Finland
Giving or taking guarantees
The most notable risks are related to guarantees given by natural persons.
If a guarantee is given by a Finnish limited liability company for liabilities of a third party then the guarantee is subject to the condition that sufficient corporate benefit, as such concept is applicable under the Limited Liability Companies Act, is given to the guarantor or pledgor, and the requirement set out in Section 13:2 of the Companies Act that no distribution of funds should lead to insolvency will apply. The existence of corporate benefit and the fulfilment of the requirement in Section 13:2 are ultimately questions of fact. Should the above referenced requirements not be fulfilled, any guarantee or other security provided for obligations owed by other parties, may be limited and funds or proceeds received may have to be returned to the guarantor.
Giving or taking security
A pledge is only valid and binding if it meets certain prerequisites (for more information, see Giving and taking guarantees and security – restrictions). Of these prerequisites, particular consideration should be had to perfection measures, as if these are not undertaken in accordance with the applicable law, the pledge might not be binding to third parties and it is also more likely to be subject to proceedings to have the pledge set aside. The perfection measures differ depending on the nature of the pledged assets (for example, with real estate mortgages the pledge has to be notified to the register at the Finnish land registry and with shares the pledge has to be written in the share and shareholder’s register and relevant share certificates must be given to the beneficiary).
In addition, we would recommend that pledge and guarantee agreements are made in written form signed by both parties. While this is not a mandatory requirement under Finnish law it is recommended for good order.
In addition, any security or guarantee may be subject to measures to have such guarantee or security set-aside under the Recovery Act.
Are there any restrictions on lending and borrowing?
Lending
Lending is a regulated activity in relation to lending to consumers. The Consumer Protection Act regulates consumer credits and the Finnish Competition and Consumer Authority supervises lending to consumers.
Consumer loans are subject to a range of regulatory requirements. For example, there are particular restrictions around:
- how the loans are marketed;
- how to deal with borrowers who fall behind with their payments; and
- how payments may be claimed from the consumers.
Borrowing
Borrowing is generally not regulated in Finland. However, certain borrowers may benefit from specific protection provided to them under Finnish law (for example consumers).
What are common lending structures?
Lending in Finland can be structured in a number of different ways to include a variety of features depending on the commercial needs of the parties.
A loan can either be provided on a bilateral basis (a single lender providing the entire facility) or syndicated basis (multiple lenders each providing parts of the overall facility).
Syndicated facilities by their nature involve more parties (such as agents which fulfil certain roles for the finance parties), are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one of the syndicate taking the lead in coordinating and arranging the financing.
Loans will be structured to achieve specific objectives, e.g. term loans, working capital loans, equity bridge facilities, project facilities and letter of credit facilities.
Loan durations
The duration of a loan can also vary between:
- a term loan, provided for an agreed period of time but with a short availability period;
- a revolving loan, provided for an agreed period of time with an availability period that extends nearer to maturity of the loan and which may be redrawn if repaid;
- an overdraft, provided on a short-term basis to solve short-term cash flow issues; or
- a standby or a bridging loan, intended to be used in exceptional circumstances when other forms of finance are unavailable and often attracting a higher margin.
Loan security
A loan can either be secured, unsecured or guaranteed.
Loan commitment
A loan can be:
- committed, meaning that the lender is obliged to provide the loan if certain conditions are fulfilled; or
- uncommitted, meaning that the lender has discretion whether or not to provide the loan.
Loan repayment
A loan can be paid back in instalments of the same size consisting of a loan repayment portion and an interest portion. The size of the monthly instalment changes in line with changes in interest rates, but the loan period remains unchanged (annuity loan).
It can also be paid back in instalments of the same size consisting of a loan repayment portion and an interest portion. The size of the monthly instalment remains unchanged when interest rates change, nut the loan period changes (fixed instalment loan).
It can also be paid back in instalments consisting of a fixed loan repayment portion and an interest portion that changes as interest rates change. When interest rates change, the size of the monthly instalment changes, but the loan period remains unchanged (fixed period loan).
It can also be paid back in one instalment consisting of the whole loan amount at the end of the loan period, and during the loan period only interest payment shall be made.
What are the differences between lending to institutional / professional or other borrowers?
Lending to legal persons is subject to less regulatory oversight and so less burdensome from a compliance perspective. It is mainly a matter of contract law.
The Consumer Protection Act (especially Chapters 7 and 7a) regulates lending to consumers and the provisions in the Act are mandatory.
Do the laws recognize the principles of agency and trusts?
Trusts are generally not recognized in Finland however, under the quite recent Act on Detecting and Preventing Money Laundering and Terrorist Financing, trust, as they are defined in Article 3, Section 7 of the Directive (EU) 2015/849, are recognized as legal entities for the purposes of the said Act.
The principle of agency is recognized in Finland and in accordance with the Act on Agent of Bondholders,it is possible to appoint an agent to act on behalf of other parties and to hold rights and other assets for the lenders or secured parties.
Are there any other notable risks or issues around lending?
Generally
Loan agreements and other finance documents are subject to general contractual principles. Consumer clients must be taken into consideration because the regulations regarding consumers are mandatory.
Specific types of lending
For instance, providing mortgages to consumers is subject to mandatory regulations. The Mortgage Credit Directive, which is implemented in Finland through chapters 6, 7 and 7a of the Consumer Protection Act, imposes a number of requirements on lenders. These requirements include, amongst other things, the lender’s need to:
- conduct affordability tests before lending;
- provide standard information about the mortgage to enable borrowers to compare products; and
- ensure that staff are suitably trained.
Standard form documentation
Most Finnish syndicated finance transactions are governed by documentation based on recommended forms published by the Loan Market Association (LMA). These are often governed under English law, however. Bilateral finance transactions are more likely to be documented on bank standard form documentation prepared in-house and be governed by Finnish law.
Are there any other notable risks or issues around borrowing?
Borrowers should be aware of the potential implications of the EU’s Bank Recovery and Resolution Directive (BRRD), which outlines certain measures for dealing with failing financial institutions. It has been implemented in Finland through the Act on Resolution of Credit Institutions and Investment Firms (laki luottolaitosten ja sijoituspalveluyritysten kriisinratkaisusta) and the Act on the Financial Stability Authority (laki rahoitusvakausviranomaisesta).
The BRRD applies to financial institutions incorporated in the European Economic Area (EEA), but does not apply to EEA branches of non-EEA incorporated entities.
Article 55 of the BRRD gives authorities the power to ‘bail-in‘ obligations of failed EEA financial institutions and also postpone the enforcement of early termination rights against the affected institution. ‘Bail-in‘ describes a variety of write down and conversion powers, such as the power to convert certain liabilities into shares or cancel debt instruments. In the case of English or other EEA law contracts, such powers override what the contracts says. In the case of non-EEA law contracts, there are requirements to incorporate such provisions into the contract.
Hans Sundblad
Partner
DLA Piper Finland Attorneys Ltd
[email protected]
T +358 9 4176 0421
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