German regulator BaFin updates its guidance notes on compliance for investment firms (MaComp)

In this context, the requirements for fair, unambiguous and non-misleading customer information regarding indicative order values resulting from Section 63 (6) of the German Securities Trading Act (hereinafter referred to as "WpHG") and Article 44 of Delegated Regulation (EU) 2017/565 (hereinafter referred to as "DR") were specified in the special section (BT) 3. In addition, the requirements for the declaration on the suitability of the investment recommendation (Section 64 (4) WpHG) were explained in more detail in the context of the special rules of conduct for the provision of investment advice and financial portfolio management pursuant to Section 64 WpHG.

1. Requirements for fair, clear and not misleading customer information (BT 3.3.1)

With its concretisation of the requirements for fair, clear and non-misleading information pursuant to Section 63 (6) WpHG, BaFin has reacted to the fact that the use of online brokerage tools is said to have recently increasingly led to considerable misleading and confusion on the part of investors.

For example, investors' securities purchase orders are said to have been settled in part for a considerably higher amount than the price value expected when the order was placed would have predicted. The divergence between the economic performance of the individual investors and the concluded purchase contract is said to have been high in some cases. Such a divergence between the expected and actual market value can occur especially if the price information used by the online brokerage tool to calculate the indicative order value is not up-to-date or is based on an inaccurate basis for the type of transaction. It is true that the stock exchange specialists responsible for price determination often succeed in identifying affected securities and contacting the order-issuing banks with an indication of the price value. However, this is not one of the tasks of an exchange and is no guarantee to detect and prevent such constellations in time.

In order to remedy this situation, BaFin has extended the information requirements pursuant to Section 63 (6) WpHG in its updated circular to include information on said indicative order values. If, when using online brokerage tools, there is a possibility that the indicative order value displayed to the customer deviates significantly from the later actual execution price, the customer must be informed of this in a sufficient and comprehensible manner.

This information must be formulated in a simple and generally understandable manner. BaFin suggests the following wording as an example: "The displayed price may be a price without turnover (PWT). This does not correspond to the relevant ask price for the purchase, which can lead to the actual execution price exceeding the indication of the displayed order value by a multiple (sometimes several € 10,000) in the case of securities quoted below one euro."

In addition, a reference to the possibility of limiting an order shall be included in the future. A limit can effectively prevent the order from being executed at a considerably higher price than intended by the customer. BaFin proposes the following wording for this notice: "You can prevent an execution at a considerably higher price than you intended by limiting your order. However, such a notice is only necessary if the respective investment firm has not already introduced the setting of a limit as mandatory. In these cases, no information is required before the specific order. It is sufficient to include this information in the general customer information.

2. Requirements for the content of the declaration of suitability pursuant to section 64 (4) WpHG

In addition, BaFin has further specified the content requirements for suitability declarations in its updated version of the circular. Pursuant to Section 64 (4) WpHG in conjunction with Article 54 (12) DR, when providing investment advice, the investment firm must provide private clients with a declaration on the suitability of the recommendation (suitability declaration) prior to the conclusion of the contract. Within the scope of the suitability declarations, it must be explained to what extent the advice provided was tailored to the preferences, ideas and goals of the client.
BaFin concludes from this that the declaration of suitability may not only contain the mere, phrase-like statement that a financial instrument is suitable. Rather, it must contain a justification related to the specific client as to why the investment firm assumes suitability, taking into account the personal circumstances in the specific individual case - i.e. to what extent the recommendation was tailored to the respective client characteristics (material justification of recommendation). This requires a qualitative comparison of the characteristics of the financial instrument with the client characteristics. Therefore, all client information required for the suitability test must also be included in the declaration.

In this respect, the declaration of suitability is special with regard to recommendations to sell. Here, it is sufficient to explain only the facts on the basis of which the sale of the financial instrument in question was recommended. All other, non-relevant facts do not have to be included in the declaration of suitability, as they did not lead to the recommendation to sell and thus do not constitute a reason for the recommendation.

BaFin also makes it clear once again that the requirements from Section 64 (4) WpHG also apply in the case of a hold recommendation. Here, too, the declaration of suitability must contain a justification as to why the product continues to be suitable for the customer. However, unlike a buy or sell recommendation, this does not require documentation of the qualitative comparison between the product details and the client details. It is not necessary to go into the individual customer characteristics, as these were regularly already documented in the declaration of suitability of the recommendation to buy.

The MaComp contains a large number of negative and positive examples of individual formulation options for all three variants (buy, sell and hold recommendation), which can serve as a template for the conception of one's own declaration of suitability.

Summary

BaFin has further specified the information and documentation obligations that apply to investment firms. This makes it easier for investment firms to comply with the applicable regulations. In particular, in future, when placing an order using online brokerage tools, customers must be clearly informed that the actual execution price may exceed the previously displayed indication of the order value many times over. Investment firms must include detailed information in the suitability statement on the extent to which an investment product matches the personal preferences and possibilities of the client. A formulaic and clichéd formulation is not permissible. Rather, an evaluation of all circumstances relevant to the investment recommendation is required in order to comply with the requirements of Section 64 (4) WpHG.

With the kind assistance of Paul Gerlach (legal assistant).