SUMMARY PROJECT FICHE

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1 SUMMARY PROJECT FICHE 1. Title: Reinforcement of institutional and administrative capacity of the financial sector 2. Project nº: ES Location: Ministry of Finance, Securities Inspectorate, (Bank of Estonia) 4. Objectives: Accession Partnership (AP) foresees as a short-term task to develop a strategy and timetable for the consolidation/strengthening of various supervisory agencies in the financial sector. Beginning early in 1999 there is a need to fulfil the next short and medium-term tasks brought out in both AP and National Programme for Adoption of the Acquis (NPAA) to establish Unified Financial Supervisory Authority (UFSA). The tasks are described in NPAA part Economic policy ; part 3.4 Free movement of services in sub-part Securities market, investment funds ; and in part 12.3 Administrative capacity of regulatory and supervisory bodies in various fields (as short-term task). Estonia handed over to the Delegation of the European Commission in Sept, 1998 a report on the progress of Estonia in the area of accession to the European Union. In the report it is mentioned that in order to fulfil the mentioned objectives, a committee of experts was established in July 1998 to develop a proposal for a Unified Financial Supervisory Authority. The task of the committee has been to analyse the positive and negative sides of the merging. Until now, a final decision on this issue has not yet been taken due to the change of Government following the elections in early March Description: This project fiche consists of two following components: 1. IB related to financial markets supervision; 2. IT systems related to financial market supervision. Ad 1. Institution Building (IB) The Estonian financial markets are quite well established and functioning. Support is needed in order to improve the performance of an effective supervisory function. Effective financial supervision can be improved through a single supervisory authority since this would facilitate the necessary exchange of prudential information notably in the supervision on a consolidated basis of financial conglomerates. Economies of scale are to be expected. Ministry of Finance and the Bank of Estonia have formed a working group (team) for working out a strategy for unification of financial supervision.

2 Based on the recent proposal of the working group, the new Government will also have to decide on a number of questions, such as: Subordination of the future organisation (government body, independent public legal person or operated under Eesti Pank); possible separate insurance supervision, structure and financing scheme of the future organisation. The strategy has been presented to the Government in early March In order to implement the strategy the team is seeking support and also experience from other countries, which have reviewed and/or executed a similar programme of change. For this purpose Ministry of Finance, Bank of Estonia, and the Securities Inspectorate must be twinned with corresponding institutions of the EU-partners, which includes an exchange of experts (including long-term experts) from EU partners. The task of experts would be to give advice for the implementation of the project. Twinning experts total 33 man/months should be spread over 24 months: 1) 18 m/m twinning by a project leader (long-term). 2) 15 m/m twinning, short and medium-term, to address specific issues identified during the implementation programme. Institution Building activities shall consist of: Advising on the drafting of regulations and implementing remaining provisions for transposing the acquis communautaire into Estonian law; Training officials of the Ministry of Finance responsible for drafting regulations in securities (and insurance field) through study trips and stages in the EU member state institutions and through training seminars in Estonia; and also in Community law; Training officials in the Securities and Insurance Inspectorates (whether in the Ministry of Finance or in a newly-established Unified Financial Supervisory Authority) in regulation, and also in supervisory skills; with necessary secondment in EU member state institutions; Determining and setting up all the public and administrative procedures for implementing the proposed Unified Financial Supervisory Authority (UFSA); Defining the status and tasks of UFSA; Training the UFSA implementation team - through study tours to the competent authorities of other countries, and training in theoretical and institutional issues in Estonia.; Preparing legislative base for UFSA work; Setting up the UFSA; Training officials of the UFSA through visits to the relevant EU member state institutions; Organising training seminars in Estonia for officials of the UFSA.

3 The project budget also includes interpretation, drawing-up and translation and publication of study- materials and books. The EU experts will define needs and elaborate these materials in close co-operation with the Estonian authorities. Ad 2. IT System Development Within the project an information system for supervising the securities market will be built. This component will be implemented in two steps. First an electronic database of market participants (investment firms, investment + credit institution companies, pension funds, etc. including their specialists, managers, owners etc. and commercial activities) and insiders register (including information of persons having inside information and their transactions in securities) will be created. In the second step an overseeing electronic database will be created which serves the Authority with day-by-day information (from the Tallinn Stock Exchange and Central Register of Securities), and also connects the Authority with other registers, etc. The creation of database consists of conceptual design, system analysis, project design, programming, testing and training. An international tender for hardware procurement will be made. 6. Institutional framework Ministry of Finance (8 officials) is responsible for development and enforcement of legislation in securities and insurance field. Securities Inspectorate (18 officials) and Insurance Inspectorate (22 officials) are at present under the governance of the Ministry of Finance. Managers of the project will organise training of the officials from the ministry and the inspectorates. IT project will be implemented by the Securities Inspectorate technical department. Bank of Estonia is responsible for drafting regulations for credit institutions and their supervision. The team of officials from the Ministry of Finance and the Bank of Estonia will form the Unified Financial Supervisory Authority and draft the legal framework, in the event of proposals for a unified financial supervisory authority being adopted by the working group and accepted by the government.

4 7. Budget: (MEUR) Investment Institution Building Total Phare (=I+IB) Recipient (National Budget) IFI TOTAL Institution Building Twinning and Training Package 0,90 0,90 0,020 0,920 IT System 0,60 0,60 0,035 0,635 TOTAL 0,60 0,90 1,50 0,055 1, Implementation arrangements Ministry of Finance will provide the necessary information, infrastructure and organization in order to carry out the measures agreed in the framework of the twinning. Further details will be agreed in contacts with performers of the work. The CFCU is the Implementing Agency responsible for tendering, contracting and accounting. Responsibility for the technical preparation, implementation and control will remain with the recipient institutions.to provide hard- and software for IT System Development project an open tender will be organized by the CFCU. The realisation of the project is entrusted to Mrs. Lelo Liive, Deputy Head of Department of Ownership Reform and Securities Market of the Ministry of Finance (Phone (372) ; In order to carry out the project Mrs. Liive will be assisted in the twinning component not only by all the civil servants in the department, but also by the following services: Securities Inspectorate under Mr. Marek Mägi (Phone (372) ; e- mail: legal Department of the Ministry of Finance, responsible for insurance regulations; Bank of Estonia, responsible for credit institutions regulations. Manager of IT System project is Ms. Ingrid Krieger, Head of Department in the Securities Inspectorate. (Phone: (372) , Mrs. Liive will report on the project`s progress to Mr. Veiko Tali, Head of Department of Ownership Reform and Securities Market of the Ministry of Finance (Phone (372) ; Mr Agu Lellep, Secretary General of the Ministry of Finance will supervise the necessary legal and statutory procedures on behalf of the government.

5 9. Implementation schedule Institution Building Start of twinning Start of project Completion process activity April, 1999 Sept, 1999 July, 2001 Start of tendering Start of Completion procurement IT System November, 1999 January, 1999 July, Environment: n/a 11. Rates of Return: n/a 12. Equal opportunity The IB project and IT system project will assure equal participation in project by women and men, taking account of the fact that at present over 60% of civil servants are women. Statistics to measure the participation of women and men might be done as a special survey. 13. Investment criteria IT system projects will support the supervision work of Inspectorate, improve the investment climate and trust towards Estonian financial market. The Securities Inspectorate, (later possibly the United Financial Supervisory Authority), will have a system giving an overall picture of the current situation, and the connections with other registers gives more efficient workflow. The system will be the basis for additional electronic systems in the future, connecting other financial institutions, including the aspects of statistics, competition decisions, etc. Estonia will be open and transparent for other countries investors. 14. Conditionality and sequencing The Phare support is based on the availability of the above-mentioned funding by the recipient, and subject to Government agreement to implement the UFSA strategies. In order to ensure the sustainability of the system, established on the basis of Phare support, Ministry of Finance will take necessary steps and appropriate measures. Ministry of Finance will take measures for staff development in order to fully benefit from the experience and results gained by the means of this Phare programme. Other applicant countries will be kept informed of progress on this project in order to assist them in their institutional reform of the capital markets.

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7 ANNEX 1 Date of Drafting January 26,, 1999 LOGFRAME PLANNING MATRIX FOR PROGRAMME Project N º ES 9904 Reinforcement of institutional and administrative capacity of the financial sector Wider Objective Indicators of Achievement* How, When and By Whom Indicators Will Be Measured Reinforcement and institutional Online connection of UFSA with A report by the Head of Supervisory Authority in development of regulatory, Tallinn Stock Exchange and Central Jan, 2001 to the Minister of Finance. supervisory, and surveillance capacity Depository; database includes Reports by twinning experts. of Ministry of Finance and unified information from other capital market financial supervisory authority registers Creation of a system to be used by Highly qualified staffing via extensive investment firms and other financial training and twinning programmes institutions for reporting to UFSA (inter alia, in fulfilment of ART. 20 of ISD) Immediate Objectives Indicators of Achievement* How, When and By Whom Indicators Will Be Measured Contracting period expires July, 2001 Total Budget (MEUR): 1,555 Assumptions and Risks Disbursement period expires July, 2002 Phare contribution (MEUR): 1,500 Changes in economic environment will not prejudice implementation Assumptions and Risks Establishing Unified Supervisory Authority; Educating persons responsible for implementing the strategy of consolidated supervisions; Training officials working in regulatory and supervisory bodies for raising their knowledge in economic field as well as corresponds to the Community requirements; Creating electronic database of market participants and potential insider trading. Supervisory Authority is established A team of 6 persons (team) have finished the project for forming a United Supervisory Authority; Officials are competent and have passed relevant evaluation; Database in Securities Inspectorate for Insiders and market participants. Report by the Minister of Finance in Dec., 2000 to the Prime Minister about establishment of the Authority. An examination by Commission for evaluating officials conformity by the end of 2000 An examination by Commission for evaluating officials conformity by the end of 2000 A report by the Head of Securities Inspectorate in Dec and Dec 2000 to the Minister of Finance about creating the IT System. Political commitment to follow short- and medium term priority to establish the unified Supervisory Authority

8 Outputs Indicators of Achievement* How, When and By Whom Indicators Will Be Measured More developed financial sector The role of foreign investor on market A report of the Minister of Finance to the has increased compared with today Parliament in Oct about the establishment Effective unified Supervisory Authority situation; of the Authority Properly trained officials in financial Financial industry is regularly A report of Prime Minister to Parliament in March sector supervised by one body; 2001 Electronic database of market All the officials have passed the An examination for evaluating officials conformity participants and day to day market evaluation A report by the Head of Supervisory Authority in monitoring system. Information database in the Jan 2001 to the Prime Minister Supervisory Authority Bills of hardware Inputs Indicators of Achievement* How, When and By Whom Indicators Will Be Measured Study materials, know-how Hard- and software 15 man /month external Short and medium term-expert (twinning) 18 man/month external Long termexpert (twinning) short term experts (for training) Study tours for the team responsible for unifying and for officials, 160 h training the team, 400 h training for officials in Ministry of Finance, 400 h training for officials in the Supervisory Authorities. 3 working places with personal computer linked to a server with a database. Server has online connection with Stock Exchange and Securities Register Statistics by the Department of Ownership Reform and Securities Market in the Feb and 2001 A report by the Head of Securities Inspectorate in Dec 1999 to the Minister of Finance and the Head of the Supervisory Authority in Jan 2001 to the Prime Minister Contracts Quarterly reports of experts Assumptions and Risks Trained people stay on their positions. High turnover of personel. The willingness of different institutions to collaborate. Assumptions and Risks Connection with other registers- fitness of software, changes in their software, Highly professional level experts might not be able to stay as a long term specialist.

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10 IMPLEMENTATION CHART - ES 9904 ANNEX 3 REINFORCEMENT OF INSTITUTIONAL AND ADMINISTRATIVE CAPACITY OF THE FINANCIAL SECTOR Component Institution Building Target group 3 (UFSA team) Target group 1 (Ministry of Finance) Target group 2 (Securities and Insurance Inspectorates) Investment/ Equipment Tendering J F M A M J J A S O N D J F M A M J J A S O N D J F x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x Procurement x Completion of conceptual design (already in progress by MoF) x x System analysis x x x x x x Project design x x x x x x x Programming of IT Systems x x x x x x x x Testing x x x x x x x x x Installation, system- training x x x x x

11 Annex 4a Cumulative contracting schedule Reinforcement of institutional and administrative capacity of the financial sector ES 9904 Sub- Programmes Projects Cumulative Commitment Schedule (Quarters; in MEUR)) III IV I PLANNED II III IV I II TOTAL MEUR TRAINING/TWINNING 0,900 0,900 0,900 0,900 0,900 0,900 0,900 0,900 0,900 IT EQUIPMENT TOTAL 0,900 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500

12 Annex 4b Cumulative disbursment schedule Reinforcement of institutional and administrative capacity of the financial sector ES 9904 Sub- Programmes Projects Cumulative Disbursement Schedule (Quarters; in MEUR)) IV I II PLANNED III IV I II III IV I II TOTAL MEUR TRAINING/TWINNING 0,290 0,460 0,800 0,860 0,900 0,900 0,900 0,900 0,900 0,900 0,900 IT EQUIPMENT TOTAL 0,290 1,060 1,200 1,400 1,460 1,500 1,500 1,500 1,500 1,500 1,500 1,500

13 ANNEX 5 Relation of the project with previous Phare activities and with ongoing projects financed from other sources ES 9904 REINFORCEMENT OF INSTITUTIONAL AND ADMINISTRATIVE CAPACITY OF THE FINANCIAL SECTOR No previous projects for financial industry covering the issues of this project have been financed earlier by Phare. Co-operation with Denmark in drafting the regulations in securities field has been going on from 1997 (financed by Denmark) and was recently prolonged till March It includes one long-term expert from Denmark, who gives advise to the Department of Ownership Reform and Securities Market of the Ministry of Finance and also to the Securities Inspectorate. Also persons responsible with the unifying supervisory authorities have visited and established contacts with the institutions in Denmark. From Federal Republic of Germany was carrying out in the Ministry of Finance of Estonia a co-operation and assistance projects. Responsible organisation in Germany was the Development Fund for Stock Exchanges and Financial markets in Central and Eastern Europe. Main components of the project were counselling in the area of securities legislation and developing of infrastructure of the Estonian securities market (Central depository, stock exchange, securities supervision). Estonia has in order to fulfil the NPAA in July, 1998 established a committee of experts from the Ministry of Finance and Bank of Estonia for creating a unified Supervisory Authority. The task of the committee is to present the Government proposals and timetable by the end of 1998.

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15 ANNEX 6 Feasibility studies of the investment project ES 99xx REINFORCEMENT OF INSTITUTIONAL AND ADMINISTRATIVE CAPACITY OF FINANCE INDUSTRY The Securities Inspectorate has made preparations to start IT System Development Project. In 1998 they expect to map overall needs, learn about other countries experience, the technical possibilities, used systems, etc. As the IT System Development project is planned to be covering connection with other different databases and is designed to be monitoring every day market it must very flexible to the possible changes. Without this project it is impossible to detect insider dealing or price manipulation. Due to the project it will be possible to supervise the market so that the EU requirements are followed.

16 ANNEX 7 List of relevant Laws and Regulations ES 99xx REINFORCEMENT OF INSTITUTIONAL AND ADMINISTRATIVE CAPACITY OF FINANCE INDUSTRY EU Regulation 77/780/EEC First Council Directive on co-ordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions 89/299/EEC Council Directive on the own funds of credit institutions 89/647/EEC Council Directive on the solvency ratio for credit institutions 94/19/EC Directive of the European Parliament and of the Council on deposit guarantee schemes 89/646/EEC Second Council directive on co-ordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions 86/635/EEC Council Directive on the annual accounts and consolidated accounts of banks and other financial institutions 93/6/EEC Council Directive on the capital adequacy of investment firms and credit institutions 92/121/EEC Council Directive on monitoring and control of large exposures of credit institutions 92/30/EEC Council Directive on the supervision of credit institutions on a consolidated bases 77/534 EEC Commission Recommendation concerning a European code of conduct relating to transactions in transferable securities 79/279/EEC Council Directive coordinating conditions for admission of securities to official stock exchange listing 80/390/EEC, 87/345/EEC, 90/211/EEC, 94/18/EC Directive coordinating the requirements for the drawing up, scrutiny and distribution of the listing particulars to be published for the admission of securities to official stock exchange listing 82/121/EEC Council Directive on information to be published on a regular basis by companies the shares of which have been admitted to official stock- exchange listing 88/627/EEC on the information to be published when a major holding in a listed company is acquired or disposed of 89/298/EEC Council Directive co-ordinating the requirements for the drawing up, scrutiny and distribution of the prospectus to be published when transferable securities are offered to the public 89/592/EEC coordinating regulations on insider dealing Estonian regulation Law on credit institutions Draft of new law on credit institutions + Law on Deposit Guarantee + Draft of new law on securities market Draft of new law on securities market +Listing rules of the Tallinn Stock Exchange +Law on Securities Market

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18 93/22/ EEC, 95/26/EEC Council Directive on investment services in the securities field 73/239/EEC, 92/49/EEC, 76/580/EEC, 84/641/EEC, 88/357/EEC, 90/618/EEC Council Directives on the co-ordination of laws, regulations and pursuit of the business of direct insurance other than life assurance 79/267/EEC, 92/96/EEC, 90/619/EEC Council Directives on the coordination of laws, regulations and pursuit of the business of direct life insurance 91/674/ EEC Council Directive on annual accounts and consolidated accounts of insurance undertakings 91/1534/EEC Commission Regulation on transfer of insurance portfolio 64/225/Eec Council Directive on the abolition of restrictions on freedom of establishment and freedom to provide services in respect of reinsurance and retrocession 72/166/EEC, 72/430/EEC, 84/5/EEC, 90/232/EEC, 91/323/EEC Council Directives on the approximation of the laws of Member States relating to insurance against civil liability in respect of the use of motor vehicles and to the enforcement of the obligation to insure against such liability 73/240/EEC Council Directive abolishing restrictions on freedom of establishment in the business of direct insurance other than life insurance 74/165/EEC Commission Recommendation concerning the application of the Council Directive 72/430/EEC 77/92/EEC Council Directive on measures to facilitate the effective exercise of freedom of establishment and freedom to provide services in respect of the activities of insurance agents and brokers and in particular, transitional measures in respect of those activities 78/473/EEC Council Directive on the coordination of laws, regulations and administrative provisions relating to Community coinsurance 81/ 76/EEC Commission Recommendations on accelerated settlement of claims under insurance against civil liability in respect of the use of motor vehicles 87/344/EEC Council Directive on the coordination of laws, regulations and administrative provisions relating to legal expenses insurance +Draft of the new Insurance Act Insurance act Draft of the new Insurance Act

19 Reference to relevant Government strategic plans and studies ANNEX 8 ES 99xx REINFORCEMENT OF INSTITUTIONAL AND ADMINISTRATIVE CAPACITY OF FINANCE INDUSTRY Relevant Government plans are given in National Programme for the adoption of the Acquis. In the part Economic policy it is overseen that the achievement of short- and medium term priorities is contingent on reliable financial sector and effective consolidated supervision over the financial sector. Part 3.4 Free movement of services sub-part Securities market, investment funds concentrates on the need for training, technical assistance and discussion about establishing a common financial supervisory institution. In part 12.3 Administrative capacity of regulatory and supervisory bodies in various fields as a short term task improvement in banking, securities and insurance supervisions is expected, also implementation of consolidated supervision. Attention should be paid on training. Estonia has passed over to the Delegation of the European Commission in Sept 1998 a report of the progress of Estonia in the area of accession to the European Union. In the report it is mentioned that in July 1998 a committee of experts was established for creating a UFSA. Estonian Government regulation No. 464-k from June 11, 1997 Government main fields activities for 1997 and 1998 foresees the establishment of UFSA on the base of banking-, insurance and securities field. The decision of the Council of the Bank of Estonia from April 7, 1998 endorses the establishment of UFSA.

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