Practicalities of the liquidation of Asset Management Company Arsenal Ltd

Opinions of the National Audit Office

Asset Management Company Arsenal Ltd (Arsenal) was founded in connection with the 1990’s bank crisis to manage bad loans and other credit and sell real estate and other assets. Public support measures to banks aimed to revitalise the Finnish banking system.

Arsenal is a company entirely owned by the State. The Ministry of Finance is in charge of Arsenal’s ownership steering.

Arsenal’s operations were intended to be temporary to begin with, and the company was put into liquidation in October 2003. The company has operated for a total of just over 21 years. During the liquidation, the company’s main task has been to recover remaining outstanding accounts, manage trials, dismantle archives, realise assets and shut down subsidiaries of the group.

Two central principles have guided the company’s operations – minimal burden on the public economy and a clarifying objective (or clarifying interest). The audit focused on whether Arsenal has considered minimising costs to the public economy and its clarifying objective and appropriately incorporated them into Arsenal’s operations during the liquidation. In addition, the audit examined whether Arsenal has been able to produce results in the liquidation, considering its operating environment and changes therein over time.

The audit also has a developmental aspect with a focus on the future. Based on the audit findings, operating principles have been developed that should be observed in such a company’s operations.

The clarifying objective and public economic interest have not been reconciled in an inappropriate manner during Arsenal’s liquidation

One of Arsenal’s objectives has been minimising State losses. Another central principle that has steered its operations has been the clarifying objective, which may allow for the review of unclarities in a debtor’s operations to be prioritised over economic objectives.

In examining the significance of the clarifying objective, one must also pay attention to factors whose evaluation from an economic standpoint may not be possible or may be difficult. Settling unclarities can be justified based on monitoring legality, for example. On the other hand, debt collection based on the clarifying objective has yielded results from an economic perspective during the liquidation. Therefore, Arsenal has not neglected economic objectives in its debt collection. It cannot be stated, based on the audit findings, that economic objectives and the clarifying objective have been inappropriately reconciled in Arsenal’s operations.

Ownership steering should be active at the end of the operations of an asset management company

Before and at the beginning of the liquidation, the company’s steering and supervision structure was appropriately stripped down. The Ministry of Finance has been the main steering body for the duration of the liquidation. Communication between the Ministry representative and Company administration has been in line with ownership steering guidelines.

However, based on audit findings, some passivity was detected in the ownership steering of the asset management company, and the owner has not necessarily been aware of all facts concerning the company’s operations and operating environment relevant from the perspective of ownership steering. One might indeed say that communication between the company’s management and owner has not been altogether in balance. From the perspective of ownership steering, the company’s operations have seemed so established that there has not been much discussion on operating principles. In terms of Arsenal’s risk management and ownership steering, the company’s internal personnel dependency and lack of documented information can be considered problematic.

Based on audit findings, Arsenal has had solid financial resources at its disposal in relation to the scope of its operations. As the liquidation has progressed, the company’s functions have been mainly limited to trials and the management of bankruptcy estates for which Arsenal has assumed responsibility in terms of costs. The number of such estates in 2014 was only approximately one tenth of the number at the beginning of the liquidation. Similarly, the number of pending trials in 2014 was approximately one fifth, and the number of related economic interests approximately one tenth of the respective figures at the beginning of the liquidation. Based on audit findings, the Ministry of Finance should examine the possibility of stripping down the company’s operative resources as its operations continue to wind down.

The audit also involved a risk review concerning the use of services of a company associated with a member of Arsenal’s management (in this case the liquidator). Based on audit findings, one cannot regard the individual in question as disqualified. However, such risks related to conflicts of interest should be considered in advance in the future.

Lessons learned from Arsenal should be utilised in establishing a potential new asset management company

Certain operating principles were developed in the audit, which should be considered in the operations of an asset management company. Based on audit findings, the contents of the principle of clarification were established. The audit also examined how changes in the company’s operating environment have affected the implementation of this principle. In addition, based on the audit findings, principles closely related to good governance requirements have been developed, which should be considered in the company administration. The audit also specified and clarified the concepts of the clarifying objective and good governance on a more general level.

Due to the application of the clarifying objective, Arsenal has committed to long-term, demanding trial and debt collection processes. The company has continued operating much longer than estimated in the early 1990’s. The poor predictability of the lifespan of an asset management company’s operations can be seen as a regulatory risk and, at the same time, as a risk related to the assessment of crisis management means. It is difficult to predict the operating lifespan and required resources of such a company.

If asset management companies are used as a crisis management instrument in the future, the audit findings indicate that public receivership should also be considered as an alternative to clarifications carried out by an asset management company. In the new Act on Resolution of Credit Institutions and Investment Firms (1194/2014, hereinafter also referred to as the Resolution Act), asset management companies are mentioned as one resolution instrument. Therefore, asset management companies will continue to be a tool in managing extensive, systemic bank crises. The operating principles developed based on the audit findings can be utilised in future development of practices and administrative structures of asset management companies used in crisis management.

Recommendations of the National Audit Office

1. The Ministry of Finance should examine the possibility of stripping down the asset management company’s operative resources as its operations continue to wind down.

2. If asset management companies are used as a crisis management instrument in the future, the following facts should also be considered:

• The management of an asset management company should explore means to reduce the lifespan of the company. One such means could be transferring the investigation of unclarities in a debtor’s operations to public receivership.

• One should also further consider what kind of debtors’ operations are intervened in based on the clarifying objective on a more general level.

• Good governance requirements should already be considered in planning the operations of an asset management company, and drafting public corporate governance guidelines related to asset management companies should be discussed.