German ministries propose to transfer financial investment brokerage supervision to BaFin
Written By
On 24 July 2019, the Federal Ministry of Finance, the Federal Ministry of Justice and Consumer Protection as well as the Federal Ministry of Economics and Energy presented their plan (hereinafter the plan) to gradually transfer supervision of financial investment brokers to the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin).
So far the supervision of investment brokers (especially financial investment brokers (Finanzanlagevermittler) in the sense of section 34f of the German Trade Regulation (Gewerbeordnung - GewO) and fee-based financial investment advisers (Honorar-Finanzanlageberater) in the sense of section 34h GewO which both fall under an exemption of the German Banking Act, but still require registration under the GewO) was entrusted to trade offices or the industrial Chambers of Commerce (IHK). This split of supervisory authority resulting in potential inherent quality is intended to be mitigated by its transfer to BaFin. The Goal is a consistent and high quality oversight system for investment brokers.
We have taken a closer look at the challenges and changes of this plan:
The Financial Investment Service Provider
The most significant change is the replacement of existing classifications as financial investment brokers and fee-based financial investment advisers by a single category, the financial investment service provider (Finanzanlagendienstleister). Under this umbrella, the plan proposes three sub-categories: (i) financial investment service providers requiring a license, (ii) sales companies (Vertriebsgesellschaft) subjected to enhanced requirements and (iii) brokers bound by contract (tied agents) that do not require an individual license.
Financial investment service providers requiring a license are the base category. Sales companies will be required to e.g. an annual instead of a reason- or risk-based review of compliance with sections 12 to 23 of the Financial Investment Brokerage Regulation (Verordnung über die Finanzanlagenvermittlung - FinVermV). Brokers bound by contract not requiring an individual license as a third sub-category follows the precedent set out in section 2 paragraph 10 of the German Banking Act (Kreditwesengesetz – KWG) and seeks to create equal treatment with securities services companies (Wertpapierdienstleistungsunternehmen). Individual entrepreneurs do not need an individual BaFin-issued license if they act on account and under liability of a sales company. The plan explicitly requires the general availability of corresponding insurance coverage for tied agents on the market, prior to the implementation of the category into law. Should this coverage not be available, they have to continue to act as financial investment service providers and require thus a license.
After the adoption of the EU Crowdfunding Regulation, the ministries will review if a new sub-category or exemptions are necessary for Crowdfunding in the sense of section 2a of the Capital Investment Act (Vermögensanlagegesetz – VermAnlG).
No substantive amendments to FinVermV rules
The plan does not propose any substantial amendments to the existing framework. The content of the FinVermV has already been adapted to securities services companies. These rules will thus only be introduced as a new section into the Securities Trading Act (Wertpapierhandelsgesetz – WpHG) and its following regulations. As its predecessors, the financial investment services provider remains an independent supervisory category. The differing levels of supervision are maintained, and consumer protection is not harmonised. For supervisory purposes, BaFin has a right to information. Following the adoption of such an amendment nationwide information events are expected. The IHK shall remain competent to perform the general knowledge examination (Sachkundeprüfung) in accordance with sections 1 ff. FinVermV. Performed examinations remain valid.
BaFin Supervision
Come the day BaFin assumes the supervisory authority, any existing permit pursuant to sections 34f and 34h GewO will, preliminarily, remain in full effect. To ensure a uniform level of supervision, BaFin will conduct a comprehensive verification procedure (Nachweisverfahren) to confirm existing licenses of all authorized financial investment service providers. The standards to be met in this procedure should however not exceed those of sections 34f and 34h GewO. Sales Companies have to submit the relevant documents to BaFin within 6 months. The deadline for all other financial investment service providers starts upon BaFin’s explicit request. The whole verification procedure shall take a maximum of 5 years with staggering and preference of high-risk brokers. If the documents are not submitted by the deadline, the fiction of permission (Erlaubnisfiktion) ends.
The plan suggests the transfer of supervisory authority to BaFin to be used to push digitalisation. This includes implementing electronic forms and systems for the transfer and distribution of information. The existing registries at the IHK are also to be transferred electronically and automatically.
Schedule
A first formal draft by the ministries is announced for the summer of 2019. The government’s draft bill then follows in the fall of 2019. The parliamentary procedure is expected to be completed in mid-2020, and the amendment subsequently published for BaFin to assume authority by1 January 2021.
Conclusion
Regarding licensing and review mechanisms, the plan does not propose any substantial changes in the law. Only the categorization is adjusted and a subsequent verification procedure will be implemented after the transfer of the supervisory authority to BaFin. The adjustments will be financed by fees for licensing procedures, the reimbursement of costs arising from review and verification procedures and a possible reallocation charge to brokers. An exact assessment of the costs for financial investment service providers is missing from the paper.
It remains to be seen whether the German federal government will follow the ministries' plan, and which financial burden the changes will bring for financial investment service providers.
We have taken a closer look at the challenges and changes of this plan:
The Financial Investment Service Provider
The most significant change is the replacement of existing classifications as financial investment brokers and fee-based financial investment advisers by a single category, the financial investment service provider (Finanzanlagendienstleister). Under this umbrella, the plan proposes three sub-categories: (i) financial investment service providers requiring a license, (ii) sales companies (Vertriebsgesellschaft) subjected to enhanced requirements and (iii) brokers bound by contract (tied agents) that do not require an individual license.
Financial investment service providers requiring a license are the base category. Sales companies will be required to e.g. an annual instead of a reason- or risk-based review of compliance with sections 12 to 23 of the Financial Investment Brokerage Regulation (Verordnung über die Finanzanlagenvermittlung - FinVermV). Brokers bound by contract not requiring an individual license as a third sub-category follows the precedent set out in section 2 paragraph 10 of the German Banking Act (Kreditwesengesetz – KWG) and seeks to create equal treatment with securities services companies (Wertpapierdienstleistungsunternehmen). Individual entrepreneurs do not need an individual BaFin-issued license if they act on account and under liability of a sales company. The plan explicitly requires the general availability of corresponding insurance coverage for tied agents on the market, prior to the implementation of the category into law. Should this coverage not be available, they have to continue to act as financial investment service providers and require thus a license.
After the adoption of the EU Crowdfunding Regulation, the ministries will review if a new sub-category or exemptions are necessary for Crowdfunding in the sense of section 2a of the Capital Investment Act (Vermögensanlagegesetz – VermAnlG).
No substantive amendments to FinVermV rules
The plan does not propose any substantial amendments to the existing framework. The content of the FinVermV has already been adapted to securities services companies. These rules will thus only be introduced as a new section into the Securities Trading Act (Wertpapierhandelsgesetz – WpHG) and its following regulations. As its predecessors, the financial investment services provider remains an independent supervisory category. The differing levels of supervision are maintained, and consumer protection is not harmonised. For supervisory purposes, BaFin has a right to information. Following the adoption of such an amendment nationwide information events are expected. The IHK shall remain competent to perform the general knowledge examination (Sachkundeprüfung) in accordance with sections 1 ff. FinVermV. Performed examinations remain valid.
BaFin Supervision
Come the day BaFin assumes the supervisory authority, any existing permit pursuant to sections 34f and 34h GewO will, preliminarily, remain in full effect. To ensure a uniform level of supervision, BaFin will conduct a comprehensive verification procedure (Nachweisverfahren) to confirm existing licenses of all authorized financial investment service providers. The standards to be met in this procedure should however not exceed those of sections 34f and 34h GewO. Sales Companies have to submit the relevant documents to BaFin within 6 months. The deadline for all other financial investment service providers starts upon BaFin’s explicit request. The whole verification procedure shall take a maximum of 5 years with staggering and preference of high-risk brokers. If the documents are not submitted by the deadline, the fiction of permission (Erlaubnisfiktion) ends.
The plan suggests the transfer of supervisory authority to BaFin to be used to push digitalisation. This includes implementing electronic forms and systems for the transfer and distribution of information. The existing registries at the IHK are also to be transferred electronically and automatically.
Schedule
A first formal draft by the ministries is announced for the summer of 2019. The government’s draft bill then follows in the fall of 2019. The parliamentary procedure is expected to be completed in mid-2020, and the amendment subsequently published for BaFin to assume authority by1 January 2021.
Conclusion
Regarding licensing and review mechanisms, the plan does not propose any substantial changes in the law. Only the categorization is adjusted and a subsequent verification procedure will be implemented after the transfer of the supervisory authority to BaFin. The adjustments will be financed by fees for licensing procedures, the reimbursement of costs arising from review and verification procedures and a possible reallocation charge to brokers. An exact assessment of the costs for financial investment service providers is missing from the paper.
It remains to be seen whether the German federal government will follow the ministries' plan, and which financial burden the changes will bring for financial investment service providers.
