Bloomberg
Copenhagen

Banks in Scandinavia face a possible ban on some commissions just as the industry relies more on fee-based revenue streams.
Sweden and Denmark may order banks to stop charging customers for the distribution of investment products, including those created by banks’ own subsidiaries, according to the two countries’ regulators. The deliberations are based on concerns that the current fee structure creates conflicts of interest which European Union rules don’t adequately address.
“We can’t accept commissions that abuse customers’ trust and that aren’t transparent,” Per Bolund, Sweden’s minister for financial markets, told Bloomberg.
The proposals follow investigations in Sweden and Denmark revealing that some asset managers were alleging that index- linked products were actively managed, enabling them to collect higher fees while doing less work.
Norway is taking similar steps. The financial watchdog there has ordered DNB, Norway’s biggest bank, to either correct pricing or improve management of its DNB Norge fund after concluding it was a so-called “closet tracker.”
The push to crack down on fee collection comes as banks rely more on commissions from trading securities and less on traditional lending amid record-low interest rates. Both Sweden and Denmark have negative central bank rates. But regulators are sounding the alarm amid concern that the business model leaves banks exposed to riskier revenue streams that can suddenly dry up when markets turn.
Finland’s Financial Supervisory Authority — the Nordic region’s only regulator that oversees banks in a euro-zone member — has warned that income structures are becoming more volatile following a 20% decline in net interest income since 2009. The development may have implications for the amount of capital banks should hold, said Jyri Helenius, head of the FSA’s prudential supervision department.
“There are higher risks now, with the volatility of income in the future higher than it has been,” Helenius said. “Because of that, we as a supervisor will be looking more closely into business models of banks and seeing if there are risks there.”
Part of the blame for the development lies with investors demanding ever higher returns, according to Jesper Rangvid, a finance professor at Copenhagen Business School and lead author of the Danish government’s report on the financial crisis.
“When banks have lower earnings because interest rates are lower, it is important to remember that ROE should, a priori, be lower,” Rangvid said. “You can’t, and shouldn’t, expect to have an RoE of 10 to 12% unless you are willing to take on additional risks.”
The biggest Nordic banks all target returns on equity of at least 12%. Nordea, the region’s largest lender, has said it aims for an RoE of about 15%.
A ban on fees in the region would exceed rules laid out in the EU, which are due to be implemented by 2017 and only target independent financial advisers.
The Swedish government is currently reviewing comments to the proposal as it considers whether to move ahead, Bolund said. Denmark’s Business Minister Troels Lund Poulsen has said he’s waiting for the outcome of a government report before deciding whether to introduce legislation.
Banks ranked fee generation among their top two strategies for raising profitability in coming months, along with cutting operations expenses, in a June European Banking Authority industry survey.
“There are benefits from having a more diversified mix of income,” Helenius said. “But most important is that banks measure and assess the risks correctly and if their income structure is such that the risks are higher, they should have higher buffers.”