Implications following the Wirecard case – and Greensill?

In the commotion caused by the Wirecard group in August 2020, German Regulator BaFin was quickly found as the one to bear the political ramifications.Following calls for consequences, both BaFin’s president and vice president resigned. The Federal Government and the Federal Ministry of Finance now want to reform BaFin and presented an additional bill to protect Germany as a financial centre.

The newest scandal, the Greensill case, may have its own implications on the reform plans.

1. Financial Market Integrity Strengthening Act - Finanzmarktintegritätsstärkungsgesetz

A draft bill to of the Financial Market Integrity Strengthening Act has already been presented by the federal government. The bill aims to amend 25 individual laws and acts, including the Securities Trading Act (Wertpapierhandelsgesetz – WpHG), the Financial Services Supervision Act (Finanzdienstleistungsaufsichtsgesetz – FinDAG), the Banking Act (Kreditwesengesetz – KWG) and the Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG). We have taken a look at some of these amendments from a financial regulatory perspective:

• Significant amendments to the Securities Trading Act (WpHG)
  
  Amendments to the WpHG include the responsibilities and competences of BaFin with regard to auditing agencies for accounting. This is most likely the direct result of the Wirecard scandal. Financial reporting procedures will have an increasingly public administration character, instead of being governed by private law. BaFin’s regulatory authority will be strengthened vis-à-vis publicly listed enterprises.
  
  BaFin officials will gain the authority to search both places of business and housing spaces as part of their inspection of companies’ reports and financial statements as far as this will be necessary and there are concrete indications of a significant breach of accounting regulations. This includes the right to seize evidence. To mitigate the limitation of civil rights, BaFin must obtain a warrant by the district court of Frankfurt (Amtsgericht Frankfurt) for any search and seizure of evidence.
  
  
• Significant amendments to the Investment Act (Vermögensanlagegesetz - VermAnlG)
  
  The bill proposes to include gold and other precious metals as a new type of investment into the Investment Act. This new type of investment shall include those investments that:
  
  “award or promise in exchange for the temporary cession of currency or commercially available precious metals
  a) interest payment and a refund;
  b) interest payment and the issue of commercially available precious metals;
  c) an asset-backed cash settlement;
  d) an asset-backed settlement through the issue of commercially available precious metals.”
  
  The following precious metals are considered to be commercially available: gold, silver, platinum, palladium, copper, iridium, and rhodium. Investments schemes with the deferred transfer after payment for precious metals shall be included to enhance consumer protection on the so-called gray capital market.
  
  
• Significant amendments to the Financial Services Supervision Act - FinDAG
  
  The Financial Services Supervision Act shall ban BaFin employees to conduct private finance business. A day before the Wirecard scandal became public, BaFin reported one of its employees for insider trading who offered structured finance products with Wirecard as underlying.
  
  The ban for BaFin employees includes a ban of any finance business in financial instruments, for own account and for account of another, that are traded within an organised market in Germany, that are issued by either a European financial corporation or that are issued by a company under BaFin supervision or are referenced to any of these.
  
  
• Significant amendments to the German Banking Act - KWG
  
  Amendments to the KWG focus on outsourcing companies. Until now these were governed by KWG’s outsourcing rules and particularly by BaFin’s circular letter 09/2017 (BA), the minimum requirements for risk management (MaRisk). The amendment introduces a legal definition of outsourcing companies in section 1:
  
  “outsourcing companies are companies to which an institution or a superordinate company has outsourced activities and processes for the execution of banking business, financial services, or other services typical to the institution, as well as its subcontractors in the case of the further outsourcing of essential activities and processes for the execution of banking business, financial services, or other services typical to the institution.”
  
  BaFin’s right to information so far included the definition for outsourcing companies. The new position in section 1 of the KWG shows the importance attributed to outsourcing companies and significantly covers all outsourcing (not just outsourcing of essential business).
  
  A notable change is that institutions will be required to notify BaFin of the intent and execution of any outsourcing of essential business as well as any essential change or significant incidences in existing outsourcing that may have essential impact on the institution’s operations. This aims for a more comprehensive information of BaFin by the institutions to enable BaFin to identify concentration risk. Additionally, the institution will be required to maintain an outsourcing register as part of its risk management. The outsourcing register is to record any essential and non-essential outsourcing of business activities.
  
  BaFin will be authorized by law to enforce regulatory instructions directly vis-à-vis the outsourcing company which has so far been a matter for contractual relations with the outsourcing institute. BaFin’s right to information is now directly applicable, and outsourcing companies outside of the EU shall name a domestic service representative for BaFin to serve instead. 
  
  
• Significant Amendments to the Payment Services Supervision Act - ZAG
  
  ZAG will implement its own definition for outsourcing companies:
  
  "Outsourcing companies in the sense of this law are such companies to which an institution has outsourced activities and processes to that aim to execute payment services, e-money business and other services typical to the institution, as well as its subcontractors in the case of the further outsourcing of essential business regarding the execution of payment services, e-money business and other services typical to the institution.”
  
  ZAG-regulated institutions will have to maintain their own outsourcing register and must pledge outsourcing companies in third-states to name a serviceable domestic representative. Again, BaFin will be authorized by law to enforce regulatory instructions directly vis-à-vis the outsourcing company, a notification requirement of outsourcing requirements already existed under ZAG rules.
  
  
• Significant Amendments to the Anti-Money Laundering Act – Geldwäschegesetz GwG 
  
  Germany’s Financial Intelligence Unit (FIU) will be strengthened with an amendment in the Anti-money Laundering Act. The FIU shall receive additional information by the Federal Central Tax Office and respective tax authorities of the German Länder.

2. The seven points plan to reform BaFin 

The Federal Ministry of Finance published a seven-points plan to reform BaFin. This reform aims for a stricter regulation of the financial markets:

• A “Focused Supervision” for complex companies: A cross sectional department of BaFin shall ensure a comprehensive and networked supervision of regulated enterprises. This aims to ensure a quicker decision-making process of BaFin to accommodate todays velocity of the financial markets.
  
  
• BaFin Task Force: The Task Force will be designed to conduct ad-hoc assessments and special audits.
  
  
• Enhanced Financial Reporting Enforcement: BaFin gains competences regarding the access to financial statements. At the same time, personnel (esp. auditors) will be added for smoother procedures.
  
  
• Market Knowledge: Information submitted to BaFin out of the market or by whistleblowers shall receive better recognition. This information may have special significance to BaFin.
  
  
• Investor and Consumer Protection: Additional instruments to promote investor and consumer protection are to be developed. Exchange with investor and consumer protection agencies is to be intensified.
  
  
• BaFin presidency: BaFin’s president shall have an enhanced position to facilitate efficient decisions. The Task Force and Focused Regulator shall report directly to the president.
  
  
• Data Intelligence Unit (DIU): IT-based supervision shall be strengthened.

3. Implications of the Greensill case

The Greensill case is the latest scandal to disrupt the German market and is currently under inquiry. calls for consequences are already surfacing. BaFin filed insolvency claims on behalf of Greensill Bank in mid-March 2021. Greensill bank raised many capital contributions via deposit platforms. These platforms are now the focus of attention and stricter regulation of the Fintechs can be expected.