In 2001, the International Monetary Fund (IMF) assessed Finland's systemically important payment systems, which according to the IMF were the Bank of Finland's real-time gross settlement system (BoF-RTGS), the large-value payment system for express transfers and checks (POPS), and the retail payment system. BoF-RTGS is a component of the Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET) system, the Euro area payment system. The 2001 IMF assessment concluded that the three systems observed all the Core Principles for systemically important payment systems (CPSIPS). A 2004 European Central Bank report assessed BoF-RTGS and POPS against the CPSIPS and found that BoF-RTGS fully observed all the core principles (CPs), except CP VIII, which it broadly observed, and POPS observed all the CPs. The report noted that CP V was not applicable to both systems. The BoF, in its 2006 Financial Stability report, indicated that Finland's SIPS conform to the CPSIPS and the BoF regularly monitors the operation of these systems. Finland is expected to migrate to the Euro area payment system, TARGET2, on February 18, 2008. TARGET2 is the successor to TARGET and is a centralized system with a common technical platform which allows it to provide a harmonized level of service for its members.

General Overview

A 2007 European Central Bank (ECB) report on "Payment and Securities Settlement Systems in the European Union" notes that the Finnish interbank payment system comprises of: the BoF-RTGS (the Finnish TARGET component), a retail payment system (PMJ), and the POPS. In 2001, the IMF assessed Finland's systemically important payment systems (SIPS), which according to the IMF report were the BoF-RTGS system, POPS, and the PMJ. The BoF's 2007 Financial Stability Report also mentions all three payment systems as "critical for the Finnish financial market" (p. 61). According to the 2001 IMF assessment all three systems observed all the CPSIPS.

In 2004, the ECB assessed the BoF-RTGS as part of its assessment of all domestic TARGET components. The report concludes that the BoF-RTGS fully observes eight out of the ten CPSIPS and broadly observes one (CP VIII, relating to practicality and economic efficiency). CP V is not applicable in the Finnish context. The 2004 assessment also assessed POPS as a systemically important, large value payment system, although it is not a TARGET component, and found it fully compliant with the nine applicable CPSIPS. The BoF's 2006 Financial Stability report mentions that the BoF conducted an assessment of the domestic systemically important payment systems against the CPSIPS, and concluded that these systems fulfilled requirements of the CPSIPS. The report further mentions that the BoF continuously monitors the operation of these systems.

The 2007 ECB report states that the Bank of Finland (Suomen Pankki, or BoF) owns and operates the BoF-RTGS, while the other two systems are owned and operated by the banks participating in them. The report further finds that payment systems in Finland are not governed by one all-encompassing law, but a number of different laws regulate separate areas of the payment systems. The relevant laws directly or indirectly governing payment systems in Finland are the 1993 Act on Credit Institutions, the 1993 Act on the Operation of a Foreign Credit Institution or Financial Institution in Finland (both acts, in tandem with other acts, implement EU Directives 2000/12/EC and 2000/46/EC), the 1932 Check Act (based on the Geneva Convention of 1931), the 1932 Act Covering Bills of Exchange, the 1947 Act Covering Promissory Notes, the 1999 Act on Certain Conditions of Securities and Currency Trading and Settlement Systems (implementing the EU Settlement Finality Directive), the 1999 Act on Credit Transfers (implementing the EU Directive on cross-border credit transfers), the 1978 Consumer Protection Act, the 1990 Penal Code, and the 1998 Act on Preventing and Clearing Money Laundering. In addition, the European Union (EU) Regulation on cross-border payments in euro, which harmonizes the fees for cross-border and national payments, is directly applicable to the Finnish payment systems.

Per the 2007 ECB report, the Act on the Bank of Finland gives the BoF oversight of the payment systems in the country. Specifically, the Financial Markets and Statistics Department within the BoF is responsible for payment system oversight and formulation of general policy in this area, as well as the development of the PMJ and POPS. The responsibility of operation and development of BoF-RTGS rests with the Banking Operations Department of the BoF. Other relevant bodies in the payment systems area, per the 2007 ECB report, are (1) the Ministry of Finance (Valtiovarainministeriö, or MoF), which makes laws on banking and other financial activities, and designates systems for the purposes of the EU's Settlement Finality Directive; (2) the Financial Supervisory Agency (Rahoitustarkastus, or FIN-FSA), charged with maintaining financial stability and public confidence in the markets; and (3) the Federation of Finnish Financial Services, which deals with banking operations, operating conditions, and interbank cooperation, and maintains contacts with financial institutions, the authorities, and economic organizations.

The 2007 ECB report provides statistics on payment instruments in Finland as of 2005. Cash and non-cash payments are both extensively used in Finland, although cash use in national retail transactions and cash withdrawals through ATMs have both shown a declining trend in recent years. For non-cash payments, credit transfers are the predominant means used in Finland. Checks have never been a popular payment media, and their use, in terms of volume, has seen a decline in recent years. Direct debit is also very marginally used. Internet banking has increased rapidly in recent years. Payment cards, including debit cards, delayed debit and credit cards, retailers cards, and prepaid cards, have been in use since the 1980s and are used in daily transactions, gradually replacing cash and almost completely replacing the use of checks. A number of small e-money service providers operate in Finland. There is only one ATM network in Finland, called "Otto." It has 1,689 ATM terminals in Finland.

According to a 2007 press release by the ECB posted on its website, TARGET2 was launched on November 19, 2007. Finland is expected to migrate to TARGET2 on February 18, 2008. TARGET2 is a centralized system in the Euro area with a common technical platform and with a harmonized level of service. The BoF website states that the BoF "will coordinate its account holders' migration to the single shared platform," and that it will simultaneously wind up its own RTGS system, the BoF-RTGS.

The Principles

I. The system should have a well-founded legal basis under all relevant jurisdictions.

FC

According to the 2004 ECB assessment, the BoF-RTGS and POPS systems fully observe this principle. The 2001 IMF assessment also finds all three SIPS in Finland fully compliant with this principle. This conclusion is reaffirmed by the BoF's assessment of the domestic payment systems, the BoF-RTGS, POPS, and PMJ, as mentioned in its 2006 Financial Stability report. According to the IMF's 2001 report, the Finnish Constitution, coupled with the EU laws and directives, provides the legal framework for a well-functioning financial system in the country. Finland also has a codified legal system. The scope of supervisory authority is circumscribed by constitutional law and its interpretations by the Constitutional Committee of Parliament.

According to a 2007 ECB report, payment systems in Finland are not governed by one all-encompassing law, but a number of different laws regulating separate areas of the payment systems. The relevant laws directly or indirectly governing payment systems in Finland are the 1993 Act on Credit Institutions, the 1993 Act on the Operation of a Foreign Credit Institution or Financial Institution in Finland (both acts, in tandem with other acts, implement EU Directives 2000/12/EC and 2000/46/EC), the 1932 Check Act (based on the Geneva Convention of 1931), the 1932 Act Covering Bills of Exchange and the 1947 Act Covering Promissory Notes, the 1999 Act on Certain Conditions of Securities and Currency Trading and Settlement Systems (implementing the EU Settlement Finality Directive), the 1999 Act on Credit Transfers (implementing the EU Directive on Cross-Border Credit Transfers), the 1978 Consumer Protection Act, the 1990 Penal Code, and the 1998 Act on Preventing and Clearing Money Laundering. In addition, the EU Regulation on cross-border payments in euro, which harmonizes the fees for cross-border and national payments, is directly applicable to the Finnish payment systems.

II. The system's rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur through participation in it.

FC

According to the 2004 ECB assessment, the BoF-RTGS and POPS systems fully observe this principle. The 2001 IMF assessment also finds all three SIPS in Finland fully compliant with this principle. This conclusion is reaffirmed by the BoF's assessment of the domestic payment systems, the BoF-RTGS, POPS, and PMJ, as mentioned in its 2006 Financial Stability report. The 2004 ECB report further finds the design and operating hours of the BoF-RTGS and POPS systems are clearly spelt out, and the information provided enables the participants to have a clear understanding of the system's impact on each of the financial risks they incur through participation in it. The legal basis for the roles, rights, and responsibilities of the participants, the operator and the settlement institution is well explained and documented. Discretionary rules or changes in rules and procedures in abnormal circumstances are possible and are sufficiently explained. The 2001 IMF assessment also observes that the three systems have clear rules of operation and access criteria and they are readily available to interested parties. The 2007 ECB report notes that the operating rules of BoF-RTGS are available on the BoF website and form an integral part of the agreement between the BoF and each participant in the system. They are also aligned with the TARGET guidelines. The rules of operation of the POPS and the PMJ are also clearly spelled out in the agreements between the participants in the respective systems and between each participant and the BoF.

III. The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks.

FC

According to the 2004 ECB assessment, the BoF-RTGS and POPS systems fully observe this principle. The 2001 IMF assessment also finds all three SIPS in Finland fully compliant with this principle. This conclusion is reaffirmed by the BoF's assessment of the domestic payment systems, the BoF-RTGS, POPS, and PMJ, as mentioned in its 2006 Financial Stability report. The 2007 ECB report finds that since the BoF-RTGS system executes transfers only when there are sufficient funds to cover the transaction, the participants incur no credit risk whatsoever. Liquidity risk is also eliminated by the fact that account holders have access only to funds equal to the minimum reserves held in the settlement accounts, and fully collateralized intraday credit offered by the BoF. As for POPS, the 2007 ECB report finds that "the overall maximum credit risk accepted by any bank is the sum of the bilateral credit limits it has granted" (p. 426). However, the risk involved is considerably reduced since the system uses gross settlement for large value and bilateral positions and because the debit/credit bilateral positions continuously change during the day. The participants directly interchange information on the position of bilateral payments as well as the payments settled on a gross basis. The 2007 ECB report finds the PMJ free of credit risk, since the banks using the system credit their customers only after final interbank settlement. Liquidity risk in the PMJ is covered in the same process as in the BoF-RTGS.

IV. The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day. (Systems should seek to exceed the minima included in this Core Principle.)

FC

According to the 2004 ECB assessment, the BoF-RTGS and POPS systems fully observe this principle. The 2001 IMF assessment also finds all three SIPS in Finland fully compliant with this principle. This conclusion is reaffirmed by the BoF's assessment of the three domestic payment systems. All three Finnish payment systems provide continuous settlement throughout the day. The 2007 ECB report notes that the BoF-RTGS system settles payments in real time and provides immediate finality, so that all payments are final and irrevocable once they are debited from the sender's account. The POPS settles "payments that exceed the bilaterally agreed credit limits... on a gross basis directly in BoF-RTGS" (p. 425-426) and single payments within the credit limits on a net basis for intraday settlement. As for the PNJ, payments in the system are settled simultaneously on a gross basis in the BoF-RTGS.

V. A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation. (Systems should seek to exceed the minima included in this Core Principle.)

II

According to the 2004 ECB assessment, this principle is not applicable to the BoF-RTGS and POPS systems. The PMJ system, according to the 2007 ECB report, settles bilaterally and "these positions are booked on a gross basis and settled simultaneously in BoF-RTGS" (p. 427).

VI. Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.

FC

According to the 2004 ECB assessment, the BoF-RTGS and POPS systems fully observe this principle. The 2001 IMF assessment also finds all three SIPS in Finland fully compliant with this principle. This conclusion is reaffirmed by the BoF's assessment of the domestic payment systems. The 2004 ECB report explains that since all payments settle in the books of the central bank, there is no credit risk or liquidity risk with respect to the settlement agent or settlement asset. The 2001 IMF assessment also reaches the same observation for all three systems; that they settle in central bank money.

VII. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.

FC

According to the 2004 ECB assessment, the BoF-RTGS and POPS systems fully observe this principle. The 2001 IMF assessment also finds all three SIPS in Finland fully compliant with this principle. This conclusion is reaffirmed by the BoF's assessment of the domestic payment systems. The 2004 ECB report adds that the systems have a security policy in place, which coincides with the TARGET risk management methodology, which makes use of an international standard (ISO 17799) for its security requirements. Finland also applies a national methodology in consonance with international standards. A secondary contingency site is available, and the infrastructure is tested periodically. Change management procedures are also implemented in the systems. Disaster recovery procedures are well documented and properly explained. The 2001 IMF assessment observes that the BoF-RTGS is "secure and reliable, with a "hot back-up site" providing high-level contingency cover" (p. 52). POPS and the PMJ are also judged to have high security and operational reliability.

VIII. The system should provide a means of making payments which is practical for its users and efficient for the economy.

CP

According to the 2004 ECB assessment, the BoF-RTGS broadly observes this principle. This is because the BoF-RTGS was reported to have a "user/pricing issue" (p. 14), wherein the Euro Banking Association (EBA) banks wanted to implement a direct debit mechanism for settlements to the EBA without bearing the cost of the feature, so the BoF did not provide this service. Also, the ECB assessment used the revised cost methodology to assess the cost recovery levels of the TARGET components, under which "more accurate and more comparable estimates of cost recovery levels" (p. 14) are used to assess the systems. POPS fully observes this principle, with no pricing problems. Both systems, however, apply the cost methodology, the BoF-RTGS applying the TARGET cost methodology. The 2001 IMF assessment found all three SIPS in Finland fully compliant with this principle. This conclusion is reaffirmed by the BoF's assessment of the domestic payment systems.

IX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access.

FC

According to the 2004 ECB assessment, the BoF-RTGS and POPS systems fully observe this principle. The access criteria for the BoF-RTGS are based on the TARGET Guideline and are included in the terms and conditions of the system, and the membership agreements. They are easily available to the public. The participants are also monitored for continued compliance with the access criteria. The access criteria for POPS are set out in the membership agreements and are restricted to credit institutions. As for the fee-structure, the 2004 ECB report observes that it "is intended to recover costs and is seen as not preventing fair and open access to the systems" (p. 15). The fees are a combination of a one-time access fee, a monthly fee, and a transaction fee. The 2001 IMF assessment finds all three SIPS in Finland to be fully compliant with this principle. This conclusion is reaffirmed by the BoF's assessment of the domestic payment systems.

The 2007 ECB report states that the BoF-RTGS charges a €3,000 fee for opening an account in the system, a fixed monthly charge of €270 per account, and a variable transaction fee, declining as the number of payments made per month increases. The cross-border payment fees are in accordance with the TARGET Guideline. Account holders are also charged a fee by the BoF for opening an account, as well as monthly maintenance charges. Further use of software, data communication, and security features cost additional fees, as also any other requirements of the account holder that costs the system. The participants in POPS and PMJ are also charged for costs incurred by the BoF in the interfaces of the settlement systems. As for POPS, the system charges an entrance fee to a new participant, and the participants bear their own costs for using the system. The same holds true for the PMJ, which works on a reciprocal basis.

X. The system's governance arrangements should be effective, accountable and transparent.

FC

According to the 2004 ECB assessment, the BoF-RTGS and POPS fully observe this principle. Information on the operation of the systems and decision making procedures are made available to the public. However, there are no formal conflict resolution procedures to deal with disagreements between the users and the operators of the systems. Also, no business plans have been worked out. Consultation with users, auditors, and overseers are done only on an ad hoc basis. The 2001 IMF assessment also finds all three SIPS in Finland fully compliant with this principle. This conclusion is reaffirmed by the BoF's assessment of the domestic payment systems. The 2001 IMF assessment notes that the BoF-RTGS is monitored by the European System of Central Banks (ESCB) on an ongoing basis as to its reliability, effectiveness, and risks, and also has "high-level contingency requirements" placed on it as a TARGET component. Further, the BoF conducts payment system oversight with a transparent approach.

A. The central bank should define clearly its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems.

FC

According to the IMF's 2001 assessment "overall, there is a good level of transparency in the roles, responsibilities and objectives of the BoF with respect to payment systems" (p. 53). The 2007 ECB report finds that the 1998 Act on the Bank of Finland charges the BoF with the objective of "maintaining the reliability and efficiency of payment systems and the broader financial system" (p. 415). As part of its payment system oversight responsibility, spelled out in the Act on the Bank of Finland, the BoF is obliged to "help to maintain the reliability and efficiency of payment systems and the financial system in general, and assist with the development of such systems" (p. 415). It also issues banknotes and works with banks and others to maintain the supply of currency. As part of the operational objective of the payment systems oversight, the BoF promotes the RTGS system usage for transferring large-value payments and ensures that the payment systems comply with the BoF and Eurosystem's oversight standards. Further, the major instruments used for oversight are recommendation and moral suasion, though its recommendations are not legally enforceable.

The 2001 IMF assessment notes that the Act on the Bank of Finland and the applicable ESCB laws prescribe the broad responsibilities of the BoF in relation to the payment systems. Further, the BoF also has publications explaining the objectives of its oversight and the developments therein. These together make the roles, responsibilities, and objectives of the BoF with regard to the payment systems very transparent. However, the assessment recommends that reporting the Parliament on payment systems operations and oversight be done annually. Also, the oversight role of the BoF is found to be conducted largely through collaboration and consultation, which is not very transparent.

B. The central bank should ensure that the systems it operates comply with the Core Principles.

FC

Per the 2007 ECB report, the Act on the Bank of Finland gives the BoF the task of the oversight of the payment systems in the country. Specifically, the Financial Markets and Statistics Department within the BoF is responsible for payment system oversight and formulation of general policy in this area. The responsibility of operation and development of BoF-RTGS rests with the Banking Operations Department of the BoF. The 2006 BoF Financial Stability report clearly indicates that the BoF continuously monitors the SIPS in the country to ensure these systems comply with the CPSIPS. The report also affirms that all the SIPS in Finland comply with the CPSIPS.

C. The central bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight.

FC

Per the 2007 ECB report, the Act on the Bank of Finland gives the BoF oversight of the payment systems in the country. Specifically, the Financial Markets and Statistics Department within the BoF is responsible for payment system oversight and formulation of general policy in this area and the development of the PMJ and POPS. The 2006 BoF Financial Stability report clearly indicates that the BoF continuously monitors the SIPS in the country to ensure these systems comply with the CPSIPS. The report also affirms that all the SIPS in Finland comply with the CPSIPS.

D. The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.

FC

The 2007 ECB report notes that the BoF's Financial Markets and Statistics Department participates in the "Eurosystem's payment and settlement systems oversight and policy work, the analysis of payment and settlement systems issues, and the monitoring of developments in national and international payment and securities settlement systems" (p. 415). Further, the BoF cooperates with the Finnish Bankers' Association (now the Federation of Finnish Financial Services) as it engages in the development of the POPS and the PMJ. These development activities aim to "improve the efficiency of payment systems; to reduce payment service providers' exposure to risks associated with payment systems and instruments; and to ensure that payment systems meet the relevant minimum standards, in particular the oversight standards of the Eurosystem" (p. 416).

The 2000 ECB report notes that "the Eurosystem favors a cooperative approach towards the enforcement of the oversight policy stance" (p. 3), wherein the national central banks or the NCBs (in Finland's case the BoF) liaise with other NCBs in conducting oversight, and coordinate their oversight activities through pertinent committees and working groups, notably the ESCB's Payment and Settlement Systems Committee and its various working groups.