7 Recommendations for a Novice Market Participant in the Estonian Financial Sector

02.01.2023 7 Recommendations for a Novice Market Participant in the Estonian Financial Sector

Olger Kaelep, attorney-at-law at Law Firm TGS Baltic, has extensive experience in advising businesses operating or just starting their journey in the financial sector. In this article, he shares recommendations on how to take a start-up from a business idea to an activity license.

In the second half of last year, gloomy clouds gathered over the global economy and unfortunately remain there also in the new year. Among others, local businesses active in financing and adjacent services are also suffering from this bad weather. As if that were not enough, the regulatory network supporting the financial sector is constantly tightening, with more and more new market participants becoming tangled in it. For example, several thus far unregulated crowdfunding service providers are currently applying for authorisation from the Estonian Financial Supervision Authority. Soon, companies that provide debt collection services or whose business consists of acquiring credit claims may face the same prospect.


If the above causes anxiety in the reader, one can seek solace in the timeless advice of the English philosopher and statesman Francis Bacon: “It were better to meet some dangers half way, though they come nothing near, than to keep too long a watch upon their approaches; for if a man watch too long, it is odds he will fall asleep”. In the same spirit, I will give some tried-and-tested tips to make life easier for market participants just starting their journey.


  1. Start with a business plan – you will also need it later

Everything always starts with a good idea, but ideas are a bit like the Schrödinger’s cat we may remember from physics class – they cannot be considered to truly exist in the world until expressed to someone else. The best expression of a business idea is a business plan. A good business plan is especially valuable to those who want to operate in the financial sector because it usually has to be included with the license application and is one of the primary sources of information about the company, its “face”. Preparing a business plan should not be left to the last moment before submitting the license application or treated as a tedious formality. A clear and well-thought-out business plan brings many benefits, helping the founder to first gather their thoughts and later express them to others.


  1. Know your board members and key employees

Certainly one of the more underestimated prerequisites for operating in the field of finance is the composition of management bodies and the recruitment of key employees. If at a “normal” start-up new people can come on board at the same pace as the company develops and its needs grow, the situation is almost the opposite for entities subject to financial supervision. The “fit and proper” assessment process of the Financial Supervision Authority is based on the principle that members of management bodies and other holders of key competencies must from the start collectively have sufficient knowledge, skills and local experience to understand and manage the activities of an Estonian market participant. Already in the initial phase, founders must be able to name specific people who no later than upon obtaining the license will take on the roles of managers or employees responsible for critical areas.


  1. Know your service and document it thoroughly

Any financial service is intrinsically intertwined with the IT solution developed to provide the service. Therefore, the details of how the service works should be documented at the same time and with the same thoroughness as the software, online platform, and information system by which the service reaches the customer. During authorisation proceedings, the Financial Supervision Authority may also ask for explanations about nuances that may seem non-essential at first glance. Having detailed documentation and process descriptions prepared concurrently with actually developing the service will come in such cases. Otherwise, these would have to be created in retrospect and in a hurry, which would mean spending additional time and effort at the most unsuitable time.


  1. Involve specialists early, not at the last minute

The preparation and start-up of financial sector service usually require the contribution of specialists from several different fields, including financial accounting and reporting, risk management, law, compliance review, and internal audit. In some cases, it is practical or even mandatory to enter into a longer-term employment or service contract with such persons. Sometimes it is enough to purchase the service on an ad hoc basis or to occasionally consult an external adviser to solve more complex issues. In any case, this should be done in the earliest stage of the project or specific work section, and not when the first problems and shortcomings have already surfaced. Or even worse – upon receiving the first negative feedback from the Financial Supervision Authority. Mistakes made due to lack of expertise or overlooked issues can be fundamental enough to change the direction of the entire project or terminate it altogether.


  1. Prepare internal rules for people, not officials

In authorisation proceedings, no activity seems more bureaucratic than the preparation of internal rules. The number of mandatory internal regulations and procedures can go into double figures, depending on the field of activity. However, it is not worth taking the easy way out and filling these documents with dry and bureaucratic text, trying to please the officials. It is smarter to take the time to describe the internal processes and chains of responsibility and command in the company in as simple and reader-friendly way as possible. Ideally, the result could be something like a set of manuals, which would be of practical use to the management board members and employees of the market participant, but would also satisfy the demanding gaze of the Financial Supervision Authority. If time is scarce, it is worthwhile to engage external legal advisers with knowledge of the sector. However, the management and key employees must also constantly participate and contribute if something valuable is to be created.


  1. Once the application is filed, be patient

Finally, the day has arrived when the application for an activity license or registration along with a huge package of attached documents is handed over to the Financial Supervision Authority. Founders now often expect that the processing of the application will not last longer than a few weeks, at most a month, and that the Authority will only have a few questions and specifications for the applicant. As a rule, such expectations are very far from reality. It is common for the applicant to be on the receiving end of hundreds of questions or to make dozens of corrections and additions to the documents during the proceedings. The whole process can take months, in some cases even up to a year. Nevertheless, the best tactic for a prospective market participant is to always be transparent, cooperative, and patient, and to treat each question answered and shortcoming addressed as one step closer to a positive decision.


  1. After successful proceedings, prepare for daily routines

Even after the long-awaited letter from the Financial Supervision Authority regarding the issuance of an activity license or entry of a registration, the brand new financial supervision subject cannot rest on its hard-earned laurels. Instead, it must map out all the regular obligations associated with its new status, including submitting reports and other information to the authorities, and determine the persons responsible for fulfilling these obligations within the company. For example, the obligation to inform the Financial Supervision Authority every time changes are made to the service itself or to the internal rules is too often overlooked or postponed. The supervisory authority should not certainly be seen as a danger, but it is still better to meet them at least halfway than to wait too long.