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With the expiry of the transition agreement between the European Union and the United Kingdom on 31 December 2020 several implications arise for credit institutions and investment firms active in the Danish market.
1. Background
Following the exit of the United Kingdom from the European Union on 31 January 2020 the European Union and the United Kingdom entered into a transition agreement inter alia allowing UK-based credit institutions and investment firms to continue to benefit from the financial services passporting regime in an interim transition period ending on 31 December 2020.
After the expiry of the transition period UK-based credit institutions and investment firms will no longer be able to passport into the European Union and provide investment services or engage in investment activities in Denmark unless the relevant entity has been duly authorised by the Danish Financial Supervisory Authority (the FSA) to engage in investment activities or otherwise to provide investment services.
This client briefing sets out the various licensing options for UK-based credit institutions and investment firms after the expiry of the transition period.
2. Danish Authorisation Regime
The Danish authorisation regime is found in section II of the Danish Financial Business Act (the FBA) and differs depending on the type of business activity the entity will engage in (banking, mortgage credit, investment services and insurance) and the scope of the license being sought. For UK based credit institutions and investment firms seeking to engage in licensed activities post 31 December 2020 there are basically the following options:
· Full Danish license;
· Limited “cross-border” license;
· Danish branch license.
2.1 Full Danish Licence
UK-based credit institutions or investment firms may choose to incorporate a Danish subsidiary which applies for a full Danish banking or investment firm license (sometimes referred to as a securities dealer’s license) pursuant to section 7 or 9 of the FBA. The following general license requirements apply:
(a) Banking license (FBA section 7)
A paid in share capital of at least EUR 5,000,000;
the board of directors and the management must be deemed to be “fit and proper”;
shareholders holding a “qualifying interest”[1] must equally be deemed to be “fit and proper” (A “qualifying interest” is the holding of 10 per cent. or more or the shares or voting rights of the company applying for the license or any other shareholding that gives the shareholder a material influence over the applicant’s management.);
the absence of any close links between the applicant and any undertakings or persons which hold a substantial stake in the applicant which could otherwise complicate or hinder the supervision by the FSA (i.e. in practice the UK entity);
the absence of any third country legislation applicable to an undertaking or person with close links to the applicant which would otherwise complicate or hinder the supervision by the FSA;
appropriate administrative procedures and controls;
the applicant has its headquarters and registered office in Denmark.
(b) Investment firm license (FBA section 9)
A paid-in share capital of EUR 730,000/EUR 125,000 or EUR 50,000 depending on the types of investment services being offered ranging from the full range of investment services (including inter alia proprietary trading, underwriting of securities issuances, placement services) to a more limited range of investment services such as executing orders for investors and providing investment advice)
Otherwise identical requirements, as in relation to banking license mutatis mutandis.
While these licenses enable the Danish subsidiary to offer the full range of banking and investment service the cost and administrative requirements will often make them less attractive to UK-based firms with limited or only occasional business activities in Denmark.
2.2 Limited “Cross-Border” License
For credit institutions and investment firms which do not intend to set up a Danish entity a “cross-border license” may be an attractive option. Section 33 of the FBA in this connection requires that non-EU credit institutions and investment firms which are licensed in a country with which (i) the European Union has not entered into a cooperative agreement with in relation to financial services and (ii) for which the EU Commission has not adopted an equivalence decision pursuant to art. 47(1) of Regulation EU/600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments or where such decision is no longer valid, must obtain a license from the FSA in order to conduct cross border investment services to eligible counterparties or per se professional clients.
While it is probably likely that the EU at some stage will enter into a such a cooperation agreement with the UK and adopt the corresponding equivalence decision, this will not necessarily be implemented prior to the 31 December 2020 deadline.
A limited license may therefore be attractive as an interim measure. Pursuant to section 33 of the FBA and the associated executive order no. 918 dated 26 June 2017 on the licensing procedure for foreign credit institutions and investment companies that have been granted a license in a country outside the European Union and that wish to perform investment services and investment activities in Denmark, an entity applying for such a license must submit the following information/documentation:
a listing of the investment activities, investment services and ancillary services it intends to provide;
a listing of the financial instruments that will be offered or otherwise be subject to its investment activities and investment services;
a statement from its home state regulator confirming that the applicant is subject to supervision in its home state; and
a statement from its home state regulator confirming that the activities for which the applicant seeks permission for are covered by the applicant license in its home state.
As part of the authorisation process the FSA will inter alia assess whether the supervision in the home state roughly corresponds to or at least has some resemblance to the prudential supervision that a similar undertaking would be subject to under Danish law. In respect of credit institutions and investment firms, this would among others entail that the applicant is subject to solvency or capital requirements, that the applicant is subject to financial reporting requirements to its home state regulator and that the management is subject to a “fit and proper” approval procedure.
The FSA additional requires that it is able to cooperate and exchange information with the home state regulator before it grants a license. It may refuse to grant the license if this condition it not met.
In respect of credit institutions and investment firms from the UK applying for such a license the FSA has recently – in anticipation of the expiry of the transition period published a special application form for UK entities only. The application form can be found here.
Potential applicants should apply prior to 15 October 2020 to allow the FSA to process the application before year-end.
In respect of the above, it should however be specifically noted that a limited cross-border license will only allow the relevant firm to provide investment services to eligible counterparties and per se professional clients.
Firms that also provide or intend to provide investment services to retail clients and elective professional clients, such as is e.g. the case with many investment firms offering CFD trading and spread betting, will either have to apply for a full Danish license cf. clause 2.1 above or set-up a duly authorised Danish branch cf. clause 2.3 below.
2.3 Danish Branch License
As an alternative to a limited cross border license a UK credit institution or investment firm may apply for a Danish branch license. A license that would most likely primarily be relevant for UK firms which have a substantial Danish customer base consisting of retail clients and elective professional clients which they would like to continue to service after the expiry of the transition period.
Pursuant to section 33(a) of the FBA, an entity applying for a Danish branch license must submit the following information/documentation to the FSA:
the name of its home state regulator and where there are several regulatory authorities, information about their respective areas of authority and responsibilities;
its name and its legal form, its registered office and address according to the articles of association, the members of its management body and relevant shareholders;
a description of the activities of the branch, including information about its organisation and the planned activities, as well as a description of any essential areas of activity which have been outsourced to external service providers[1];
names of the persons who are responsible for managing the branch, as well as documentation that they meet the relevant “fit and proper” requirements in the FBA; and
information about the branch’s freely available initial start-up capital.
[1] Namely the latter will be relevant for UK firms which intend only to use their Danish branch as a marketing and point of contact platform. The FSA will assess the application on the basis of the above information and will issue a branch license in case the following requirements have been fulfilled:
the activities for which the applicant seeks permission must be covered by the applicant’s license in the applicant’s home state and must be supervised by the home state regulator;
there must be a cooperation agreement in place between the FSA and the home state regulator which inter alia includes provisions on information sharing for the purpose of maintaining market integrity and protecting investors;
the initial start-up capital available to the branch must be deemed to be sufficient;
the local management must be deemed to be “fit and proper”;
the applicant’s home state must have entered into an agreement with Denmark which fully complies with the standards of Article 26 of the model tax convention of the Organisation for Economic Cooperation and Development (OECD) concerning income and property and which ensures effective sharing of tax information, including multilateral tax agreements;
the applicant must be part of an investor guarantee scheme under which the foreign credit institution or investment firm is part of an investor guarantee scheme which is approved or recognised under Directive 97/9/EC of the European Parliament and of the Council of 3 March 1997 on investor-compensation schemes;
the branch will be able to meet various other conduct of business and governance requirements in the FBA and the Capital Markets Act, including e.g. section 43 of the FBA on good business practice, section 71 on effective governance and administrative procedures etc. as well as certain MiFID II related regulations.
Compared to the requirements for a limited cross-border license, the requirements for a Danish branch license are more thorough and comprehensive, partly reflecting that the branch may also provide investment services to retail clients and elective professional clients.
For more information on the Danish licensing regime, please contact a member of Carsted Rosenberg Advokatfirma to assist.
Carsted Rosenberg is a specialist international law firm with a focus on cross-border banking & finance, capital markets, mergers & acquisitions and corporate & commercial matters. It provides high-end legal counsel services in connection with large-scale cross-border transactions with a particular focus on the Danish market.
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