Mutual funds and collective investment schemes

Net subscriptions in Norwegian management companies' mutual funds totalled NOK 4 billion in 2022, which was the lowest level since the financial crisis in 2008. Institutional investors' negative net subscriptions of NOK 12 billion were the main factor behind the reduction in total subscriptions. Defined-contribution pension schemes represented the largest positive contribution, with net subscriptions of NOK 18 billion. Institutional investors and private individuals acted contrary to each other (excluding defined-contribution pension schemes): Institutional investors’ negative net subscriptions in fixed-income funds came to NOK 21 billion, while there were positive net subscriptions of NOK 10 billion in equity funds. Private individuals, on the other hand, had positive net subscriptions in fixed-income funds and negative net subscriptions in mutual funds, both at NOK 2 billion.

Net subscriptions and assets under management by client group
All figures in NOK billion

Clients	Net subscriptions	Assets under management
Norwegian private individuals	-2	345
Norwegian institutional clients	-12	886
Defined-contribution pensions	18	315
Total Norwegian clients	4	1546
Foreign clients	0	114
Total	4	1660

Net subscriptions and assets under management by fund category
All figures in NOK billion

Funds	Net subscriptions	Assets under management
Equity funds	21	949
Balanced funds	-4	87
Fixed-income funds	-14	611
Other funds	0	13
Total	4	1660

Source: Norwegian Fund and Asset Management Association

At year-end 2022, 56 Norwegian licensed AIF managers were subject to ordinary supervision by Finanstilsynet. In addition, 190 AIF managers featured in Finanstilsynet’s registry, which is 10 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 521 Norwegian AIFs and 49 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 2022 were largely due to operational errors, lack of market data or fluctuations either in the mutual fund market or in the funds' investments. No market events were of such a nature that they led to serious breaches at several managers at the same time. The statistics for 2022 reflect individual events with implications for several of the managers' funds. The average number of breaches per quarter was higher in 2022 than in 2021. The duration of the breaches was shorter in 2022 than in the previous year.

Common Supervisory Action on valuation

In 2022, Finanstilsynet participated in a thematic survey on the valuation of mutual funds and open-ended alternative investment funds under the auspices of the European Securities and Markets Authority (ESMA). The survey aimed to assess compliance with organisational requirements, with particular emphasis on the management companies' valuation procedures and policies, including whether the companies followed principles and methodologies that ensure correct valuation of the funds' portfolios during both normal and stressed market conditions.

Finanstilsynet assessed ten management companies, six of which were licensed as both a management company and an AIF manager. Following a review of the submitted responses and documentation, Finanstilsynet chose to conduct on-site inspections at two management companies for a more thorough investigation. The investigation showed that the responses to the thematic survey had not been exhaustive and that the companies had more comprehensive procedures and control processes than described and included in the thematic survey.

Finanstilsynet sent ESMA its assessments of how the Norwegian management companies comply with the requirements. The key findings concern inadequate valuation policies and procedures and ambiguity about the importance of liquidity stress tests for the valuation. ESMA will, after further analysis, publish a summary report to the market in 2023. Finanstilsynet will consider the need for further follow-up.         

Developments in prices of mutual funds in consequence of new pricing models

Stricter rules governing investment firms’ opportunity to accept consideration from parties other than the client have resulted in significant changes in the pricing models for mutual funds. Management companies' payments to distributors (inducements) have been reduced, and very few distributors retain the inducements they have received but transfer them to their clients. To compensate for the loss of income, distributors have introduced platform fees that clients pay directly to the distributor.

In 2021 and 2022, Finanstilsynet conducted a survey to examine how the changes in pricing models affected management companies, distributors and end clients, respectively. The survey included 13 distributors and 12 management companies. Finanstilsynet examined developments in the overall price of actively managed equity funds, index funds and balanced funds. A report on the results was published in May 2022.

The main findings from the survey showed that the fee structure for mutual funds had become complex and non-transparent. It was challenging for consumers to examine and compare prices of various mutual funds. However, the client's end price for actively managed mutual funds had been reduced. Prices were on the decline prior to the rule changes on 1 January 2018, but were further reduced from 2019. The distributors accounted for the entire price reduction related to equity funds. There have been smaller reductions in the management companies’ management fees than in their distribution costs, but there are large differences between the companies. There was a marginal price decline for balanced funds, while prices of index funds remained unchanged.

In 2022, Finanstilsynet prepared a consultation document proposing a prohibition against paying and receiving inducements. See more about the proposal in the report on investment firms.

The circular on revenue sharing no longer applies

Circular 14/2007 concerned management companies' right to enter into an agreement on revenue sharing with some of their large clients. Revenue sharing means that the client pays a reduced management fee. The circular allowed management companies, under certain conditions and within a limited scope, to enter into such agreements with certain large clients. An identical letter was sent to the management companies in June 2022, providing information on current regulations and changes in administrative procedures. Parallel to this, circular 14/2007 was removed from Finanstilsynet’s website.

Off-site thematic inspections of measures against money laundering and terrorist financing – registered AIF managers

In 2022, Finanstilsynet initiated a thematic inspection of compliance with the AML legislation among eleven registered AIF managers. The selection of managers was based on previous surveys of compliance with the AML legislation. The thematic review had not been finalised at end-December 2022, but so far show inadequate compliance with basic requirements for, among other things, business-specific risk assessments and customised procedures. The thematic review will be concluded during 2023.

Supervision of individual firms

Finanstilsynet conducted an inspection of two AIF managers in 2022. Serious deficiencies were revealed in one of the firms’ risk management. However, as the firm took action, the announced order for corrective measures was not issued. Weaknesses were also identified in procedures and policies related to conflicts of interest. At the second firm, Finanstilsynet pointed out some aspects of operations that posed a risk related to operational continuity and the firm’s independence. Weaknesses were also identified in procedures and policies related to conflicts of interest, along with deficiencies in the firm's use of disclaimers.

Finanstilsynet conducted a limited inspection of a fund manager where deficiencies were identified in the firm's valuation procedures and liquidity stress testing. A limited inspection was also carried out at two fund managers to examine how historical returns were presented in their key information. Both firms marketed mutual funds in which historical returns were compared with a non-relevant benchmark index. The companies were criticised because historical results were made to look better than they actually were, and the investor information could be partly misleading.

Monitoring of firms’ finances

The profitability and financial soundness of the management companies and AIF managers were monitored through audits and analyses of submitted notifications. Overall, the fund managers enjoyed sound profitability and capital adequacy. However, figures for the first half of the year showed declining profitability compared with the same period the previous year. A breach of the own funds requirements was identified at one management company and two AIF managers, compared with only one breach the previous year.

Licensing 

Fund management companies

Licences

In 2022, Finanstilsynet granted one new licence to engage in mutual fund management. The company already had a licence to manage alternative investment funds. Finanstilsynet has undertaken a number of fit and proper assessments of new owners and people in senior positions and considered matters concerning the organisation of the business, handling of conflicts of interest and outsourcing.

New mutual funds, changes in articles of association and liquidation of mutual funds

In 2022, Finanstilsynet granted licences for the establishment of nine new mutual funds, of which four are national mutual funds that can place a larger share of their assets in one and the same fund than what is allowed for UCITS funds. Permission was granted for the liquidation or merger of 22 mutual funds. Existing unit holders in several of the funds had redeemed all their fund units at the time permission for liquidation was granted.

In the course of the year, Finanstilsynet approved amendments to the articles of association of a number of mutual funds. In many cases, the changes apply to provisions on unit classes. It is still possible to introduce 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. Finanstilsynet approved amendments to articles of association whereby unit classes were introduced for a number of mutual funds that have not previously had unit classes. Finanstilsynet also approved changes to provisions concerning unit classes for a large number of funds in consequence of changes in the regulatory framework for inducements to distributors and the management companies' opportunity to enter into revenue sharing agreements with clients.

475 mutual funds established in other EEA states were passported for marketing to Norway. This is true above all of funds established in Luxembourg and Ireland.

Managers of alternative investment funds (AIFs)

Licences

In 2022, Finanstilsynet granted licences for the management of alternative investment funds to eight companies. Finanstilsynet undertook a number of fit and proper assessments of individuals with senior positions at licensed AIF managers and processed notifications of outsourcing and other significant changes at AIF managers.

Marketing

Finanstilsynet granted 21 permits for the marketing of AIFs to retail investors in 2022. 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, including information about 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 2022, Finanstilsynet granted 113 permits for the marketing of AIFs to professional investors in Norway where either the manager, the fund or both are established outside the EEA. 705 AIFs established in other EEA member states were passported for marketing to professional investors in Norway. This is true above all of funds established in Luxembourg and Ireland.

Finanstilsynet granted permits for the marketing of a total of 12 funds designated as EuVECA funds in 2022. These European venture capital funds have to meet additional requirements concerning portfolio composition and the manager’s organisation and operational activities. EuVECA funds can be managed by registered AIF managers and marketed to retail investors on specified terms. 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. Finanstilsynet was notified of the marketing of 36 EuVECA funds to investors in Norway where the manager is established in another EEA state.

Complaint about decision to prohibit marketing of alternative investment fund

In 2022, Finanstilsynet handled one complaint from an AIF manager concerning the rejection of an application for permission to market a feeder fund established in Norway whose manager was established in Norway, but where the master fund was established in the EEA and had a manager established outside the EEA. In Finanstilsynet’s opinion, the AIF Act does not allow for the marketing of such a feeder fund in Norway. The complaint was sent to the Ministry of Finance for decision.

Regulatory development 

Consultation document on the implementation of parts of the Shareholder Rights Directive II

Finanstilsynet prepared a consultation document with draft provisions of secondary legislation for the implementation of parts of the Shareholder Rights Directive II (SRD II). The key provisions of the directive, which targets the financial market area, have been implemented through a legislative amendment which has not yet entered into force. New provisions have been laid down in sector legislation governing institutional investors and asset managers (life insurers and pension institutions, AIF managers, management companies and investment firms providing portfolio management). The main purpose is to promote long-term active shareholder engagement in connection with investments in listed shares in the EEA. In order to fully implement the directive requirements, Finanstilsynet proposed new provisions in the Financial Institutions Regulations, the AIF Regulations, the Securities Funds Regulations and the Securities Trading Regulations. The new provisions provide supplementary rules on active share ownership and the obligation to disclose investment strategies.

Consultation document on prohibition against inducements

Finanstilsynet sent the Ministry of Finance a proposal to prohibit the opportunity to accept and offer consideration from parties other than the client when mediating savings products to retail investors.

A prohibition means that distributors of savings products can no longer accept inducements. The proposal will be of relevance to investment firms, insurance intermediaries, insurers and fund management companies. The proposed regulation would, in Finanstilsynet’s view, ensure better consumer protection.

Proper liquidation of management companies, AIF managers and investment firms – proposed new rules

In December 2022, Finanstilsynet sent a draft consultation document to the Ministry of Finance concerning, among other things, an administrator scheme that can be used when liquidating management companies, AIF managers and investment firms. The background for this is that it may be necessary for Finanstilsynet to intervene to safeguard clients’ interests in a situation where such entities have had their licence revoked and there is a risk that the business will not be liquidated in a proper manner.

Adoption of regulations on European long-term investment funds (ELTIF)

As of 1 January 2023, after the entry into force of new provisions in the AIF Act, it will be possible to establish long-term investment funds (ELTIF) in Norway. In December 2022, Finanstilsynet adopted amendments to the AIF regulations, whereby Norwegian rules are in line with pan-European supplementary rules. The rules entered into force on 1 January 2023.

Stipulation of new rules on fund managers' sustainability risk management

In December 2022, Finanstilsynet adopted amendments to the Securities Funds Act and the AIF Act on fund manages' sustainability risk management. The regulations are based on supplementary pan-European rules adopted by the European Commission in 2021. The rules came into force on 1 January 2023, parallel to the Sustainable Finance Act.

Guidance

In 2022, Finanstilsynet provided extensive guidance by publishing information on finanstilsynet.no. This included: 

• inspection reports
• descriptions of new legislation on separate topic pages
• consultations on draft legislation, both from Norway and EU consultations of relevance to the EEA

In June 2022, Finanstilsynet arranged a half-day seminar for investment firms, fund management companies, managers of alternative investment funds and depositories. The agenda included the distribution of mutual funds, upcoming sustainability rules, employees’ personal securities transactions and ESMA's common supervisory actions. Finanstilsynet also held presentations of fund-related topics at other events.