Iceland’s financial regulatory framework has gone through major changes in recent decades. Prior to 1998, oversight was carried out by several separate government entities and committees. But the system proved inadequate during the rapid growth of Iceland’s banking sector in the early 2000s.
To consolidate regulation and address weaknesses in supervision, the Icelandic government established the FME in 1998. It combined the pre-existing Insurance Supervisory Authority, Securities Commission and other oversight bodies into a single integrated regulator.
The FME formally opened its doors in 1999 and took over supervision of banks in addition to its other duties. Its creation represented a major step toward centralizing control over Iceland’s financial industries. However, when the 2008 crisis hit, the agency still lacked sufficient regulatory teeth and transparency.
After the collapse of the country’s major banks, an independent Special Investigation Commission (SIC) reviewed the causes of the meltdown. The SIC’s report criticized lax oversight by the FME and recommended reforms to its structure and operations.
This led to a major reorganization of the FME in 2009 in accordance with IMF recommendations. The revamped agency received more independence along with expanded powers to protect financial stability. These changes enabled the FME to play a key role in rebuilding and restoring confidence in Iceland’s post-crisis financial system.
Organizational Structure and Leadership
The FME consists of six main departments overseeing key areas such as banking, insurance, securities, consumer affairs, legal affairs, and operations. The organizational structure includes:
- Board of Directors – Responsible for the FME’s priorities, budget and administration. Includes five members appointed by Iceland’s Minister of Finance and Economic Affairs.
- Director General – The CEO who manages daily operations and supervises staff. Nominated by the Board and appointed by the Minister.
- Public Relations – Handles external communications, publications and educational activities.
- Internal Auditor – Provides independent auditing and consults on risk management.
In addition to the leadership team, the FME employs approximately 150 staff members including lawyers, economists, accountants and other financial experts. The relatively small headcount allows for a flexible, team-based approach to supervision and enforcement.
The FME currently lists Mr. Höskuldur H. Ólafsson as Director General overseeing the organization. The Board of Directors includes members from academia, business, economics, law and the Icelandic Central Bank.
While part of the Ministry of Finance and Economic Affairs, the revamped FME now operates as an independent agency not beholden to political interests. This enables it to serve as an impartial financial authority focused solely on regulation, supervision and transparency.
Objectives and Key Responsibilities
The FME works to promote financial stability, order and good practices across Iceland. Its primary objectives include:
- Supervising Financial Firms – The FME oversees banks, credit firms, pension funds, insurance companies, the stock exchange and other entities. This includes licensing, reporting, on-site inspections and enforcing applicable rules.
- Regulating Markets – Setting standards and regulations for investment, securities, derivatives, insurance and private pensions. The FME creates and monitors compliance with prudent conduct rules.
- Protecting Consumers – Ensuring financial companies provide clear information to consumers and treat customers fairly. The FME aims to boost transparency and minimize misconduct.
- Maintaining Stability – Identifying systemic risks, implementing macroprudential policy, monitoring markets and mitigating threats to financial stability.
- Enforcing Laws – Investigating potential legal violations, imposing sanctions where appropriate, and referring criminal matters for prosecution.
The wide scope of the FME’s authority allows it to regulate conduct across financial sectors while also monitoring activities from a high level. This dual microprudential and macroprudential oversight model provides balanced supervision.
Regulatory and Enforcement Powers
As part of its 2009 reorganization, the Althingi parliament significantly expanded the FME’s powers to improve oversight and compliance across Iceland’s financial industries. The FME now has authority to:
- Impose administrative fines on supervised entities for violations.
- Revoke operating licenses from firms that fail to meet standards.
- Oversee approved prospectuses for securities offerings.
- Intervene quickly when a financial company faces difficulties.
- Establish rules guiding stress tests, capital buffers, and risk management.
- Request a court order to block a merger or acquisition deal.
- Compel supervised entities to reduce exposures and limit risky activities.
- Appoint a special manager to temporarily manage a troubled financial firm.
The FME can open on-site inspections of regulated companies with just one day’s notice. Firms must provide prompt access to any relevant information.
For enforcement, the agency now has the power to impose administrative fines of up to 10% of a violator’s total annual turnover. The director general can rapidly freeze assets if violation fines go unpaid. These muscular authorities enable swift intervention to enforce compliance.
The FME also works closely with the Special Prosecutor to prosecute cases of serious fraud, money laundering and other financial crimes. This adds additional teeth to enforcement when illegal activity is suspected.
Risk-Based and Rule-Based Approach
The FME employs a balanced combo of risk-focused and rules-based supervision of Iceland’s financial sector. This multifaceted approach includes:
- Risk assessments – The FME regularly analyzes risks and vulnerabilities at individual institutions as well as industry-wide. Stress tests also evaluate firms’ ability to withstand shocks. These ongoing risk reviews help target oversight where it’s most warranted.
- Reporting requirements – Supervised companies must submit detailed reports on their financials, operations, risk exposures and other metrics on both a routine and ad hoc basis. This provides continuous monitoring of firms’ condition.
- On-site inspections – In addition to periodic reporting, the FME performs on-site inspections of regulated entities to assess governance, controls, policies and compliance rigor. Inspections occur under both regular schedules and in response to red flags.
- Enforcement actions – Fines, license revocations, bans and asset freezes provide strict enforcement to curb violations and non-compliance. Criminal prosecutions add further deterrence for financial misconduct.
- Conduct standards – The FME sets clear rules for ethical behavior, transparency, consumer protection and risk management via binding regulations and published guidelines.
This multidimensional model strengthens oversight and gives the FME overlapping means of identifying problems, enforcing expectations, and commanding corrective actions.
recent Activities and Initiatives
The FME maintains an active supervision regimen including licensing, inspections, enforcement and investigations across all sectors under its purview. Some examples of recent initiatives include:
- Resolution framework – Developed a structured resolution regime for winding down failing systemically important banks and financial firms. Helps avoid future public bailouts.
- COVID response – Granted temporary relief on capital buffer requirements and accounting standards during the pandemic while monitoring increased risks.
- Consumer protection – Identified instances of poor conduct by pension funds and required corrective actions and improvement of practices.
- Anti-money laundering – Required parties subject to AML laws to register with the FME’s oversight platform to enhance monitoring.
- Climate risk – Started evaluating regulated firms on incorporation of climate change risk analysis into their governance, strategy and risk management.
- Fintech sandbox – Launched an innovation sandbox for fintechs to test new solutions before full authorization. Promotes new services under controlled conditions.
- Cybersecurity – Required companies to conduct cyber risk assessments and demonstrate cyber resilience readiness via new reporting rules.
These initiatives and supervisory activities enforce prudent conduct and help strengthen financial stability amid an evolving landscape of risks and innovations.
Ongoing Evolution and Impact
The revamped FME maintains an active role in overseeing Iceland’s post-crisis financial sector recovery and build-out of its resolution framework. Some key steps in its evolution include:
- Increasing staff – Added personnel in enforcement, economics, on-site inspections and other areas to bolster oversight capabilities.
- New risk focus – Developed dedicated new groups for monitoring systemic risk, securities compliance, and insurance risks.
- Governance guidelines – Published detailed new corporate governance requirements for financial firms focused on control environments and risk governance.
- Crisis preparedness – Expanded crisis simulation exercises and stress testing collaborations with Iceland’s Central Bank to improve crisis response readiness.
- Industry input – Launched a Financial Stability Committee with industry participation to advise on systemic risk monitoring and macroprudential policy.
- International collaboration – Joined the European Systemic Risk Board and pursues cross-border partnerships with Scandinavian financial regulators.
Under its revamped structure and leadership, the FME continues to take an active shaping role in Iceland’s post-crisis financial environment. It has ushered in stronger oversight, transparency and consumer protection to support the ongoing rebuilding of trust.
Conclusion
Through its extensive supervisory powers over key financial sectors combined with proactive risk monitoring and swift enforcement, Iceland’s Financial Supervisory Authority remains a lynchpin for stability in the country’s post-collapse financial system.
In the aftermath of the catastrophic 2008 banking crash, the rebuilt FME has spearheaded vital reforms and helped ensure prudent conduct by financial institutions going forward. Its multifaceted approach recognizes that effective oversight requires balance across rules, risk analysis, real-time market monitoring, and stringent enforcement.
While challenges remain, the FME stands well positioned to promote consumer protection and sustainable financial services growth while guarding against excesses like those that precipitated Iceland’s financial crisis. The agency continues to evolve by adding new risk focus areas, collaborating across borders, and driving adoption of emerging best practices.
More than a decade after the banking collapse, Icelanders can have renewed confidence that financial stability stands on far firmer regulatory footing under the scrutiny of a revitalized and empowered Financial Supervisory Authority.