Capital Markets
Financial Licensing in Denmark

Danish Financial Sector
Background

The regulation of companies that deliver financial services is mainly done on the basis of the Danish Financial Business Act. The Financial Business Act is a relatively new act in Denmark and is a compilation of previous existing legislation regarding financial undertakings. With the Financial Business Act, Denmark now has one primary Act providing most of the regulation for the intermediaries within the financial sector. The Financial Business Act is also a result of EU regulation and is further supported by a number of executive orders, all of which governs individual sectors comprised of the Financial Business Act.

Financial undertakings are subject to supervision by the Danish Financial Supervisory Authority (“Danish FSA”). The Danish FSA resides under the responsibility of the Ministry of Economic and Business Affairs.

Financial Undertakings

Pursuant to the Financial Business Act, a financial undertaking is defined as one of the following undertakings:

Banks,
Mortgage-credit institutions,
Investment companies,
Investment management companies, or
Insurance companies.

Financial undertakings, as mentioned above, are subject to special provisions in the Financial Business Act which relates to their special type of financial activity.

However, the majority of the provisions in the Act are applicable to financial undertakings in general. The Financial Business Act requires that all financial undertakings, prior to carrying out their services, obtain a license. Moreover, the Financial Business Act contains provisions on best practice, ownership and management, capital position, annual report, audit and appropriation of profit for the year, intervention in or cessation and supervision.

Banks

Pursuant to the Financial Business Act, banks shall obtain a license prior to initiating business. The banking business is normally understood as financial activities consisting of the acceptance of deposits from the general public and repaying this deposit at a later date. However, banking business covers various activities and is further described in an annex to the Financial Business Act. With the exception of some ancillary business, Banks may only carry out services for which they have been granted a license.

When applying for a license the undertaking must have a share capital of no less than EUR 8 million.

Banking businesses, pursuant to the Financial Business Act, correspond to the definition of credit institution in Directive 2006/48/EC.

Mortgage – Financial Institutions

Mortgage-credit institutions are undertakings which grant loans against registered mortgages in real property on the basis of issuing mortgage-credit bonds. Mortgage-credit institutions must obtain a license from the Danish FSA before conducting business.

Mortgage-credit institutions and foreign credit institutions have the exclusive right to issue mortgage-credit bonds and they are subject to the same share capital demand of EUR 8 million as banks.

When granting a loan against registered mortgages in real property, the lending must fulfil requirements set forth in the Mortgage-credit Loans and Mortgage-credit Bonds etc. Act. This Act requires among several things a maximum term of the loan of 30 years. Depending on the real estate which serves as security, there can be different lending limits.

The activities which mortgage-credit institutions may provide are comprised by the definition of credit institution in 2014/17/EU.

Investment Companies

Investment companies may provide several different services in relation to the dealing of securities. The activities which an investment company may perform are listed in an annex to the Financial Business Act. The activities cover services relating to portfolio management, the execution of orders for third party’s account, investment counselling and arranging portfolio strategies.

In applying for a license, the investment company must comply with a share capital demand of EUR 0.3 million. When applying for both a license and a membership with a stock exchange, a central securities depository or a clearing centre, the investment company must have a share capital equivalent of EUR 1 million.

The regulation of investment companies is based on the MiFID-directive.

Investment Management Companies

The primary business for investment management companies is the management of collective investment schemes. Collective investment schemes are a general description for different kinds of investment undertakings which receive funds from either the public or institutional investors. Investment management companies have the exclusive right to manage the main part of the collective investment schemes. However, investment management companies may also extend their license to provide services as investment companies.

Investment management companies must have a share capital equivalent of either EUR 1 million or EUR 0.3 million depending on whether they at the same time apply for acceptance to a stock exchange, a central securities depositary or a clearing centre.

The regulation of investment management companies in the Financial Business Act derives from the rules in respect of management companies in the UCITS Directive.

Approval Process

Prior to issuing a license, companies wishing to be licensed as one of the mentioned financial undertakings must meet several requirements. However, pursuant to the Financial Business Act, the Danish FSA shall grant a license when:

1. The special requirements in relation to the financial undertakings are met,
2. Members of the board of directors and management are deemed fit and proper, and have adequate experience in relation to their position,
3. Owners of qualifying interests will not oppose sound management of the financial undertaking,
4. There are no close links between the applicant and other undertakings or persons that could complicate the performance of the tasks of the Authority,
5. Legislation in another country outside the EU/EAA concerning undertakings or persons with whom the applicant has close links and which will not complicate performance of the tasks of the Danish FSA,
6. The procedures and administrative conditions of the applicant are appropriate,
7. The headquarters and registered office are placed in Denmark.

The Danish FSA can, however, decline or suspend the application process if they consider an application incomplete.

Foreign Entities
Possibility to Carry Out Business in Denmark

Foreign financial undertakings that wish to offer financial services in Denmark have the option of carrying out activities on a cross border basis or through a branch.

The provisions applicable further depend on whether the company seeking to conduct business is located in a country outside or inside the EU/EAA.

A foreign financial undertaking within the EU/EEA may begin providing services in Denmark through a branch two months after the Danish FSA has received notification from the supervisory authorities of the country of domicile. After receiving such a notification, the Danish FSA will ask for additional information from the supervisory authorities of the country of domicile. The additional information concerns description of the branch, declaration that the activities planned are covered by their license in the country of domicile, address of the branch and the names of the management.

A foreign undertaking, which has been granted a license to carry out activities within an EU/EAA area, may on a cross border basis begin providing services in Denmark when the Danish FSA has received notification from the supervisory authorities of the country of domicile. The foreign undertaking may only carry out activities covered by the license in the country of domicile.

Foreign credit institutions and investment firms, that have been granted a license in a country outside the EU/EAA, are required to apply for and obtain a license from the Danish FSA before providing services in Denmark. Prior to issuing the license, the Danish FSA requires the applicant to specify which activities and financial instruments the applicant intends to carry out services with. Further, the Danish FSA requires a statement from the supervisory authorities of the country of domicile stating that the applicant is subject to supervision, and that the activities for which the applicant is seeking authorisation are covered by their license in the country of domicile.

Provisions regarding good practice also apply to the business of foreign undertakings in Denmark, whether it is on a cross border basis or through a branch.

Investment Advisory Services

Pursuant to these provisions, companies that wish to carry out services with investment advisory services now need to obtain a license from the Danish FSA. Investment advisory services are defined as personal advice regarding the trading of financial instruments.

Foreign companies within the EU/EAA may carry out investment advisory services either through a branch or on a cross border basis as mentioned above.

The provisions regarding investment advisory services originate from the MiFID-Directive.

Collective Investments Schemes

In Denmark the regulation of collective investment schemes are found in the Investment Associations and Special-Purpose Associations as well as other Collective Investment Schemes etc. Act (“CISA”). Pursuant to CISA collective investment schemes cover various investment undertakings. CISA provides for the regulation of investment associations, special-purpose associations, associations of professionals, restricted associations, hedge associations and other collective investment schemes. Moreover, CISA also contains provisions regarding foreign investment undertakings wishing to market their units in Denmark. With the exception of restricted associations and associations of professionals, common for all of the collective investment schemes are that they receive funds from either a wide circle or from the general public. Besides association of professionals, associations subject to CISA must obtain approval prior to initiating business.

Investment Associations

The most renowned and used retail investment undertaking in Denmark is the investment association. The provision regarding investment associations derives from the UCITS-Directive. CISA requires that the funds of the association are invested in accordance with a principle of risk-spreading and placed in securities subject to different limits depending on the type of securities. Furthermore, investments for borrowed funds are not permitted (gearing). Investment associations may invest in listed securities, derivative financial instruments, units of other associations or divisions hereof, some foreign investment undertakings, registered mortgages etc. Investors may at any time be redeemed.

Hedge Associations

Hedge associations are in their structure very similar to investment and special-purpose associations. Hedge associations address the retail investor and must at any time comply with an investor’s wish of redemption. The two main differences between hedge association and investment association are that hedge association are able to borrow funds for investment purposes, and that they can define their risk policy and risk profile in the articles of association.

Hedge association may also address only few investors. These are known as restricted hedge associations.

Other Collective Investment Schemes

Other collective investment schemes are undertakings that address the retail segment and at the same time are not investment-, special-purpose- or hedge associations. Other collective investment scheme may invest up 80 % of its funds directly or indirectly in various financial instruments listed in an annex to the Financial Business Act. Consequently, this means that these undertakings can hold op to 20 % in assets that are not considered financial instruments (real property) and still be comprised by CISA. The Danish FSA may decide that such undertaking must be converted into an investment-, special-purpose or hedge association.

Other collective investment schemes need not be approved by the Danish FSA, but are, however, still subject to supervision by the Danish FSA. Other collective investment schemes shall describe its activity in a set of regulations – normally the articles of association – and in an offering document.

Foreign Investment Undertakings

Depending on their legal structure, foreign investment undertakings may market their units in Denmark.

UCITS

Foreign investment undertakings comprised by the UCITS-Directive may obtain an authorisation to market their units directly or indirectly in Denmark, when submitting the following documents to the Danish FSA:

1. A statement from the supervisory authorities of the investment undertaking, verifying that the institution has been approved as an investment undertaking in accordance with the UCITS-directive,
2. Fund regulations or articles of association,
3. Complete and simplified prospectuses,
4. The latest annual report; if this has been prepared, along with any biannual statement of assets,
5. Statement of the intended marketing,
6. Information on the measures intended for implementation in Denmark with a view to securing the members’ rights to receive dividends and redeem units,
7. Information on the information the investment undertaking shall provide for its members according to the regulations in its country of domicile, including information said investment undertaking shall provide if it ceases marketing in Denmark,
8. Information on the taxation regulations applicable to Danish investors.

3.7.1 Other foreign investment undertakings

Non-UCITS investment undertakings may also seek marketing approval in Denmark. The approval process is set down in an executive order. The executive order applies to foreign investment undertakings which have been approved by a competent authority in another country within the EU/EAA or in a country with which the EU has entered into an agreement regarding the financial area.

Broadly speaking, foreign Non-UCITS can be marketed if they:

1. Have as their object to receive funds from the retail investor and place the funds according to a principle of risk-spreading, and if they are open for redemption,
2. Invest as hedge associations,
3. Have as their object to receive funds from a wide circle or from the general public in connection with the first general meeting but are not regularly open to issue and redeem units, and
4. Are subject to public supervision.

The main differences between the three undertakings mentioned above are that no. 1 and no. 2 are open-ended undertakings whereas no. 3 is close-ended.

When applying for marketing approval the following documents shall be submitted to the Danish FSA:

1. Fund rules or articles of association.
2. Prospectus.
3. The most recent annual report, unless the undertaking has not yet operated for a full accounting period, and any biannual statement of assets.
4. Statement of marketing plans,
5. Information on the measures intended for implementation in Denmark with a view to securing the unit-holders’ rights to receive dividends and redeem units.
6. Information on the information the investment undertaking is required to provide for its unit-holders according to the regulations in its country of domicile,
7. Information on the taxation regulations applicable to Danish unit-holders
8. A statement from the supervisory authorities of the country of domicile stating that the undertaking is approved,
9. A statement from the supervisory authorities of the country of domicile stating that they are prepared to grant access to similar Danish associations to market their units in the country in question.
10. Other documents which the investment undertaking is obligated to make public in its country of domicile.