## 1. Summary of Compliance with BCPs ## Source details **Canonical URL:** [1. Summary of Compliance with BCPs](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14335.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14335.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14335.pdf.json) --- ### A. Summary - Denmark has a "high level of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs)." - The Danish Financial Supervisory Authority (DFSA) has appropriate legal authority and a risk-based supervisory approach focusing on key banking risks. - DFSA has evolved into a "hands-on and proactive supervisor." - Compliance with credit-risk and capital adequacy related principles is "uniformly high." - Recommendations: - Reduce the length of the examination cycle through additional resources. - Adopt a more thorough and comprehensive approach to operational risk and market risk. - Protect DFSA operational independence by retaining certain supervisory imperatives with the Director General while strengthening DFSA Board governance. ### B. Introduction and context - Assessment presented as a Report on the Observance of Standards and Codes (ROSC) complementing FSAP documents. - Assessment mission dates: March 2-21, 2014. - Assessed against the BCP methodology issued by the Basel Committee on Banking Supervision (BCBS) in September 2012. - Assessment team: Christopher Wilson (IMF) and William Rutledge (Consultant). ### C. Information and methodology used - Authorities opted to be assessed and rated against both Essential Criteria (EC) and Additional Criteria (AC). - Compliance assessed qualitatively using the BCP Methodology's set of essential and additional criteria for each core principle (CP). - Revised 2012 BCP methodology increased focus on risk management and strengthened requirements for supervisors and expectations of banks. - Assessment considered proportionality relative to Denmark's banking sector sophistication, complexity, interconnectedness, size, risk profile, and cross-border operations. ### D. Key findings (detailed) - Scope and concentration: - DFSA supervises a total of 88 banks and 7 mortgage credit institutions (MCIs). - Banking system highly concentrated: the 5 largest banks account for 87 percent of total banking assets; the two largest banks account for approximately 70 percent. - Supervisory approach and resourcing: - DFSA prioritizes resources on high-risk and high-impact areas. - Onsite inspections are thorough and cover capital, liquidity, governance, risk management, and Pillar 1 risks. - Supervisory cycle for onsite inspections ranges between one and six years; the six-year cycle is used only for small, low-risk, simple business-model banks. - Recommendation: reduce examination cycle length and increase flexibility for additional onsite work; seek approval for additional resources to lessen time between examinations and enhance responsiveness. - Governance and operational independence: - Regulatory architecture well-developed, but current structures may interfere with DFSA operational independence. - Decision-making currently requires approval of the Financial Council (members appointed for up to four-year terms by the MoBG, representing stakeholder groups including the financial industry). - Replacement of the Financial Council with a Board of Directors in July 2014 will remove industry representatives casting votes on supervisory policy, but will extend the range of issues on which short-term appointees (two-year terms) can decide and give the Board additional authority to set DFSA direction. - Recommendation: protect DFSA operational independence by retaining certain supervisory imperatives with the Director General and strengthen Board governance. - Offsite reporting and risk information: - DFSA collects comprehensive financial and prudential data on routine and ad hoc bases; most banks submit standardized quarterly regulatory returns (more frequent for certain data). - Reporting instructions are fit for purpose and regularly updated; data undergo statistical validations and cohort analyses. - Gaps: no reporting instructions for operational risk loss and related party lending—these should be enhanced in scope and granularity. - Enforcement and early intervention: - DFSA demonstrates willingness to act early to address unsafe/unsound practices; uses a range of supervisory tools and has revoked licenses. - Since the global financial crisis, 19 banks were closed as part of problem bank resolution. - DFSA uses the Supervisory Diamond to monitor risk profile changes and can take corrective actions even when regulatory capital requirements are met. - Powers related to changes in control: - DFSA lacks the power to reverse a change in control; it can withdraw shareholder voting rights but cannot reverse a transfer of significant ownership. - Under the Financial Business Act (FBA), DFSA can review and reject transfers of significant ownership but cannot impose prudential conditions on such transfer proposals; in practice, DFSA will reject acquisitions unless all criteria are fulfilled. - Credit risk supervision: - DFSA places very strong focus on credit risk with extended onsite examination activity and regulatory reporting. - The ten largest exposures of a bank are reviewed annually by the Board, external auditors, and examiners. - DFSA adopts a strong and conservative approach to impairment and provisioning policy. - Regulatory limits restrict exposures to single counterparties/groups; banks typically have a risk appetite for large exposures lower than the 25 percent limit; Supervisory Diamond encourages prudent aggregate credit concentration management. - Related-party definitions and monitoring: - Legal definition of "related parties" covers only the Board of Directors (BoD), the Board of Management (BoM), and intra-group transactions; it excludes minor shareholders and key risk takers (e.g., credit officers). - Deficiency limits DFSA powers; routine supervision lacks sufficiently frequent reporting to track related-party exposures (no required quarterly or semi-annual supervisory reporting). - Recommendation: expand the definition of related parties and extend supervision processes to actively monitor related-party exposures within the supervisory cycle. - Market risk supervision: - DFSA has comprehensive market risk regulations requiring BoD-approved policies and processes, regularly reviewed. - Offsite market risk reporting currently covers categories: currency, interest rate, commodity, and equity products, but lacks instrument-level breakdowns. - Risk: increases in market risk exposures will be detectable but their direct causes (e.g., option risks or concentration risks) may not be visible without onsite examinations. - Recommendation: expand supervisory reporting of traded market risk to capture a broader suite of risk information and stress-testing results. - AML/CFT supervision: - DFSA has increased supervision of AML/CFT compliance and liaises actively with the Financial Intelligence Unit (FIU). - A risk-based onsite examination program exists; banks must complete a self-assessment questionnaire annually. - Outcomes: increased STR reporting and more AML prosecutions; onsite examinations commenced for the largest banks. - Recommendation: expand onsite AML/CFT examinations across a larger population of banks. - Operational risk supervision: - Supervisory reporting is not sufficiently frequent/detailed to identify changes in operational risk profile. - Onsite operational risk examinations are subsets of credit and market risk reviews. - Routine reporting does not require reporting of operational risk losses by event type/category, inhibiting meaningful offsite trend analysis. - Note: banks using the standardized method will report Basel event type and category beginning in the first quarter of 2014 under new Common Reporting requirements. - Pillar III disclosures: - DFSA receives Pillar III reporting but does not systematically review completeness or accuracy except for larger banks (Group 1 and 2), where reviews are typically informational rather than completeness/accuracy assessments. - Provisions exist to require republication or impose fines, but these measures have never been used. - Cross-border cooperation: - DFSA maintains close cooperation with other supervisors; largest banks have strong regional ties. - DFSA hosted supervisory college meetings for Danske Bank since February 2009 and participates in Nordic-Baltic supervisory colleges as host supervisor. - A cooperation agreement exists on cross-border financial stability, crisis management and resolution among Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway, and Sweden. ### Consolidated list of selected recommendations (from this section) - Seek increased operational independence and legislative changes on Board appointment terms. - Expand powers to reverse change of control and define “ultimate beneficial owners”. - Amend FBA to require written demand for banks to notify DFSA about material information affecting suitability of a major shareholder or controlling party. - Shorten time between examinations; require comprehensive recovery and resolution plans for all banks. - Use onsite examinations more flexibly and require audit and risk reports on a flow basis. - Apply prudential rules to financial holding companies and obtain authority for ongoing fit and proper reviews of non-financial parents. - Require risk committees, codes of conduct, and conflicts of interest policies; ensure independent model validation. - Update rules so CRO dismissal requires BoD concurrence (implemented as of March 31, 2014); add SIFI requirements and apply to FHCs. - Broaden database of larger exposures for rating consistency checks. - Revise related-party regulations and enhance disclosure of related party exposures. - Expand offsite market risk data and on-site market risk examinations. - Formalize netting procedures. --- ### Authorities’ Response (paras 19–22) - Danish authorities welcome the assessment and intend to use observations and recommendations to improve regulation and supervision. - Authorities state general agreement with the assessment and the grading of most of the Basel Core Principles. - On DFSA operational independence: authorities understand concerns but emphasize that a problem has not materialized historically; high transparency of DFSA findings has been positive. - On examination intensity (conforming to Basel Core Principle 8): - DFSA acknowledges inspections could be more frequent but notes the examination schedule is based on ongoing risk assessment; only small banks with low risks and a simple business model are covered by the extended examination schedule of six years. - DFSA regularly updates the examination schedule to reflect changes in individual banks’ risk assessments derived from ongoing outlier surveillance (based on regular reporting and semi-annual stress-test model), solvency meetings, or written material such as the auditor’s protocol. - Ongoing risk assessment prioritizes banks deemed riskiest; consequently low-risk banks are visited significantly less often as a by-effect of a risk-based approach. --- ### Insurance Core Principles — Summary and key findings - Overall assessment: Insurance regulation in Denmark has a good level of compliance with the Insurance Core Principles (ICPs). - Supervisory structure: DFSA regulates insurance and pension funds for prudential and market conduct purposes; focus on key risks and readiness to require action are strengths. Comprehensive oversight of reinsurance. - Solvency and Solvency II preparation: - Solvency standards robust and well-aligned to the EU Solvency II regime; DFSA would benefit from a clear legally-set solvency level below which companies may not operate. - DFSA does not require all insurers to have functions responsible for risk, compliance, internal audit and actuarial work, but will do so as it implements Solvency II. - Market conduct and intermediaries: - Need to increase attention to market conduct supervision; scope to extend supervision to product design. - Supervision of intermediaries lacks powers for onsite inspections and has low resources. - DFSA would benefit from powers to impose administrative penalties and should have an explicit policyholder protection objective in legislation. - Offsite vs onsite supervision: - Offsite supervision well-developed and based on extensive reporting and stress tests; frequency of onsite inspections for firms not seen as high risk is low. - DFSA should better integrate offsite analysis with assessment of governance, management, and controls; extend group supervision to insurance holding companies; increase supervision of insurance fraud issues and AML/CFT. - Institutional framework and resources: - Composition and governance of the Financial Council create risks to independence of supervisory decision-making. - DFSA is subject to government budgetary procedures and salary constraints that can hamper ability to raise extra resources. - No provision for internal audit at the DFSA. - DFSA’s resources should be increased given breadth of responsibilities and key tasks. - Macroprudential surveillance: - No specific framework for macroprudential surveillance for insurance. - Scope to take a more formal approach, including occasional assessment of individual companies’ systemic significance and cross-sectoral analysis. - Extending financial stability experts’ work at the DN to insurance would add perspective. ### Insurance sector key statistics and facts - Number of insurance companies: 115 at end-2013 (down from 174 in 2008). - Technical provisions: DKK 1.37 trillion in 2008 and DKK 2.06 trillion in 2013. - Unit-linked life insurance provisions: have grown six fold since 2008. - Profitability: Positive returns on equity throughout 2009 to 2013. - Solvency ratios (2013): 328 percent in life insurance and 292 percent in nonlife. - Implementation timeline: DFSA and industry preparing for the implementation of Solvency II in 2016. - Frequency of onsite inspections noted: four years for many insurance firms not seen as high risk. - Regulatory adjustments scheduled: comprehensive requirements for risk management, compliance, actuarial and internal audit functions introduced in 2014, to be followed by related suitability requirements in 2015. - Institutional change: As of July 2014, the Financial Council has been replaced by a Board. --- ### 25. Operational risk — Recommendations (selected) - Expand routine reporting to include a broader suite of risk information, i.e., by loss event type. - Establish a stand-alone onsite examination program for operational risk to achieve a comprehensive view of risk bank-wide. - Agree formal notification requirements to allow supervisors to remain apprised of developments at a bank in the event of an operational risk incident. ### 26–29. Internal and external audit, regulatory reporting, AML/CFT — Recommendations (selected) - Modify regulations to direct internal auditors of banks to review risk management, compliance and control functions; include provisions related to dual control and protection of assets. - Require that fair value estimates are subject to independent verification and validation. - Seek authority for the DFSA to have access to work papers of external auditors. - Change DFSA internal policies to ensure there is a systematic review of Pillar III disclosures to assess completeness and accuracy of filings. - Expand the self-assessment program to include all banks as part of annual offsite surveillance. - Expand the onsite AML/CFT examination program within the risk-based approach to a broader number of banks. --- ### 12. Winding-up and Exit ### Exit and Insolvency Framework - Legislation provides for exit from the market and insolvency in ways which safeguard the interests of policyholders. - Requirement for a special register of assets equal to technical provisions and to be used exclusively for the benefit of insured parties, effectively providing for policyholder preference. ### Reinsurance and Risk Transfer - DFSA exercises particularly close supervision of reinsurance cover of nonlife insurance companies. - Limited regulatory requirements on reinsurance; could be extended to include an explicit requirement that cedants have reinsurance and risk transfer strategies appropriate to the nature, scale and complexity of their business. ### Valuation - Valuation requirements for life insurance moved away from using current risk free rates across the yield curve since 2008. - Valuation carried out on an economic basis and closely aligned with expected EU Solvency II approach. - DFSA initiative to establish a longevity benchmark has led to stronger valuation standards. - No peer review requirement for actuarial work; responsible actuary in life insurance has reporting obligations to the BoD and DFSA. ### Investment - Detailed regulations on investments held against technical provisions. - Obligations on BoDs for prudent management of investment risk, regular reporting to the DFSA, obligations on auditors and DFSA oversight through on-site supervision. - Requirements apply to individual insurers and pension funds rather than directly, on an aggregate basis, to groups. - Additional reporting should be considered where risks identified from thematic work (for example alternative investments). ### Enterprise Risk Management for Solvency Purposes - Extensive framework of requirements and a process of own risk and solvency assessment. - Board of Directors responsible for carrying out risk assessment and making key decisions on calculation of the Individual Solvency Need. - Overall approach introduced at the start of 2014 and will take time to embed; DFSA has not reviewed any risk assessments as yet. - Some detailed ICP standards not reflected in DFSA approach, including requirement for an explicit ALM policy. ### Capital Adequacy - Capital adequacy requirements substantially revised at the start of 2014 but will take time to embed. - Framework strengthened, particularly the calculation of the Individual Solvency Need through addition of a standard model based on the most recent draft Solvency II requirements and a target protection level corresponding to VaR with a confidence level of 99.5% over 12 months. - Recent development of holding company regulation with recognition of insurance holding companies has strengthened group supervision of capital adequacy. - No prior approval requirement for use of internal models; limited appetite for model use. - Absence of a full framework of solvency control levels for solo entities or groups places a premium on supervisors to follow up concerns promptly. ### Intermediaries, Conduct of Business, Public Disclosure, Fraud, AML/CFT, Group Supervision, Macroprudential Surveillance, Cross-border Cooperation - Intermediaries: industry mainly distributes via agents; broker sales gaining momentum. DFSA can monitor agents through supervision of insurers; scope for improvements in oversight of brokers. - Conduct of Business: DFSA focuses on good business practices; regulators should ensure intermediaries have written policies/procedures and that product appropriateness is assessed, particularly when switching from guaranteed interest to unit-linked products. - Public Disclosure: extensive DFSA-set disclosure requirements; gaps in qualitative disclosure (e.g., corporate governance) remain. - Countering Fraud: fraud criminalized under Danish Criminal Code; DFSA currently takes no measures to assess fraud risk or require insurers/intermediaries to take effective measures, except monitoring transactions for good practice. - AML/CFT: DFSA active in AML/CFT fora; plans to intensify supervision of life insurance and pensions informed by near-complete study; low level of suspicious transactions reporting indicates supervisory gap. - Group-wide supervision: DFSA supervises groups per EU Directive; recommend requiring group reporting systems to measure and monitor aggregate intra-group risk exposures and commencing joint on-site supervision for financial conglomerates. - Macroprudential surveillance: no specific DFSA framework; recommend formalizing occasional assessments of systemic significance and extending DN financial stability analysis to insurance sector. - Supervisory cooperation and crisis management: supervisory colleges operate in line with EIOPA templates; DFSA coordination arrangements and emergency plans in place though untested in a full solvency crisis. ### Key recommendations by ICP number (selected) - ICP 1: Consider explicit legislative requirement in DFSA’s objectives to include maintenance of a fair and safe insurance sector for protection of policyholders. - ICP 2: Consider instituting an internal audit unit within the DFSA and exemption from government administrative rules to strengthen autonomy. - ICP 5–9: Expedite implementation of key control functions and suitability requirements; require internal audit work auditing internal controls. - ICP 15–17: Extend group-wide investment reporting; introduce ALM policy requirement; strengthen capital adequacy by establishing solvency control levels and prior approval before model use. - ICP 18–23: Improve intermediary and conduct of business supervision; empower DFSA to require fraud reporting; expedite National Risk Assessment on AML/CFT risks in life insurance and pension funds. - ICP 24–26: Establish formal macroprudential processes for insurance; expedite Denmark’s accession to the IAIS multilateral MoU; test crisis arrangements in line with 2012 EIOPA test. *Source: _cr14335 - 1. Summary of Compliance with BCPs; 1. Responsibilities,; 25. Operational risk; 12. Winding-up and Exit (IMF).* ### 1. Summary of Compliance with BCPs ___________________________________________________________ 10 ### 1. Summary of Compliance with BCPs ### A. Summary - Denmark has a "high level of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs)." - The Danish Financial Supervisory Authority (DFSA) has appropriate legal authority and a risk-based supervisory approach focusing on key banking risks. - DFSA has evolved into a "hands-on and proactive supervisor." - Compliance with credit-risk and capital adequacy related principles is "uniformly high." - Recommendations noted: reduce the length of the examination cycle through additional resources; adopt a more thorough and comprehensive approach to operational risk and market risk; protect DFSA operational independence by retaining certain supervisory imperatives with the Director General while strengthening DFSA Board governance. ### B. Introduction and context - The assessment is presented as a Report on the Observance of Standards and Codes (ROSC) and complements the FSAP documents. - Assessment mission dates: March 2-21, 2014. - Denmark was assessed against the BCP methodology issued by the Basel Committee on Banking Supervision (BCBS) in September 2012. - The assessment team comprised Christopher Wilson (IMF) and William Rutledge (Consultant). ### C. Information and methodology used - Authorities opted to be assessed and rated against both Essential Criteria (EC) and Additional Criteria (AC). - Compliance assessed qualitatively using the BCP Methodology's set of essential and additional criteria for each core principle (CP). - The revised 2012 BCP methodology has a heightened focus on risk management and strengthened requirements for supervisors and expectations of banks. - Assessment considered proportionality relative to Denmark's banking sector sophistication, complexity, interconnectedness, size, risk profile, and cross-border operations. ### D. Key findings (detailed) - Scope and concentration: - DFSA supervises a total of 88 banks and 7 mortgage credit institutions (MCIs). - The banking system is highly concentrated: the 5 largest banks account for 87 percent of total banking assets; the two largest banks account for approximately 70 percent. - Supervisory approach and resourcing: - DFSA prioritizes resources on high-risk and high-impact areas. - Onsite inspections are thorough and cover capital, liquidity, governance, risk management, and Pillar 1 risks. - Supervisory cycle for onsite inspections ranges between one and six years; the six-year cycle is used only for small, low-risk, simple business-model banks. - Recommendation: reduce examination cycle length and increase flexibility for additional onsite work; DFSA should seek approval for additional resources to lessen time between examinations and enhance responsiveness. - Governance and operational independence: - Regulatory architecture is well-developed, but current structures may interfere with DFSA operational independence. - Decision-making currently requires approval of the Financial Council (members appointed for up to four-year terms by the MoBG, representing stakeholder groups including the financial industry). - Replacement of the Financial Council with a Board of Directors in July 2014 will remove industry representatives casting votes on supervisory policy, but will extend the range of issues on which short-term appointees (two-year terms) can decide and give the Board additional authority to set DFSA direction. - Recommendation: protect DFSA operational independence by retaining certain supervisory imperatives with the Director General and strengthen Board governance. - Offsite reporting and risk information: - DFSA collects comprehensive financial and prudential data on routine and ad hoc bases; most banks submit standardized quarterly regulatory returns (more frequent for certain data). - Reporting instructions are fit for purpose and regularly updated; data undergo statistical validations and cohort analyses. - Gaps: no reporting instructions for operational risk loss and related party lending—these should be enhanced in scope and granularity. - Enforcement and early intervention: - DFSA demonstrates willingness to act early to address unsafe/unsound practices; uses a range of supervisory tools and has revoked licenses. - Since the global financial crisis, 19 banks were closed as part of problem bank resolution. - DFSA uses the Supervisory Diamond to monitor risk profile changes and can take corrective actions even when regulatory capital requirements are met. - Powers related to changes in control: - DFSA lacks the power to reverse a change in control; it can withdraw shareholder voting rights but cannot reverse a transfer of significant ownership. - Under the Financial Business Act (FBA), DFSA can review and reject transfers of significant ownership but cannot impose prudential conditions on such transfer proposals; in practice, DFSA will reject acquisitions unless all criteria are fulfilled. - Credit risk supervision: - DFSA places very strong focus on credit risk with extended onsite examination activity and regulatory reporting. - The ten largest exposures of a bank are reviewed annually by the Board, external auditors, and examiners. - DFSA adopts a strong and conservative approach to impairment and provisioning policy. - Regulatory limits restrict exposures to single counterparties/groups; banks typically have a risk appetite for large exposures lower than the 25 percent limit; Supervisory Diamond encourages prudent aggregate credit concentration management. - Related-party definitions and monitoring: - Legal definition of "related parties" covers only the Board of Directors (BoD), the Board of Management (BoM), and intra-group transactions; it excludes minor shareholders and key risk takers (e.g., credit officers). - Deficiency limits DFSA powers; routine supervision lacks sufficiently frequent reporting to track related-party exposures (no required quarterly or semi-annual supervisory reporting). - Recommendation: expand the definition of related parties and extend supervision processes to actively monitor related-party exposures within the supervisory cycle. - Market risk supervision: - DFSA has comprehensive market risk regulations requiring BoD-approved policies and processes, regularly reviewed. - Offsite market risk reporting currently covers categories: currency, interest rate, commodity, and equity products, but lacks instrument-level breakdowns. - Risk: increases in market risk exposures will be detectable but their direct causes (e.g., option risks or concentration risks) may not be visible without onsite examinations. - Recommendation: expand supervisory reporting of traded market risk to capture a broader suite of risk information and stress-testing results. - AML/CFT supervision: - DFSA has increased supervision of AML/CFT compliance and liaises actively with the Financial Intelligence Unit (FIU). - A risk-based onsite examination program exists; banks must complete a self-assessment questionnaire annually. - Outcomes: increased STR reporting and more AML prosecutions; onsite examinations commenced for the largest banks. - Recommendation: expand onsite AML/CFT examinations across a larger population of banks. - Operational risk supervision: - Supervisory reporting is not sufficiently frequent/detailed to identify changes in operational risk profile. - Onsite operational risk examinations are subsets of credit and market risk reviews. - Routine reporting does not require reporting of operational risk losses by event type/category, inhibiting meaningful offsite trend analysis. - Note: banks using the standardized method will report Basel event type and category beginning in the first quarter of 2014 under new Common Reporting requirements. - Pillar III disclosures: - DFSA receives Pillar III reporting but does not systematically review completeness or accuracy except for larger banks (Group 1 and 2), where reviews are typically informational rather than completeness/accuracy assessments. - Provisions exist to require republication or impose fines, but these measures have never been used. - Cross-border cooperation: - DFSA maintains close cooperation with other supervisors; largest banks have strong regional ties. - DFSA hosted supervisory college meetings for Danske Bank since February 2009 and participates in Nordic-Baltic supervisory colleges as host supervisor. - A cooperation agreement exists on cross-border financial stability, crisis management and resolution among Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway, and Sweden. *Source: _cr14335 - 1. Summary of Compliance with BCPs (IMF).* ### 1. Responsibilities, ### 1. Responsibilities, objectives and powers ### Overview - The DFSA has an appropriate overall set of legal authorities to carry out supervision of the Danish banking system. - Responsibilities and objectives of each authority involved in banking supervision are clearly defined in legislation. - In addition to ongoing supervisory activities, the DFSA assists in drawing up financial legislation and prepares binding Executive Orders (EOs) for the financial sector area. ### Independence, accountability, resourcing and legal protection for supervisors - Replacement in July of the Financial Council with a Board of Directors will: - Eliminate current industry representatives’ casting votes on intended supervisory policy actions (a major governance weakness). - Extend the range of issues on which short-term appointees on the Board are authorized to decide. - Maintain current responsibilities of the Financial Council and add authority for setting the direction of the DFSA’s operations. - Recommended actions: - Seek to secure increased operational independence by revisiting the threshold of significance for Financial Council and Board decision-making, and by establishing supervisory imperatives wholly within the authority of the Director General. - Seek legislative change on very short terms of appointees and the absence of a formal vetting process for nominees. ### Cooperation and collaboration - Well-designed structure for supervisory coordination domestically: essentially all domestic financial supervision is housed within the DFSA. - Memoranda of Understanding (MoU) with appropriate foreign supervisors are in place. - Good operational cooperation between the DFSA and the DN; close work on stress testing and shared data for analysis and surveillance. - Broader cooperation between the DN, the MoF, the MoBG, and the DFSA for coordination of financial stability matters, codified in a MoU. ### Permissible activities and market structure - Use of the word “bank” is clearly defined in the law (FBA) and controlled by the DFSA. - Banks have the exclusive right to use the words "bank", "sparekasse" or "andelskasse" in their name; the list of banks licensed by the DFSA is published on their website. - MCIs are licensed under the Mortgage Credit and Covered Bond Act and are not allowed to use the term "bank" or to take retail deposits. - There are 8 licensed MCIs. ### Licensing, transfers, and acquisitions - Licensing criteria: - DFSA has appropriate powers to set licensing criteria and reject applications. - Typical licensing process takes one year from first meeting to license grant. - Transfer of significant ownership: - Supervisor can review and reject proposed transfers of significant ownership or controlling interests in existing banks, but does not have a formal power to impose prudential conditions. - DFSA has addressed this deficiency in certain circumstances. - No definition of ultimate beneficial owners in the FBA. - Recommended actions: - Expand powers to be able to reverse a change of control. - Explicitly define “ultimate beneficial owners” in the law. - Amend the FBA to require a written demand for banks to notify DFSA about any material information which may negatively affect the suitability of a major shareholder or a party with a controlling interest. - Major acquisitions: - Prior notification and approval required of the DFSA for a major acquisition. - For major acquisitions involving a foreign undertaking, a lower threshold is applied of prior notification. - Power to impose prudential conditions on an acquisition is not contained in the legislation (identified gap). - In practice, DFSA will not approve a major acquisition unless it is satisfied all criteria are fulfilled. ### Supervisory approach, techniques, tools and reporting - Supervisory approach: - DFSA uses a Supervisory Diamond to constrain risky business models. - Examination schedule is generally very extended: four years for the most well-capitalized medium sized banks, and up to six or even more years for smaller and most well-capitalized banks. - Recommendation: seek budgetary approval to lessen significantly the length of time between examinations and require recovery and resolution plans for all banks. - Supervisory techniques and tools: - A commendable set of tools was put in place post-crisis; assessors were impressed by supervisors’ knowledge and commitment. - On-site inspection tool needs more frequent use; staying on top of developments between inspections would be aided by receipt of audit and risk management reports on a flow basis (DFSA expects to address this later for SIFIs). - Recommended actions: - Use onsite examinations more flexibly with additional budgetary resources. - Require submission of audit and risk management reports on a flow basis. - Supervisory reporting: - Powers under the FBA allow DFSA to collect a generally comprehensive set of financial and risk information from banks on routine and ad hoc basis. - Reporting instructions are fit for purpose and regularly reviewed and updated. - Most banks submit standardized regulatory returns quarterly and more often for certain information. - Corrective and sanctioning powers: - DFSA has demonstrated ability and willingness to intervene early to address unsafe and unsound practices; exercised a range of supervisory tools to bring about timely corrective actions. ### Consolidated supervision and home-host relationships - Consolidated supervision: - Approach for groups with the bank as the ultimate parent appears sound. - Only selected requirements apply to financial holding companies (FHCs) where non-bank financial companies are the ultimate parent (solvency, reporting of large exposures and exposures to related parties). - Requirements are not applicable, even to the limited extent appropriate, on a consolidated basis to groups where a non-financial company is the ultimate parent. - Recommended actions: - Apply prudential rules more generally to financial holding companies. - Seek authority to do fit and proper reviews on an ongoing basis of owners and senior management of non-financial parent companies. - Home-host relationships: - DFSA works very closely with other national supervisors in well-designed and implemented colleges. - DFSA has not established individual resolution plans for large banks, but issued an order requiring all banks to make a resolution assessment. - DFSA has a well functioning resolution planning regime for small and medium sized banks. ### Corporate governance and risk management - Corporate governance: - DFSA has a good overall approach; conducted a comprehensive horizontal review of Boards of Directors and ensured necessary changes. - Gaps: not yet requiring risk committees (to be required April 1, 2014); not requiring codes of conduct and overall conflicts of interest policies; not ensuring independence in validation of models. - Recommended actions: - Require establishment of risk committees and issuance of codes of conduct and overall conflicts of interest policies. - Modify regulations to ensure independence in validation of models. - Risk management process: - Generally well designed, strongest in credit risk and less developed for market and operational risk. - Improvement opportunities under way: - Update EOs to require dismissal of the CRO to have concurrence of the BoD (this has been implemented as of March 31, 2014). - Add further requirements for SIFIs, and apply requirements more generally to FHCs (the latter implemented as of March 31, 2014). - Clarify rules/guidance on independence of units doing validation of models. - Recommended actions: - Ensure liquidity and other risks are factored into internal pricing, new product approval, and performance measurements. ### Capital adequacy, credit risk and problem assets - Capital adequacy: - DFSA has implemented the Basel II capital standards effectively. - Supervisor sets prudent and appropriate capital adequacy requirements reflecting individual bank risk and broader economic conditions. - Pillar 2 arrangements are well developed and applied through annual ICAAP exercises including forward-looking elements such as stress testing. - Emphasis on quality of capital to absorb losses. - Credit risk: - Strong focus with significant examination activity and regulatory reporting. - Ten largest exposures of the bank are reviewed annually (by the Board, external auditors, and examiners). - Credit inspections emphasize specific credit risk exposures and file reviews are key in onsite credit risk examination. - Problem assets, provisions, and reserves: - DFSA has taken a strong and conservative approach to impairment and provisioning. - Reports on asset quality are made regularly to supervisors; an annual review of exposures addressing integrity of the classification system is required to be presented to the BoD. - Monitoring based on prompt identification of weak exposures is required under relevant EO. - Improvement opportunities: - Broaden the database of larger exposures used to check consistency of ratings. - Detail criteria for reversals of write-downs in the relevant EO. - Recommended action: - Broaden the data base of larger exposures that is used to check consistency of ratings. ### Concentration, related-party, country and market risks - Concentration risk and large exposure limits: - Notification requirements for large exposures need tightening; currently DFSA is notified at the end of each quarter. - Banks typically have a risk appetite for large exposures lower than the 25 percent limit; the Supervisory Diamond enforces aggregate credit concentration management. - Transactions with related parties: - Regulations cover only BoD, BoM and intra-group transactions; definition does not extend to minority shareholders and key risk takers (e.g., credit officers). - Deficiencies limit DFSA’s powers to mitigate related party lending risks. - Routine supervision surveillance is not sufficiently frequent. - Recommended actions: - Revise regulations to incorporate a broader definition of related parties. - Enhance routine disclosures to include related party exposures with detailed information for offsite analysis. - Country and transfer risks: - Two largest banks have extensive cross-border exposures, majority within Nordic countries (Sweden, Norway, and Finland). - Banks take country risk through trade finance and foreign currency lending (mainly Euro and Swedish Krona). - On-site examinations assess adequacy of frameworks to identify and manage country and transfer risk; process appears effective. - Country risk is assessed on an ad hoc basis and occurs when macroeconomic conditions indicate such risk. - Market risk: - Comprehensive set of market risk regulations requiring prudent management. - Majority of traded market risk activity is customer driven (flow); typical instruments include Danish mortgage bonds, equities, FX derivatives, and commodities. - Reporting requirements capture majority of traded instruments, but more exotic instruments are not captured; build-up in market risk could occur absent onsite examinations. - Recommended actions: - Expand suite of data used in routine offsite supervision. - Expand onsite market risk examinations in a risk-based approach to include a broader set of banks. ### Interest rate risk in the banking book, liquidity and operational risk - Interest rate risk in the banking book: - Laws and regulations stipulate minimum obligations to manage and mitigate IRR. - For larger banks, onsite inspections are conducted at minimum once every four years. - Banks with SIFI-status will be assessed annually beginning in 2014. - Supervision cycle of once every four to six years for medium and smaller banks considered too long given limited offsite reporting. - Recommended action: - Formalize procedures for netting. - Liquidity risk: - FBA prescribes two quantitative liquidity requirements banks must meet at all times; reported to DFSA monthly for majority of banks (very small banks exempted to quarterly reporting). - Systemic banks subject to reporting LCR and NSFR monthly. - DFSA requires banks to submit results of liquidity stress tests on a monthly frequency. - MCIs have very high levels of encumbrance due to business model restricted to lending based on issuing covered bonds within tight risk-profile limits. - Operational risk: - Onsite operational risk examinations are performed as subset of credit and market risk reviews. - Supervisory reporting is not sufficiently frequent and detailed to identify and monitor operational risk profile changes. - Routine reporting should be expanded to include broader risk information (e.g., by loss event type and changes in business environment and internal control factors). - Requirements for routine supervisory reporting should be expanded to allow meaningful analysis of operational risk trends and profile changes. ### Internal control, audit, disclosure and AML/CFT - Internal control and audit: - Gap in EO not directing that internal auditors must review risk management, compliance, and control function. - Evidence some reviews are done for largest banks; EO should be updated. - Financial reporting and external audit: - Overall external auditor program appears sound. - DFSA extracts value from external auditors by requiring detailed review of largest exposures. - Shortcomings: - No requirements that fair value estimates are subject to independent verification and validation. - DFSA does not have access to work papers of external auditors. - Disclosure and transparency: - Disclosure requirements look adequate on paper, but DFSA does not review whether they are met. - Only Group 1 and 2 banks have such disclosures read for information purposes, not to assess completeness or accuracy. - Provisions in EO to require republication or impose fines have never been used. - Abuse of financial services / AML/CFT: - Since 2006, DFSA increased supervision of banks’ compliance with the AML/CFT Act. - DFSA developed a risk-based onsite examination program for AML/CFT compliance. - As a result, reporting of STRs has increased and there have been more cases of AML prosecution. - Work remains to effectively implement AML/CFT supervision. ### Consolidated list of key recommendations (selected) - Seek increased operational independence and legislative changes on Board appointment terms. - Expand powers to reverse change of control and define “ultimate beneficial owners”. - Amend FBA to require written demand for notification of material information affecting major shareholders. - Shorten time between examinations; require comprehensive recovery and resolution plans for all banks. - Use onsite examinations more flexibly and require audit and risk reports on a flow basis. - Apply prudential rules to financial holding companies and obtain authority for ongoing fit and proper reviews of non-financial parents. - Require risk committees, codes of conduct, and conflicts of interest policies; ensure independent model validation. - Update rules so CRO dismissal requires BoD concurrence (implemented as of March 31, 2014); add SIFI requirements and apply to FHCs. - Broaden database of larger exposures for rating consistency checks. - Revise related-party regulations and enhance disclosure of related party exposures. - Expand offsite market risk data and on-site market risk examinations. - Formalize netting procedures. *Source: _cr14335 - 1. Responsibilities,* ### 25. Operational risk  The current focus of routine reporting should be expanded to include a broader ### 25. Operational risk ### Operational risk — Recommendations - The current focus of routine reporting should be expanded to include a broader suite of risk information, i.e., by loss event type. - Establish a stand-alone onsite examination program for operational risk to achieve a comprehensive view of risk bank-wide. - Formal notification requirements should be agreed to allow supervisors to remain apprised of developments at a bank in the event of operational risk incident. ### 26. Internal Audit and control — Recommendations - Modify regulations to direct internal auditors of banks to review risk management, compliance and control functions. - Include provisions related to dual control and to the protection of assets. ### 27. External Audit — Recommendations - Require that fair value estimates are subject to independent verification and validation. - Seek authority for the DFSA to have access to work papers of external auditors. ### 28. Regulatory reporting — Recommendation - Change internal policies of the DFSA to ensure there is a systematic review of Pillar III disclosures to assess completeness and accuracy of the filings. ### 29. Anti-money laundering and Counter-terrorist financing — Recommendations - Expand the self assessment program to all include banks as part of annual offsite surveillance. - Expand the onsite examination program within the risk-based approach to a broader number of banks. ### Authorities’ Response (paras 19–22) - The Danish authorities welcome the assessment and intend to use observations and recommendations to improve regulation and supervision of the banking sector in Denmark. - Authorities state general agreement with the assessment and the grading of most of the Basel Core Principles. - On DFSA operational independence: authorities understand concerns but emphasize that a problem has not materialized historically; high transparency of DFSA findings has been positive. - On examination intensity (conforming to Basel Core Principle 8): - The DFSA acknowledges inspections could be more frequent but notes the examination schedule is based on ongoing risk assessment; only small banks with low risks and a simple business model are covered by the extended examination schedule of six years. - The DFSA regularly updates the examination schedule to reflect changes in individual banks’ risk assessments derived from ongoing outlier surveillance (based on regular reporting and semi-annual stress-test model), solvency meetings, or written material such as the auditor’s protocol. - The ongoing risk assessment prioritizes banks deemed riskiest; consequently low-risk banks are visited significantly less often as a by-effect of a risk-based approach. --- ### Insurance Core Principles — Summary and key findings - Overall assessment: Insurance regulation in Denmark has a good level of compliance with the Insurance Core Principles (ICPs). - Supervisory structure: The DFSA regulates insurance and pension funds for prudential and market conduct purposes; focus on key risks and readiness to require action are strengths. Comprehensive oversight of reinsurance. - Solvency and preparation for EU regime: Solvency standards are robust and well-aligned to the EU Solvency II regime; DFSA would benefit from a clear legally-set solvency level below which companies may not operate. DFSA does not require all insurers to have functions responsible for risk, compliance, internal audit and actuarial work, but will do so as it implements Solvency II. - Market conduct and intermediaries: Need to increase attention to market conduct supervision; scope to extend supervision to product design. Supervision of intermediaries lacks powers for onsite inspections and has low resources. DFSA would benefit from powers to impose administrative penalties and should have an explicit policyholder protection objective in legislation. - Offsite vs onsite supervision: Offsite supervision is well-developed and based on extensive reporting and stress tests; frequency of onsite inspections for firms not seen as high risk is low. DFSA should better integrate offsite analysis with assessment of governance, management, and controls; extend group supervision to insurance holding companies; increase supervision of insurance fraud issues and AML/CFT. - Institutional framework and resources: Composition and governance of the Financial Council create risks to independence of supervisory decision-making. DFSA is subject to government budgetary procedures and salary constraints that can hamper ability to raise extra resources. No provision for internal audit at the DFSA. DFSA’s resources should be increased given breadth of responsibilities and key tasks. - Macroprudential surveillance: No specific framework for macroprudential surveillance for insurance. Scope to take a more formal approach, including occasional assessment of individual companies’ systemic significance and cross-sectoral analysis (e.g., linkages between insurance and banking through the covered bond market). Extending financial stability experts’ work at the DN to insurance would add perspective. ### Insurance sector key statistics and facts (as presented) - Number of insurance companies: 115 at end-2013 (down from 174 in 2008). - Technical provisions: DKK 1.37 trillion in 2008 and DKK 2.06 trillion in 2013. - Unit-linked life insurance provisions: have grown six fold since 2008. - Profitability: Positive returns on equity throughout 2009 to 2013. - Solvency ratios (2013): 328 percent in life insurance and 292 percent in nonlife. - Implementation timeline: DFSA and industry preparing for the implementation of Solvency II in 2016. - Frequency of onsite inspections noted: four years for many insurance firms not seen as high risk. - Regulatory adjustments scheduled: comprehensive requirements for risk management, compliance, actuarial and internal audit functions introduced in 2014, to be followed by related suitability requirements in 2015. - Institutional change: As of July 2014, the Financial Council has been replaced by a Board. *Source: IMF staff assessment text provided in the content unit.* ### 12. Winding-up and Exit ### 12. Winding-up and Exit ### Exit and Insolvency Framework - Legislation provides for exit from the market and insolvency in ways which safeguard the interests of policyholders. - Requirement for a special register of assets equal to technical provisions and to be used exclusively for the benefit of insured parties, effectively providing for policyholder preference. ### Reinsurance and Risk Transfer - DFSA exercises particularly close supervision of reinsurance cover of nonlife insurance companies. - Limited regulatory requirements on reinsurance; could be extended to include an explicit requirement that cedants have reinsurance and risk transfer strategies appropriate to the nature, scale and complexity of their business. ### Valuation - Valuation requirements for life insurance moved away from using current risk free rates across the yield curve since 2008. - Valuation is carried out on an economic basis and is closely aligned with the expected EU Solvency II approach. - DFSA initiative to establish a longevity benchmark has led to stronger valuation standards. - No peer review requirement for actuarial work; the responsible actuary in life insurance has reporting obligations to the BoD and DFSA. ### Investment - Detailed regulations on investments held against technical provisions. - Obligations on BoDs for prudent management of investment risk, regular reporting to the DFSA, obligations on auditors and DFSA oversight through on-site supervision. - Requirements apply to individual insurers and pension funds rather than directly, on an aggregate basis, to groups. - Additional reporting should be considered where risks identified from thematic work (for example alternative investments). ### Enterprise Risk Management for Solvency Purposes - Extensive framework of requirements and a process of own risk and solvency assessment. - Board of Directors responsible for carrying out risk assessment and making key decisions on the calculation of the Individual Solvency Need. - Overall approach introduced at the start of 2014 and will take time to embed; DFSA has not reviewed any risk assessments as yet. - Some detailed ICP standards not reflected in DFSA approach, including requirement for an explicit ALM policy. ### Capital Adequacy - Capital adequacy requirements substantially revised at the start of 2014 but will take time to embed. - Framework strengthened, particularly the calculation of the Individual Solvency Need through addition of a standard model based on the most recent draft Solvency II requirements and a target protection level corresponding to VaR with a confidence level of 99.5% over 12 months. - Recent development of holding company regulation with recognition of insurance holding companies has strengthened group supervision of capital adequacy. - No prior approval requirement for use of internal models; limited appetite for model use. - Absence of a full framework of solvency control levels for solo entities or groups places a premium on supervisors to follow up concerns promptly. ### Intermediaries - Insurance industry mainly distributes via agents; broker sales gaining momentum. - Changes in broker remuneration regulations mean brokers primarily serve corporate clients. - DFSA can monitor insurance agents through supervision of the insurers for whom they act as agent. - Ongoing review of brokers could be improved; DFSA’s review focuses on registration compliance, consumer complaints, and thematic good practice cases. - Scope for improvements in oversight of intermediaries. ### Conduct of Business - DFSA focus: good business practices; regulations requiring insurers to “act honestly and loyally” with customers; product information, disclosures and marketing. - No equivalent regulation obliging intermediaries to set up written policies and procedures to ensure compliance with good practices. - DFSA should have a process to determine whether insurers consider interests of different customer types when developing and marketing products. - Particular need to address presentation of costs and benefits when policyholders/pension scheme members are offered exchange from guaranteed interest rate product to unit linked product. - DFSA should consider additional resources for oversight of brokers and legislative power for on-site risk-based supervision of broker intermediaries. ### Public Disclosure - Insurers subject to extensive disclosure requirements set by the DFSA under its authority to set accounting and disclosure standards for all regulated financial undertakings; apply at solo and group consolidated levels. - Requirements focus on measurement standards; gaps in qualitative disclosure (for example corporate governance, except for few listed companies). - Financial information readily available from the Danish Business Authority and to an extent from the DFSA website. ### Countering Fraud in Insurance - Fraud is a criminal offence under the Danish Criminal Code. - DFSA takes no measures at present to assess fraud risk or to require insurers and intermediaries to take effective measures to address those risks, except requirement on insurers to monitor transactions or relationships not in line with the good practices policy. ### Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) - DFSA active in AML/CFT fora within Denmark and externally; has necessary powers, if not the resources, to enforce compliance and exchange information. - Plans to intensify supervision of life insurance and pensions, informed by a new, near-complete study of the risks and exposures. - No supervisory work is taking place; risk that life insurers and pension funds do not adequately address AML/CFT requirements as evidenced by low level of suspicious transactions reporting. ### Group-wide Supervision - Supervision of insurance groups follows the EU Directive. - DFSA has adequate powers and flexibility to determine scope of insurance groups and to supervise both regulated and non-regulated entities. - Recommendation that DFSA require appropriate group reporting systems to measure and monitor aggregate intra-group risk exposures. - Review of group risks, including intra-group transactions at holding company level, will provide better insights to solo entity risk management. - With banking/insurance conglomerates, authorities encouraged to commence joint on-site supervision focused on intra-group exposures and market conduct inspections. ### Macroprudential Surveillance and Insurance Supervision - No specific DFSA framework for macroprudential surveillance, but DFSA has clear appreciation of major vulnerabilities in the insurance sector and targets information collection and supervisory efforts accordingly. - DFSA has a clear view of risks to financial stability arising in insurance sector. - More formal approach to occasional assessment of individual companies’ systemic significance would help validate DFSA view. - Extending work of financial stability experts at the DN to insurance sector would enhance macroprudential oversight and cross-sector analysis. ### Supervisory Cooperation and Coordination - Supervisory colleges operate in line with EIOPA’s templates and guidelines for international insurance groups. - High level of bilateral engagement regionally (other Nordic supervisors), within the EU and internationally. - National cooperation and coordination with relevant agencies (including the Consumer Ombudsman, DN and other government ministries) as required. ### Cross-border Cooperation and Crisis Management - DFSA’s coordination arrangements and emergency plans based on the EIOPA template are in place for all colleges in which DFSA participates. - DFSA has not had to manage a full solvency crisis; processes remain untested though DFSA has cooperated with other supervisors on significant weaknesses at some firms. ### Authorities’ Response (DFSA) - DFSA welcomes assessment and will use observations and recommendations to improve regulation and supervision. - DFSA generally shares views and level of fulfillment of the Insurance Core Principles; raises remarks on Risk Management and Internal Controls, Conduct of Business and Macroprudential Surveillance and Insurance Supervision. - DFSA agrees insurers should have sufficient control functions in line with ICP 8 and Solvency II; informed insurers in 2009 that four control functions would be embedded in Danish regulation; plans to have four functions formally implemented through regulation during fall 2014. - On market conduct, legislation contains regulation of “fairness” supported by regulation on the contribution principle regulating fair treatment with profit sharing products; insurers must submit products technical basis continuously which DFSA assesses and publishes. - DFSA has carried out several thematic analyses with broader view than microprudential supervision, for example covering use of derivatives, liquidity swaps and repos, and assessment of alternative investments. ### Key Recommendations (selected by ICP number) - 1. Objectives, Powers and Responsibilities of the Supervisor - Consider explicit legislative requirement in DFSA’s objectives to include maintenance of a fair and safe insurance sector for protection of policyholders. - Consider amendments to improve clarity in the powers of DFSA as primary authority responsible for supervision and regulation of individual financial institutions. - 2. Supervisor - Consider instituting an internal audit unit within the DFSA. - Consider exempting DFSA from government administrative rules to strengthen financial and operational autonomy; consider setting DFSA as a legal statutory body. - Review adequacy of supervisory resources, training plans, succession planning; consider exemption from collective agreements and salary controls. - Establish explicit provisions on public disclosure of reasons for removal of the head of DFSA and future governing Board before end of statutory period of appointment. - 5. Suitability of Persons - Expedite implementation of key control functions and suitability requirements. - Review application of suitability requirements to senior management to cover all relevant positions. - 7. Corporate Governance - Review the FBA and Executive Order 1575 to clarify expectations on BoDs and BoMs regarding protection of policyholders’ interests. - Amend governance requirements to require directors to act in best interests of insurer and policyholders and require boards to carry out succession planning. - Review expectations of BoM composition and whether to set requirements. - 8. Risk management and Internal Controls - Expedite introduction of requirements for control functions at all insurers. - Clarify in regulations that internal audit functions must carry out a minimum of work auditing internal controls. - Undertake cross-firm/thematic work early to benchmark major companies against new requirements. - 9. Supervisory Review and Reporting - Review strategy on supervisory cycles for insurers. - Consider a risk-based supervisory framework to integrate quantitative and qualitative aspects of risk assessment. - Include conduct of business monitoring requirements for full on-site inspections of large insurers. - Equip DFSA with adequate supervisory resources to shorten supervisory cycle and improve oversight. - 15. Investment - Extend reporting requirements to cover group-wide aggregate investments and consider closer supervisory review of custodial services security. - Carry out periodic updates to surveys of insurers’ and pension funds’ investments to monitor developments, e.g., increases in unit-linked business. - 16. Enterprise Risk Management for Solvency Purposes - Introduce a requirement for an ALM policy. - Review application of requirements on risk management for solvency purposes and own risk and solvency assessments to groups and extend framework as necessary. - 17. Capital Adequacy - Strengthen capital adequacy by establishing solvency control levels, including a minimum capital requirement below which an insurer is regarded as no longer viable and must close or transfer business. - Set a requirement for prior approval before a model may be used. - 18. Intermediaries - Review and promote appropriate regulatory framework and supervisory practices for intermediaries’ good conduct and improve broker licensing and ongoing review requirements. - Establish proportionate governance expectations tailored for broker intermediaries focused on fair treatment outcomes. - Ensure DFSA has adequate resources for effective supervision of intermediaries, including brokers. - 19. Conduct of Business - Give closer attention to disclosure requirements so customers are cognizant of inherent product risks and establish a process to review product appropriateness. - Empower DFSA with additional resources for on-site risk-based supervision of broker intermediaries and more proactive conduct of business supervision. - 20. Public Disclosure - Review and revise financial reporting requirements from perspective of effective disclosure to ensure companies present complete information, including qualitative information such as product nature and corporate governance. - Extend to annual reports the interim-report requirement that insurers make the report available to the public, for example on their websites. - 21. Countering Fraud in Insurance - Change legislative framework to empower DFSA to issue enforceable rules requiring insurers and intermediaries to report insurance frauds. - DFSA should have a supervisory process to review fraud-related reports received from insurance companies and broker intermediaries. - 22. AML/CFT - DFSA, with the FIU and Danish Industry Association, should expedite completion of the National Risk Assessment Report on AML/CFT risks in life insurance and pension funds. - DFSA should use this as basis for an enhanced supervision plan for 2014, augmenting staffing as necessary. - 23. Group-wide Supervision - Increase supervisory intensity on groups beyond solvency and ownership review to include key control functions and group risks. - Review supervisory cycle to ensure smaller domestic insurance groups are not left unsupervised on a group basis. - Provide group supervisory oversight to market conduct and consumer protection matters in a group context, including bancassurance models. - Require appropriate group reporting systems to measure and monitor aggregate risk exposures to capture intra-group transactions. - Commence joint onsite supervision for financial conglomerates. - 24. Macroprudential Surveillance and Insurance Supervision - Establish a process to consider macroprudential issues more formally on a regular basis, including occasional review of potential systemic significance of large insurers using the IAIS assessment methodology. - Supplement vulnerability assessments with periodic macroeconomic stress tests. - DN should extend its financial stability analysis to cover the insurance sector, starting with cross-sector linkages. - 25. Supervisory Cooperation and Coordination - Expedite Denmark’s accession to the IAIS multilateral MoU to facilitate cross-border cooperation with non-EEA signatories to MMoU. - 26. Cross-border Cooperation and Crisis Management - Seek opportunities for further testing of arrangements and plans in line with the 2012 EIOPA test. - Review requirements DFSA places on insurers for crisis management and contingency plans to ensure appropriately wide range of crisis events and include operational procedures for information provision and communications to DFSA and college of supervisors. *Source: _cr14335 - 12. Winding-up and Exit* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14335.pdf_