17 June 2014

Rules on Foreign Exchange amended to mitigate the effects of halting unauthorised saving abroad

For some time, the Central Bank of Iceland has been investigating whether the insurance contracts offered for sale in Iceland by foreign insurance companies are in compliance with the Foreign Exchange Act and the Rules on Foreign Exchange. The Bank’s investigation has revealed that various types of such contracts provide for unauthorised saving or accumulation of capital abroad. Such contracts affect a large number of resident individuals, and the transactions and capital outflows deriving from them have increased markedly since the capital controls were introduced. In order to protect the interests of these individuals and enable them to maintain their contractual relationships on the basis of amended terms and conditions, the Bank will issue amended Rules on Foreign Exchange. The Rules will be published in the Law and Ministerial Gazette tomorrow and will take effect the following day, 19 June 2014. The Rules provide foreign insurance companies with investment authorisations consistent with those of resident entities.

According to the Foreign Exchange Act, which entered into force on 28 November 2008, the capital controls do not restrict trade with goods and services. Payment of premiums in accordance with insurance contracts – such as life insurance, medical insurance, or accident insurance – is considered the purchase of a service and is therefore permissible under the Foreign Exchange Act. On the other hand, the capital controls restrict payments deriving from contracts entailing saving or accumulation of capital abroad, irrespective of what such saving or accumulation of capital may be called, unless the contracts were concluded before the capital controls were introduced. However, the boundaries between the two are not always obvious, such as when the same contractual agreement provides for both insurance and saving. This, and the Bank’s conviction that it was necessary that the Bank, other Icelandic authorities, and the International Monetary Fund (IMF) should understand these boundaries in the same way, is why no action has been taken in this matter until now.

The Central Bank has attempted to minimise the potential inconvenience for the many individuals who have concluded such agreements with foreign insurance companies, should the capital transfers for their saving contracts be stopped. The amended Rules on Foreign Exchange were prepared with the objective of enabling individuals to maintain their contractual relationships with foreign insurers instead of stopping their payments. This implies that the contracts must be in Icelandic krónur and the saving or accumulation of capital must take place in Iceland. A four-month adaptation period will be granted so as to give service providers the scope to adapt their arrangements for payment of premiums to the Icelandic regulatory environment. During that period, rights holders may fulfil foreign-denominated contracts concluded prior to the effective date of the Rules, while appropriate amendments to the terms and conditions of the contracts are in preparation.

The Central Bank stresses that the insurance companies concerned must make the appropriate amendments to contracts entailing unauthorised saving or accumulation of capital abroad as soon as possible. It should not be necessary for individuals to take any action at this time, but they can contact the service provider for their foreign insurance company for further information. No investigations will be carried out on individuals who have concluded savings contracts with foreign insurance companies, nor will these individuals be required to redeem the principal of such contracts.
It is important that all parties to this matter work together to minimise the negative impact on individuals, so that their contractual relationships can be maintained, but in compliance with the Foreign Exchange Act and the Rules on Foreign Exchange.

In addition to the above-mentioned amendments, the Rules affect non-residents’ authorisations to sell financial instruments issued in domestic currency and real estate in Iceland. Other amendments primarily entail changes to the wording of the Rules, so as to ensure consistency in their interpretation.

The English version of the Rules on Foreign Exchange will be published here on 19 June 2014. As is stated above, they will take effect on that date.

Further information can be obtained from Már Guðmundsson, Governor of the Central Bank, at tel: +354 569-9600.

No. 20/2014
17 June 2014