real estate company (MREC), which was fully-owned by the company GT, had granted a real estate mortgage to the business partners of GT and GT's sole shareholder, a private person. The mortgage was granted as security for the payment obligations of GT and its owner pursuant to a settlement agreement which was unrelated to the activities of the MREC. When payment under the settlement agreement was not made, the mortgagees brought enforcement action against the MREC. In those proceedings, the MREC contended that the mortgage was invalid due to lack of corporate benefit on the part of the MREC to grant collateral for the debts of its owner. Do subsidiaries still need to receive loan proceeds? It is common ground that a subsidiary may grant security for the obligations of its parent only if the subsidiary derives from the transaction such direct or indirect benefit which justifies putting its assets at risk. According to precedent, security granted by a subsidiary for the obligations of its parent has been held invalid due to lack of corporate benefit in situations where the parent is in financial difficulties and it is evident already at the time of the granting of the security that the security will likely be lost (KKO 2006:96). In other circumstances, it has remained unclear what constitutes sufficient corporate benefit. In connection with loan arrangements, it has in practice often been considered that security granted by a subsidiary for the borrowing obligations of its parent is effective only up to the amount which corresponds to the loan proceeds actually channelled to the subsidiary (e.g. as intra-group loans). “The Court of Appeal adopted an interpretation that was clearly more creditor-friendly than the prevailing market view.“ Need to secure maintenance charges The Court of Appeal adopted an interpretation that was clearly more creditor-friendly than the prevailing market view. The mortgage was granted in a situation where GT's business partners had already filed for GT's bankruptcy due to GT's failure to make the payments set out in the settlement agreement. In assessing corporate benefit, the Court found that the MREC was dependent on maintenance charges from GT and that the mortgage was necessary to remove the threat of GT's bankruptcy and to secure the continued payment of maintenance charges to the MREC. The Court therefore held that the requirement of corporate benefit was met and the mortgage was valid. The Court's findings concerning the MREC's interest to secure the inflow of maintenance charges could well have been different. Every MREC is dependent on maintenance charges from its shareholders. It is questionable whether financial difficulties of a shareholder can be regarded as a circumstance with which the MREC should be concerned and which would justify using other than distributable assets to support the shareholder. The Court's ruling would seem to lead to the problematic outcome that an MREC can always guarantee the debts of its shareholder if the shareholder is in serious financial difficulties. “If this were to be the law, it would present a completely new landscape for corporate security arrangements.“ New collateral landscape The real reason behind the creditor-friendly ruling was presumably that no other creditors of the MREC were harmed by the enforcement. The ruling therefore appears to say that very little or no corporate benefit is required for upstream security as long as at the time of the granting of the security there were no creditors who were likely to be harmed by such security. If this were to be the law, it would present a completely new landscape for corporate security arrangements. The ruling has, however, been appealed to the Supreme Court and it remains to be seen whether the creditor-friendly approach of the lower courts will prevail.

Dittmar & Indrenius