The Securitisation Law Review: Norway
The Norwegian securitisation market has historically not been substantial compared with the market in other jurisdictions in Europe. In 2004, the now-repealed Norwegian Financial Institutions Act (the FIA Act)2 was amended to enable financial institutions to securitise their loan portfolios by way of a 'true sale' to securitisation special purpose entities (SSPE). The amendment to the FIA Act addressed traditional, 'true sale' securitisation, rather than synthetic securitisation where there is no sale of assets from the financial institution to the SSPE.
Owing to the complexity of the rules and the lack of beneficial treatment of securitisations under the Norwegian capital adequacy regime, Norway never developed a substantial securitisation market and the already minuscule market for securitisation dropped to zero when the FIA Act was replaced by the Norwegian Act on Financial Undertakings and Financial Groups (the FUA Act)3 from 1 January 2016, as the new act did not provide for securitisation, thus making securitisation practically impossible for financial institutions in Norway.
Ordinary corporates and other non-financial institutions may securitise their loan portfolios or similar assets without regard to some of the restrictions that currently apply to financial institutions.
Following the implementation of a new framework for securitisation in the EU – consisting of the EU Securitisation Regulation,4 the EU Securitisation Prudential Regulation amending the Capital Requirements Regulation5 and the EU Securitisation Prudential Regulation Solvency II6 (collectively the EU Securitisation Law), all of which are considered relevant to the European Economic Area (EEA) but are not yet implemented in the EEA Agreement – the Norwegian legislature tasked the Financial Supervisory Authority of Norway (FSAN)7 with establishing a working group (the Working Group) to assess a Norwegian implementation of expected EEA rules corresponding to the EU Securitisation Law. The Working Group was aided in its work by the Reference Group, which comprised representatives from the market. On 29 May 2019, the Working Group sent its final report (the Report) to the Norwegian Ministry of Finance, the Report forming the basis for a legislative proposal published by the Ministry of Finance on 4 December 2020. The final legislation for implementation of the EU Securitisation Law in Norwegian law by amending the FUA Act (the Implementing Law) was passed by Parliament on 23 April 2021 but, at the time of writing, has not yet entered into force. We expect the new legislation to take effect at the same time as the EU Securitisation Law is implemented in the EEA Agreement, the timing of which is currently unknown.
In short, the Implementing Law states that the EU Securitisation Law should be implemented by cross-reference in Norway (i.e., word for word). To the extent that certain issues are not regulated in the EU Securitisation Law, the Norwegian legislature is entitled to pass ancillary regulations in respect of those issues, provided, however, that any such Norwegian regulations are drafted to comply with the objective of the EU Securitisation Law and general EEA principles. The Implementing Law contains a limited number of such ancillary regulations; see further details in the sections below.
i Licensing requirements in Norway
Lending is a regulated activity in Norway and a licence or a passport is needed. Norwegian financial undertakings without a banking licence may grant loans based on a licence as a non-banking credit institution or as a finance company. Consequently the original lender would need a permit in Norway to grant loans.
The sale of existing loans is not a licensable activity in Norway, but the transfer of a substantial part of a financial institution's loan portfolio requires approval from the Ministry of Finance. In our opinion, which is backed by the Report,8 the approval requirement does not apply to the transfer of loans in a securitisation context.9 Therefore we do not believe that a sale of a loan portfolio from the original lender, originator or sponsor, as a rule of thumb, would trigger a need for an approval from the Norwegian authorities.
Pursuant to the current FUA Act, the purchase of existing loans in a traditional securitisation constitutes a licensable activity and will thus subject the SSPE to licensing requirements, capital requirements and supervision unless an exemption exists. This is also the case for SSPEs that provide credit default swap protection to the originator in a synthetic securitisation. However, the Implementing Law amends the FUA Act to clarify that securitisation SSPEs are not subject to licensing requirements as long as they do not issue bonds on a continuing basis. The SSPE must be established for the sole purpose of carrying out one or more securitisations. The EU Securitisation Regulation permits the use of SSPEs established in a third country, (i.e., not established in the EU),10 as long as the third country is not listed as, for example, a high-risk and non-cooperative jurisdiction by the Financial Action Task Force.
The debtors under securitised loans have certain rights pursuant to the Norwegian Act on Financial Agreements (the FAA Act) provided that the original lender or originator was a financial institution.11 The debtor's rights under the FAA Act will attach to the loan and must be respected by the SSPE that has acquired the loan. To further protect the debtors' rights under the FAA Act in cases of securitisation, the Implementing Law requires that the servicer of a securitised loan portfolio be a bank, a non-banking credit institution or a finance company. The expectation is that a Norwegian bank will normally be original lender, originator and servicer, and consequently imposing such a requirement on a securitisation servicer should not be onerous for most originators.12
ii Consent requirements
As a main rule, Norwegian law allows for monetary claims (e.g., receivables) to be freely assigned to third parties without the debtor's consent, provided such consent is not required by law or contract. An exception from this rule is set out in the FAA Act, which applies to loans and other credits provided by financial institutions. FAA Section 45 states that a financial institution may not, without the debtor's explicit consent, assign a loan to a third party, unless the assignee is a financial institution or similar entity (in which case only a notification is required). This consent requirement cannot be waived by consumer borrowers (but non-consumer borrowers may do so). However, the Implementing Law provides for an explicit derogation from FAA Section 45 with respect to securitisation transactions, meaning that no consent of the debtors is required to transfer loans to SSPEs. Instead, the financial institution is only required to inform each individual debtor about the contemplated securitisation transaction no less than three weeks prior to closing of the transaction.
iii Simple, transparent and standardised securitisation
The EU Securitisation Law introduces a new regime for simple, transparent and standardised securitisation (STS securitisation). Subject to a legitimate designation of a securitisation as an STS securitisation pursuant to the EU Securitisation Regulation and the EU Securitisation Prudential Regulation amending the Capital Requirements Regulation, certain investors may receive more favourable capital treatment for their investment in a traditional STS securitisation compared with a similar investment in a securitisation that does not have the STS designation.
Without going into detail, the STS designation is contingent both on the ordinary securitisation requirements being met and on special conditions related only to the STS securitisation (e.g., a sample of the underlying exposure shall be subject to external verification prior to issuance of the securities resulting from the securitisation) and there are, to some extent, different rules regarding non-ABCP securitisations compared to ABCP securitisations.
The responsibility for the assignment devolves jointly on the originator, sponsor and SSPE, but they may designate, subject to certain conditions and approval from the FSAN, a third party to attest the satisfaction of the STS criteria. This, however, will not absolve from liability the originator, sponsor and SSPE if it turns out that the assertion was incorrect.
Notification of the STS designation must be sent to the European Securities and Markets Authority (ESMA) by the originator and sponsor or, in the case of an ABCP programme, the sponsor. ESMA shall publish the STS notification on its official website and the originator and sponsor must inform the FSAN of the STS notification.
The STS designation can only be obtained when the originator, sponsor and SSPE are established in the EEA.
From the outset, the EU Securitisation Regulation has only provided for STS designation for a traditional securitisation. However, in April 2021 the EU passed two regulations13 amending the EU Securitisation Regulation and the Capital Requirements Regulation to provide also an STS framework for synthetic securitisation transactions. On 7 September 2021, the Norwegian Ministry of Finance published a consultation paper on new legislation to implement these two regulations in Norway. The consultation paper was prepared by the FSAN and follows on from the Norwegian Parliament's adoption of the Implementing Law on the 23 April 2021. This legislation is expected to enter into force simultaneously with the Implementing Law.
iv Risk retention
One of the contributing factors to the financial crisis in 2008 was the misalignment between the interests of the originators on one side and the investors on the other – securitisation transactions were often based on the 'originate-to-distribute' model, where the originators or lenders did not intend to keep the loan on their books for any longer than necessary. As a response to the unfortunate consequences that followed from this misalignment, regulators have set out certain remedial requirements intended to align the parties' interests, such as a condition that a minimum of 5 per cent of the net economic credit risk in the transaction is retained by the originator (risk retention).
It follows from Article 6 of the EU Securitisation Regulation that the risk retention requirement applies to the originator, sponsor or original lender. The interest is measured at the time of origination and shall be determined by the notional value for off-balance-sheet items. It is not allowed to split the net economic interest among different types of retainers or to perform any credit-risk mitigation or hedging related to the retained risk – this would make the risk retention requirement void.
The originator may not select assets to be transferred to the SSPE with the aim of rendering losses on the assets transferred compared to similar assets held by the originator that are not being securitised. As a starting point, the assessment is based on the assets' term, or over a maximum of four years where the life of the transaction is longer than four years.
There are five different methods by which the relevant party may comply with the risk retention requirement. We believe many parties will choose one of the less complicated methods, namely risk retention either by way of a vertical slice (retention of at least 5 per cent of the nominal value of each tranche sold or transferred to investors) or a first loss exposure (retention of a first loss exposure of not less than 5 per cent of every securitised exposure in the securitisation).
There are, however, exemptions to the risk retention requirement under the EU Securitisation Regulation. For instance, an entity established or that operates for the sole purpose of securitising exposures will not be deemed an originator and consequently will be excluded from acting as the retainer of risk. Similarly, there will not be any risk retention requirement if the securities exposures are fully, unconditionally and irrevocably guaranteed by, for example, central governments or central banks.
v Reporting requirements
Pursuant to the Norwegian Act on Debt Information,14 a financial institution has to report information to an authorised debt registry institution about a customer's unsecured debt or unused credit line for which the financial institution is a creditor. The SSPE is exempt from the licensing requirements and will consequently not be deemed a financial institution. Therefore, the Implementing Law provides that the securitisation servicer will be subject to the reporting requirement.
The EU Securitisation Regulation lays down an extensive list of requirements regarding information to be provided to a securitisation repository, or, if such a repository has not been established and subject to certain conditions, on a website, to make the transaction public. Such requirements may be reflected in Norwegian regulations passed by the Ministry of Finance after the Implementing Law has entered into force.
vi Institutional investors – due diligence requirements
Institutional investors15 are subject to strict requirements regarding due diligence and risk assessment prior to an investment; for monitoring asset performance following the investment; and compliance by the original lender, originator and sponsor (as applicable) with certain aspects of the securitisation (e.g., that the risk retention requirement has been met – see Section II.iv). The institutional investor must be able to demonstrate to the FSAN, upon request, that the investor has a comprehensive and thorough understanding of the securitisation and its management.
As a main rule, the underlying exposures used in a securitisation shall not contain other securitised exposures (re-securitisation). The purpose of the ban on re-securitisation is to make the securitised product more transparent – hidden risk due to re-securitisation was one of the components that led to the financial crisis in 2008. A carve-out is made for re-securitisation used for a legitimate purpose, such as where re-securitisation is in the interest of the investors because of the non-performance of the underlying exposures or for facilitation of the winding-up of a credit institution, an investment firm or a financial institution. The capital requirement related to a position in a re-securitised exposure is 100 per cent. Consequently, and taking historical events into account, we believe that the ban will not have any particular impact on the Norwegian market.
Originators, sponsors and original lenders must apply to the exposures being securitised the same sound and well-defined criteria for credit-granting that they apply to non-securitised exposures. The EU Securitisation Regulation also bans residential mortgage-backed securitisations that are backed by loans where the loan applicant was made aware that the information provided by the loan applicant might not be verified by the lender; this, however, is provided that the loans were made after the entry into force of the Mortgage Credit Directive.16
The EU Securitisation Regulation also bans the selling of securitised positions to retail clients, subject to certain carve-outs.
Security and guarantees
i Common types of security
As a prerequisite for its validity, a legal charge must be established in accordance with the terms of the Norwegian Pledge Act (the Pledge Act).17 There are a few requirements that must be met pursuant to the Pledge Act for the charge to be valid inter partes. For example, a charge cannot be validly established over all the debtor's assets,18 and it is not possible for a chargor to grant security over less than its entire ownership in the relevant asset to be charged. To obtain legal perfection, additional requirements must be met (see Section III.ii).
Pursuant to the Pledge Act, the original lender is able to secure its claim in almost every type of asset that the debtor owns; for example, autos (auto mortgage, auto mortgage floating charge or auto chattel mortgage); inventory; machinery and plant (floating charges); patents; residential home or commercial property; and monetary claims (both claims linked to a bank account held with the original lender and claims against a third party).
ii Ways to achieve legal perfection
Under Norwegian law, assignment of a non-negotiable monetary claim obtains legal perfection when the debtor has been notified about the assignment, either from the assignor (the originator or sponsor) or the assignee (the SSPE).
The establishment of a floating charge mortgage (e.g., a charge over inventory, receivables or machinery and plant) normally obtains perfection by way of registration in the Norwegian Mortgaged Movable Property Register (the Property Register).19 The same applies for fixed charges in autos, construction machines and railway rolling stock. The establishment of a mortgage in assets registered in a designated asset register gains perfection by registration in that asset register (e.g., the Norwegian Land Register for real estate and the Norwegian Civil Aircraft Register for aircraft).20
The assignment of a mortgage with the underlying loan will, as a general rule, obtain legal perfection by way of notification to the debtor; in other words, it will follow the perfection mechanism of an assignment of a monetary claim, unless otherwise provided by contract or law. This means, for instance, that when an auto loan and a related auto chattel mortgage are collectively assigned from the originator to the SSPE by way of ownership, the assignment of both the auto loan and the auto chattel mortgage will be legally perfected once the debtor has been notified about the assignment – even though the establishment of an auto chattel mortgage obtains legal perfection through registration. Such legal perfection applies in relation to the debtor's and the originator's creditors alike.21
Pursuant to Norwegian law, the SSPE may grant security over its assets to the extent allowed by law and contract. The security may, as a general rule, be pledged in favour of a security trustee on behalf of the investors. The SSPE may normally also assign the mortgages to a security trustee by way of security; the trustee obtains a sub-mortgage22 over the mortgage. Section 1-10 of the Pledge Act states that security rights can be sub-mortgaged in favour of third parties unless prohibited by contract or other circumstances. It is not entirely clear under Norwegian law whether Section 1-10 of the Pledge Act constitutes a statutory basis for the creation of sub-mortgages in general, but we are of the opinion that it most likely does.
There is a fee for registering mortgages in the relevant register. For instance, registering a mortgage in the Property Register costs 1,051–1,516 Norwegian kroner (depending on the means of registration) and, for registration in the Land Register, the fee ranges from 540 to 585 Norwegian kroner. While electronic mass registration in the Land Register is limited to a maximum fee of 5,400 Norwegian kroner irrespective of how many mortgages are registered, the same has not been the case for mass registration in the Property Register, where there is currently no maximum fee related to mass registration. The absence of a maximum fee for mass registration in the Property Register makes true sale securitisation of certain underlying assets (such as auto loans) economically less attractive and represents an obstacle for achieving the objects of the EU Securitisation Regulation. With a view to solving this issue, the Ministry of Trade, Industry and Fisheries has put forward a proposal that, if adopted, would allow for registration of several mortgages simultaneously against a fixed fee of 483 Norwegian kroner. According to the proposal, there is a maximum limit on how many mortgages you can submit for registration at once. The maximum limit is currently expected to be set between 500 and 1,000 mortgages per submission.
iii Capital requirement – significant risk transfer to the SSPE
A prerequisite for capital relief for the originator is that the securitisation has removed the significant risks associated with the underlying assets from the originator's balance sheet. The rules on significant risk transfer (SRT) are set out in the Capital Requirements Regulation,23 which was incorporated into Norwegian law with effect from 31 December 2019. To recognise that a securitisation ('true sale' or synthetic) reduces the originator's credit risk, thus allowing a capital reduction, it must meet a qualitative test (setting out how much of the asset credit risk must be transferred) and a quantitative test (requiring the securitisation to have certain features to avoid 'fake' risk transfers). On 23 November 2020, the European Banking Authority published a report on SRT in securitisation with the aim of harmonising the current diverging approaches taken on SRT by competent authorities across the EU. It is expected that the outcome of this work will form the basis for the approach taken by the Norwegian authorities on SRT in securitisations by Norwegian originators.
iv Claw-back provisions
Regardless of legal perfection, public administration and bankruptcy proceedings (as applicable) will subject the transactions to scrutiny pursuant to Norwegian bankruptcy claw-back provisions. Essentially, the claw-back rules can be invoked by the insolvency administrator to rescind transactions deemed to be objectively unfair to the other creditors of the insolvent party.
Priority of payments and waterfalls
There is no established market practice for this in Norway as there is currently no active securitisation market.
Isolation of assets and bankruptcy remoteness
i The starting point of the insolvency estate's seizure of assets
Pursuant to the Norwegian Creditors Recovery Act,24 the insolvency estate may seize only those assets that belong to the debtor. In this context, 'belong' refers to the debtor's actual right of ownership in the asset, which may be different from any registered or formal ownership right. Nevertheless, the insolvency estate may also seize assets:
- held by a debtor to the detriment of creditors who have not perfected their ownership interest (see Section III.ii);
- in circumstances where the estate is not bound by the transfer agreement (i.e., the assets fall back into the estate; see, for example, Section V.ii); and
- where the assets are subject to claw-back (see Section III.iv).
ii Valid contractual arrangement
A fundamental prerequisite for isolating the asset from the insolvency estate is that the transfer agreement between the original lender or originator and the SSPE is legal, valid and binding. This means, inter alia, that the insolvency estate is not bound by the agreement if it is pro forma, or if the agreement is later deemed invalid – for instance, because the agreement itself is unreasonably in favour of the debtor's contracting party (the SSPE).25
As stated in Section I, we expect that the new rules on securitisation in Norway will take effect simultaneously with the EU Securitisation Law being implemented in the EEA Agreement. At the time of writing, the timing of such implementation is yet unknown. Following implementation, the same securitisation rules will apply in Norway as in the rest of the European Economic Area insofar as the relevant subject is regulated by the EU Securitisation Law.
1 Markus Nilssen is a partner and Vanessa Kalvenes is a senior associate at Advokatfirmaet BAHR AS.
2 Act No. 40 of 10 June 1988 on Financing Activity and Financial Institutions (Finansieringsvirksomhetsloven).
3 Act No. 17 of 10 April 2015 on Financial Institutions and Financial Groups (Finansforetaksloven).
4 Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No. 1060/2009 and (EU) No. 648/2012.
5 Regulation (EU) 2017/2401 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) No. 575/2013 on prudential requirements for credit institutions and investment firms.
6 Commission Delegated Regulation (EU) 2018/1221 of 1 June 2018 amending Delegated Regulation (EU) 2015/35 as regards the calculation of regulatory capital requirements for securitisations and simple, transparent and standardised securitisations held by insurance and reinsurance undertakings.
8 See the Report p. 34.
9 cf. also the preparatory works to the FIA Act, NOU 2001:23 p. 36.
10 Once implemented in the EEA Agreement, the EU Securitisation Regulation will recognise SSPEs established in the EEA-EFTA states (Norway, Iceland and Lichtenstein) as equivalent to EU-established SSPEs.
11 Act No. 46 of 25 June 1999 on Financial Contracts and Financial Assignments (Finansavtaleloven).
12 See the Report p. 56.
13 Regulation (EU) 2021/557 and Regulation (EU) 2021/558, respectively.
14 Act No. 47 of 16 June 2017 on Debt Information Related to Credit Assessment of Private Persons (Gjeldsinformasjonsloven).
15 That is, credit institutions or investment firms as defined in the Capital Requirements Regulation; insurance and reinsurance undertakings as defined in Directive 2009/138/EC; an alternative investment fund manager (AIFM) as defined in Directive 2011/61/EU; an institution for occupational retirement provision falling within the scope of Directive (EU) 2016/2341 or an investment manager or an authorised entity appointed by an institution for occupational retirement provision pursuant to Directive (EU) 2016/2341; an undertaking for the collective investment in transferable securities (UCITS) as defined in Directive 2009/65/EC; and an internally managed UCITS, which is an investment company authorised in accordance with Directive 2009/65/EU; cf. Regulation (EU) No. 575/2013 and the EU Securitisation Regulation 2(12).
16 Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No. 1093/2010.
17 Act No. 2 of 8 February 1980 regarding Pledges (Panteloven). See the Pledge Act Section 1-2 Subsection 2.
18 The ban is applicable for situations where all the debtor's assets are charged under one floating charge deed (Generalpant). The secured party can, in reality, establish a charge over all the debtor's assets by means of several deeds covering separate parts of the debtor's assets.
20 Grunnboka and Luftfartøyregisteret, respectively.
21 With respect to perfection against the originator's (i.e., the assignor's) creditors, the question has not been clearly answered in Norwegian legislation or jurisprudence, but the predominant view among Norwegian legal scholars seems to be that a security right, such as a chattel mortgage, obtains legal perfection in the same way the underlying claim is perfected, when it is sold together with the claim. The rationale for this view is that a security right is so closely attached to the underlying claim that it does not make sense to require for the security right a different perfection act from that of the underlying claim when both are sold together. This view is also supported by the preparatory works; see, for instance, Ot.prp.nr.39 (1977–1978) pp. 27 and 102.
23 Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/2012.
24 Act No. 59 of June 8 1984 regarding Creditors Recovery (Dekningsloven).
25 Act No. 4 of 31 May 1918 regarding Conclusions of Agreements, the Right to Deposit an Item of Debt and Limitation of Claims (Avtaleloven) Section 36. For an agreement to be deemed unreasonably in favour of one party such that the contract is invalid, the threshold is high.