What you need to know about financial services licences in Estonia
The global financial services industry is in a state of rapid expansion. International trade alliances, an explosion of growth in online transactions, the development of digital currencies, and other innovations have fueled demand for more and more advanced financial services. As the world’s leading digital society, Estonia is playing a major role in that expansion.
Estonian companies have access to the EU single market and the country is well-known for its limited bureaucracy and business-friendly tax policies. These characteristics make Estonia an ideal jurisdiction for incorporating a financial services business. However, before you decide to form a financial services-related company in Estonia, you should determine whether your business activities require licencing and which financial services licences you need.
The following article details several of the financial services-related activities that require licencing in Estonia and the steps you’ll need to take to obtain a financial services licence for your business.
Your guide to applying for financial services licences in Estonia
Estonia’s financial laws encourage growth and innovation while preventing money laundering, fraud, terrorist funding, and other financial crimes. These laws require that companies engaging in financial services-related businesses obtain a licence. Failing to obtain the necessary financial services licences can put your company at risk for fines and other sanctions.
However, not every type of finance-related activity requires licencing in Estonia and the country requires different types of licences for different types of financial service businesses. For these reasons, you should consult with advisors who are familiar with Estonian law and the agencies that oversee its financial services regulations before finalizing your business plan.
In some instances, you may need to adjust your strategy to meet the applicable licencing requirements. Getting advice early in your planning process can help you avoid costly mistakes.
Where to apply for financial services licences in Estonia
Two separate agencies, The Financial Intelligence Unit (FIU) and the Financial Supervision and Resolution Authority (FSA), are responsible for overseeing licencing and for financial services in Estonia. Each of these agencies supervises different segments of the financial services industry within Estonia in coordination with other authorities.
The FIU, a subdivision of the Estonian Police and Border Guard Board (PBGB), issues financial services licences for various financial services-related businesses and is tasked with detecting and preventing money laundering and terrorist financing.
The FSA, an autonomous agency that acts in coordination with the European Single Supervisory Mechanism (SMM), is responsible for overseeing and authorizing specified financial institutions. Financial service businesses or financial institutions that do not fall under the FSA’s jurisdiction are supervised and will obtain their financial services licences from the FIU.
What types of businesses must obtain financial services licences
The FIU and FSA each enumerate several types of businesses that must obtain financial services licences before operating in Estonia.
In particular, businesses that will obtain their licence from the FIU include trust or company service providers, pawnbrokers, virtual currency exchanges*precious metals, precious metal articles and precious stone traders, and financial institutions not licensed or required to be licensed by the FSA or the FSA of another state within the European Economic Area.
Businesses that must obtain a licence through the FSA include banks, insurance companies, insurance intermediaries, investment firms, fund managers, investment and pension funds, payment institutions, e-money institutions, creditors and creditor intermediaries, and securities markets.
In our experience, entrepreneurs seeking to incorporate investment firms, payment and e-money institutions, and credit-based businesses are particularly drawn to Estonia.
In addition to the defined business types, both the FIU and FSA require licencing of financial institutions. However, determining whether your business is a financial institution and which of the two agencies is responsible for its supervision can become complicated. Estonia’s Money Laundering and Terrorist Financing Prevention Act and its Credit Institutions Act each include a definition of “financial institutions.”
If, after reviewing the list of business types that require licencing, you realize that your business is among them, your next step will be to identify where and how to file your authorization application. But you don’t have to go through this process alone. We’re happy to help you evaluate your business’s status and prepare the necessary filings to obtain your Estonian financial services licence.
What types of businesses does Estonia categorize as financial institutions
Section 6(2) of the MLTFPA lists the types of organizations that Estonia considers to be financial institutions for the purposes of enforcing its anti-money laundering and financial services licencing laws.
That list includes the following business types:
- foreign exchange service providers
- payment services providers (as defined by the Payment Institutions and E-money Institutions Act) excluding payment initiation service provider and account information service providers
- e-money institutions (as defined by the Payment Institutions and E-money Institutions Act)
- insurance undertakings (as defined by the Insurance Activities Act) for services related to life insurance excluding services related to mandatory funded pension insurance contracts (as defined by the Funded Pensions Act)
- insurance brokers (as defined by the Insurance Activities Act) engaged in the marketing of life insurance or providing other instrument-related services
- management companies, excluding those that manage mandatory pension funds
- investment funds founded as public limited companies (as defined by the Investment Funds Act)
- investment firms (as defined by the Securities Market Act)
- creditors or credit intermediaries (as defined by the Creditors and Credit Intermediaries Act)
- savings and loan associations (as defined by the Savings and Loan Associations Act)
- central contact points serving e-money institutions or payment service providers
- any other financial institution (as defined by the Credit Institutions Act)
- any branch of a foreign service provider that is of a type defined by Section 6(2)
But, as you can see, determining whether your business model isn’t just a matter of reviewing Section 6(2) of the MLTFPA. Within that list are references to several other Estonian laws including the Creditor and Creditor Intermediaries Act, the Insurance Activities Act, and the Payment Institutions and E-money Institutions Act.
Of particular significance is the section’s reference to the Credit Institutions Act which contains a separate list of business types that are financial institutions. This list must also be considered by businesses evaluating their obligation to obtain financial services licences in Estonia.
The Credit Institutions Act provides that any company that is not a credit institution, but is principally and permanently engaged in one or more of the following activities is a financial institution:
- acquiring holdings
- operating a borrowing or lending service such as offering consumer credit, factoring or similar financing
- providing payment services (as defined by the Payment Institutions and E-money Institutions Act)
- issuing or administering non-cash payment e-money, traveler’s cheques, bills of exchange or electronic payment instruments
- guaranteeing or otherwise creating binding future obligations
- securities trading on behalf of the organization or clients
- issuing or selling securities
- advising clients on economic activities or transactions or acts related to business mergers or divisions
- money brokering
- investment consulting or portfolio management
- holding or administering securities
Once you’ve determined your business’s category, you can begin the application process. In the next sections, we describe how to apply for some of the most commonly sought-after financial services licences in Estonia.
Guidelines for applying for financial services licences through the FIU
Financial services licencing is required when a company operating in Estonia provides financial services to third parties as its principal and permanent activity. Businesses for which the provision of financial services is casual or ancillary to its primary purpose not required to obtain a licence.
How can you determine whether your financial service activities are principal to your business and require licencing
Estonian courts have ruled that a company’s main area of activity should be determined by looking at how the company presents itself in internal and external communications. Proof of primary purpose may be found in the company’s annual report, its website, and the description and advertising of the company’s service portfolio.
Documents referencing the company’s future plans and strategies, its use of resources, and the percentage of total revenue derived from the provision of financial services will be taken into account when determining whether a company is offering financial services in Estonia.
Because future plans are considered when determining a business’s status, you should acquire a licence before engaging in extensive financial services even if this has not been your company’s primary activity in the past. Further, if you have any doubts about your company’s status, we recommend that you file for an application. Our team of experts can help you complete the process.
What is required to apply for an FIU-issued financial services licence?
Companies that plan to provide financial services as a permanent and main activity are expected to meet a high standard of diligence and maintain their fiduciary obligations. These high standards preserve the stability of Estonia’s financial system, reduce risk, and prevent abuse.
Companies providing financial services must demonstrate in their application that they have implemented internal controls and codes of conduct that will prevent fraud and errors.
This requirement ensures that sufficient internal procedural and control rules are in place prior to commencing financial services operations. The lack of appropriate rules increases the risks of money laundering and terrorism financing.
Also, parties seeking a financial services licence should not have a conviction for anti-governmental activities, money laundering, or other intentionally committed crimes. Before issuing a licence, the FIU will confirm that the company and none of its shareholders and management board members, procurators, or ultimate beneficial owners have a disqualifying criminal record.
In addition, the FIU thoroughly assesses if the contact person appointed by the company complies with the requirements set forth in the MLTFPA.
Applications for authorization to operate as a financial institution must be submitted through the web portal of the Register of Economic Activities or an Estonian notary. The one-time state fee for the application for the authorization to operate as a financial institution is EUR 3,300 and this fee is exempt from VAT.
Once an application is received, the FIU will usually decide whether or not to grant the licence within 60 working days. However, the agency may extend this period to up to 120 days. If the authorization is granted, it will be granted for an unlimited term without the need to pay recurring fees for maintaining the authorization.
Guidelines for applying for financial services licences through the FSA
The FSA has jurisdiction over several different types of financial institutions, mostly in the investment, securities, and credit verticals. Among the types of businesses that must obtain financial services licences from the FSA before engaging in operations in Estonia, investment firms, payment and e-money institutions, fund managers, and creditors or creditor intermediaries have proven to be the most popular among our clients.
In the following sections, you’ll find details about the application process for each of these entities.
Obtaining a licence for your Estonian investment firm
An investment firm, or aktsiaselts (AS) in Estonian, is a public limited company whose permanent activity is the provision of one or more investment services to third parties or the performance of one or more investment activities on a professional basis. If your business engages in any of these activities, it must apply for authorization from the FSA.
Section 43 of the nation’s Securities Markets Act defines “investment activities” as any of the following:
- receiving and transmitting of orders related to securities
- executing orders related to securities in the name of or for the account of a client
- dealing in securities for an owned account
- providing securities portfolio management
- providing investment advice
- guaranteeing securities or guaranteeing the offer, issue or sale of securities
- organizing securities offerings or issuances
- operating a multilateral trading facility
- operating an organized trading facility
To apply for an activity licence, an application must be submitted to the FSA. In most instances, the FSA will issue a decision of whether to grant or deny the application within two months of receipt of all the required application materials. However, the agency may extend this deadline for up to six months.
You should be aware of the following limitations before filing for a licence to operate an investment firm in Estonia. Authorizations for investment firms granted by the FSA are not transferable. Your company cannot obtain a licence and then transfer it to another business. Additionally, the FSA may withdraw a business’s authorization if that business fails to meet its regulatory obligations.
Also, when applying for your licence you must specify the investment-related activities your business will perform. Your business may apply for one licence which covers all of its investment service-related activities or separate financial services licences for each planned activity. To add services after your initial authorization has been granted, your business can apply for supplemental licences.
Estonia charges a one-time fee of EUR 1,000 to process investment firm licencing applications. Businesses that file applications to add services or activities must pay a fee of EUR 500. The documents and other information required from applicants may be found on the FSA website’s Applying for an operating licence page and include the organization’s founding documents, a list of shareholders, income and expense statements, and other relevant data.
At first glance, these filing requirements may appear intimidating. However, the team at Incorporate has the expertise to help you assemble the necessary data and prepare your application with minimal hassles.
Obtaining a licence for your Estonian payment services or e-money institution
While the licencing process and requested documents are fundamentally the same for both payment institution licence and e-money institution licence, the licences for these types of businesses are not interchangeable.
E-money institutions may provide payment services in addition to issuing e-money. But, a financial services licence for payment services does not authorize the holder to engage in activities related to e-money. Thus, if your organization plans to issue e-money and offer other financial services, you must obtain separate financial services licences.
What is a payment institution?
The official definition of a payment institution is a company that provides payment services as its primary and permanent activity. Payment institutions specialize in one activity – the execution of payments. Any other activities or services the payment institution engages in must be connected to this primary purpose.
Along with the FSA, the Payment Institutions and E-money Institutions Act (referred to in Estonian as the Makseasutuste ja e-raha asutuste seadus or MERAS) regulates payment services and e-money services in Estonia. In Section 3 of the MERAS, you’ll find the definition of payment services and payment service providers.
According to Estonian law, any business or person engaging in the following services for economic or professional purposes is a payment service provider:
- enabling persons to make cash payments to payment accounts
- enabling persons to withdraw cash from payment accounts
- executing payment transactions, including transfers of funds to a payment account
- executing payment transactions when funds have been granted as a loan to the client of the payment institution
- issuing or acquiring payment means, means of payment or payment instruments
- acting as an intermediary for the execution of payment transactions authorized by the payer and executed via telecommunications, digital, or information technology (e.g., ecommerce or similar digital transactions)
Similar to investment firms, each separate service that the payment institution wishes to provide for its customers requires a licence from the FSA.
Most of the payment institutions licensed in Estonia hold financial services licences for money transfer or remittance activities. These services permit a payer to give cash to the payment service provider which is then sent to a designated payee or that payee’s payment service provider via the internet or another communications network.
The use of these services enables individuals and businesses to transfer funds without opening a payment account.
How do payment services differ from banks?
Payment institutions may solely engage in payment processing and related activities. Unlike traditional banks, they cannot accept and hold deposits from the public. Payment institutions do not profit from deposits or savings but rather from facilitating payment transactions.
This independence from relying on interest rate fluctuations and other administrative obligations enables payment institutions to respond quickly to market demand for cash transfer and related services.
As a business, holding a payment services licence that permits this type of transfer can give you a marked advantage. With this licence, you can transmit payments on behalf of your clients without them having to open a separate payment account with a traditional bank.
A 2019 report on the sector published by the FSA notes that interest in obtaining the payment institution licence has increased. New companies are applying for licences to enter the field and existing companies are adding licences as they add supplementary services to their portfolios.
What are e-money institutions?
In Estonia, e-money institutions may operate as public or private limited companies (osaühing or OÜ in Estonian). These institutions’ primary and permanent activity is the issuance of e-money.
The MERAS defines e-money as any monetary value stored on an electronic medium which expresses a monetary claim against the issuer and is issued at par value of the amount of the monetary payment received, used as a payment instrument to execute payment transactions, and accepted as a payment instrument by at least one other person besides the issuer of the e-money.
If you aren’t sure whether your organization should obtain an e-money licence, we can help. We can assess your planned activities and identify if what you are doing or intend to do can be considered as the issuance of e-money or not.
Requirements when applying for a payment institution or e-money institution licence
The required minimum share or initial capital investment for organizations that wish to operate a payment institution in Estonia ranges from EUR 20,000 to EUR 125,000, depending on the company’s planned services.
For e-money institutions, Estonia requires an initial capitalization or share of EUR 350,000. Additionally, applicants must pay a one-time fee of EUR 1,000 for an initial licencing application and EUR 500 for any supplemental licences for which they apply.
Decisions regarding an application are usually made within three months following the receipt of all required information. However, the FSA may delay a decision by up to six months following the submission of an application. Licences are issued without a term and are non-transferable.
What does the future look like for payment and e-money institutions in Estonia?
So far, the FSA has issued only one e-money institution licence to an Estonian company. We believe that situation is likely to change soon. We anticipate that more e-money licences will be applied for and issued in Estonia since the nation recently updated its laws regarding e-money.
Obtaining a payment institution or e-money licence in Estonia is particularly attractive because of Estonia’s business-friendly environment and its membership in the EU. Estonian financial services licences enable their holders to provide the licensed services in all other EU member states.
Obtaining a licence to operate as a fund manager in Estonia
The Investment Fund Act (IFA) defines fund managers as any company which manages one or more funds as its main and permanent activity. Financial services licences for small alternate fund management are among those our clients frequently seek to hold. The IFA refers to these small alternative fund managers as “small fund managers” and defines them in Section 6 of the IFA.
A company may be considered a small fund manager if it directly or indirectly manages alternative funds if it meets either of the following criteria:
- the funds’ total asset volume, including leveraged assets, does not exceed 100 million EUR
- the funds’ total asset volume does not exceed 500 million EUR and the portfolio of funds is comprised of unleveraged funds and the right of redemption for units or shares for each alternative fund is no sooner than five years after the date of investment.
Registering to operate as a non-licence small funds manager
Generally, a small fund manager does not need to apply for a licence from the FSA unless it intends to create and manage a public fund (aktsiaseltsifond in Estonian) or a common fund (lepinguline fond in Estonian).
However, exempted companies must still register their activities with the FSA. To register with the FSA, the non-licenced small fund manager must submit data required by the IFA along with a legal analysis demonstrating that the fund is an investment fund that requires registration.
If a small fund manager creates and manages a public fund or a common fund, it is not exempt and must obtain the requisite financial services licences.
Requirements when applying for authorization to provide alternative fund management services in Estonia
To apply for the licence to operate as a fund manager of alternative small funds, the company’s authorized representatives must submit a written application to the FSA and provide all the documents and information required by the IFA. The IFA has published a collection of guidelines to assist small fund managers prepare their applications that are worthwhile to consult before you get started.
Also, whether your small fund management company will be licensed or non-licensed, it must have a minimum share capital investment of EUR 125,000. This requirement applies to both newly formed and operational companies. Fund manager licence applicants must also pay a one-time fee of EUR 1,000 when submitting their application.
Once all the required information has been submitted, the FSA has up to two months to review the application and decide whether to grant or deny the licence, but the agency may request an extension of up to six months. As with other financial services licences, the fund manager licence does not expire.
Obtaining a licence to operate as a creditor or creditor intermediary in Estonia
The FSA is the agency responsible for supervising creditors and creditor intermediaries and grants and revokes their authorizations. In 2019, there were 48 creditors not associated with credit institutions, 11 creditors associated with credit institutions, and nine credit intermediaries in Estonia, according to the FSA’s end of year report.
The Creditors and Credit Intermediaries Act (CCIA) defines the business types that must obtain a financial services licence to operate as a creditor or a creditor intermediary.
What types of companies are considered creditors or creditor intermediaries?
Public limited companies, private limited companies, or commercial associations (hoiu-laenuühistu in Estonian) that grant credit to consumers as their principal or permanent activity are considered creditors in Estonia. A business “grants credit” to consumers if it extends credit, postpones a payment’s due date for a fee, offers leases or any other similar financial aid, or executes credit agreements with consumers.
A credit intermediary in Estonia is defined as a natural person or a legal entity that does not operate as a creditor but as a main and permanent activity provides intermediating credit to consumers.
This credit intermediation may include intermediating the granting of credit or the possibility to enter into a credit agreement for a fee, providing pre-contractual assistance to consumers, or concluding credit agreements on behalf of and in the name of creditors.
Financial services providers that grant or intermediate credit to consumers relating to residential immovable property (mortgages) are also categorized as creditors or credit intermediaries in Estonia.
Requirements when applying for a creditor or creditor intermediary licence
To apply for a licence to operate as a creditor or a credit intermediary, the company’s authorized representatives must submit a written application to the FSA and provide all the documents and information required by the Creditors and Credit Intermediaries Act (CCIA).
The FSA will decide whether to grant or refuse to grant the licence for operating as a creditor or a credit intermediary within six months as of receiving all the necessary data and the applicant’s fulfillment of the application requirements.
This deadline may be extended, but a decision must be made not later than eight months after the submission of the respective application. Once the FSA grants the licence, it will be granted for an indefinite period.
Applicants must pay a one-time processing fee of EUR 1,000 when requesting their initial licence. If a licence holder wishes to add services at a later date for which a supplemental licence is required, they must pay an additional fee of EUR 500.
When considering applications for credit or credit intermediary licences, the FSA will consider the applicant’s reliability and credibility. In particular, applicants must be able to demonstrate that their organization’s internal policies comply with Estonia’s lending and other finance-related regulations.
The integrity of company’s owners, managers, and stakeholders will be examined. In addition, the FSA will scrutinize the organization’s know-your-client (KYC) policies and procedures. If you are planning to apply for a creditor or creditor intermediary licence in Estonia, we encourage you to consult with one of our advisors first.
Our team can assess your company’s likelihood of success and identify any issues that you should resolve before applying.
Preparing your company for success as a financial services provider in Estonia
Estonia is located in the EU and extends its reach around the globe with its forward-thinking policies on digital citizenship and commerce. Businesses licenced to offer financial services in Estonia operate across the Eurozone and beyond.
If you are ready to launch your financial services business, whether it is an investment fund, e-money payment service, or creditor, you should consider incorporating in Estonia. And, to help you ensure that your business gets off the ground smoothly, you should call on Incorporate. Our team of experts has helped hundreds of founders start and operate their businesses in Estonia.
We can help you determine which financial services licences your business will need to succeed, select the agencies with which you’ll need to file your applications, and prepare your application. Ready to get started?
Contact us and make an appointment to speak with one of our consultants.