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Kleinanlegerschutzgesetz: Regulations for FinTechs (Part 2)

The German legislature ratified the final draft of the Kleinalegerschutzgesetz, Germany’s new investor protection law, which became effective 10 July 2015 (see also my previous blog on the early stages of the early stages of this law making process). However, not all the provisions were implemented in July; exceptions apply on the provisions of Art 13 (1) and (2), which come into effect on 1 January 2016 and 3 January 2017 respectively.

1. New rules

The Kleinanlegerschutzgesetz introduces the following major changes:

  • Specification and Extension of the obligation to publish a prospectus,
  • An obligation to provide specific information also after the public offering ends,
  • A ban on advertisement for public places (e.g. public transport, public posters and flyers),
  • Establishment of a ‘product governance’ process,
  • Additional powers and obligations for Germany’s supervisory authority, the BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht).

However, some important exceptions apply to specific FinTechs or financial technology companies.

2. Exemptions for crowdfunding/crowdinvesting

Investments provided through a financial instrument which do benefit from the following described exceptions will require a prespectus approved by BaFin. This prospectus will be valid only for 12 months maximum and will have to be updated afterwards, with BaFin approving the update.

For crowdfunding/crowdinvesting projects up to EUR 2.5 Million a prospectus is not needed, as Long as the equities are offered through an internet market place and each Investor (investment companies excluded) is only investing up to EUR 1,000 (or up to EUR 10,000 once the investor proves that he owns assets of more than EUR 100,000). However, the provider is obliged to provide to each investor with a “Key Information Document” (Vermögensanlagen-Informationsblatt).

3. Exemptions for “social projects”

Also for the investment in so-called social projects (projects for the common good of the society) the prospectus exception as described for crowdinvesting projects applies here as well. There is also no provisions for a certified annual report for the issuer. Having this said, there are strict requirements for “social projects” such as a cap for loan interest, no inducements allowed etc.

4. Exemptions for non-profit organisations

No prospectus (as mentioned for crowdfunding and “social projects”) is neeeded for projects with non-profit orgainizations and religious communities. There is also no requirement for a certified annual report. No accounting standards need apply for projects up to an investment sum of EUR 250,000.

5. Additional BaFin powers

Through the Kleinanlegerschutzgesetz, BaFin is not only allowed to supervise crowdfunding entities, but it is obliged to supervise the collective consumer-protection. BaFin has just established seven new departments covering consumer-protection issues. Therefore even when FinTech (e.g. crowdfunding, crowdinvesting) is not offering regulated banking/payment services and does not need to offer an approved prospectus. BaFin will still supervise such entity due to its obligation to support the collective consumer-protection.

Third Countries Regime pursuant to MiFID II

Single aspects of future market access in Germany for investment firms from third countries according to MiFID II (Directive no. 2014/65 / EU) and MiFIR (Regulation (EU) No. 600/2014)

Part of the revision of MiFID was the intended uniform regulation of market access in the European Union (EU) for providers of investment services and activities from third countries.

However, the EU Member States could agree on a single set of rules only in the area of (so called “born”) professional clients and eligible counterparties. In the future, providers of investment services domiciled in a third country are allowed to provide cross borders services (without a branch) to professional clients and eligible counterparties, if the European Commission has issued an equivalence decision regarding prudential and business conduct requirements for the country of origin. In addition, a cooperation agreement between ESMA (European Securities and Markets Authority) and the relevant competent authority of the third country is needed. Furthermore, the provider must be authorized in its home country for the investment services to be provided in the EU and be subject to effective supervision and enforcement ensuring a full compliance with the requirements applicable in that third country. Last but not least, a registration of the investment firm (third country) with ESMA is required.

These provisions were included in MiFIR. As an EU regulation, the MiFIR is directly applicable in all EU Member States, so that the provisions contained therein are consistent across the EU. Although the regulation will come into effect on January 3, 2017, the new rules on cross border services by third country providers will only apply, when an equivalence decision and an agreement for cooperation between supervisors will have been obtained. Therefore, the national rules will continue to apply after January 3, 2017 for a transitional period of up to three years after the conclusion of an equivalence decision and an agreement for cooperation between supervisory authorities.

With respect to the market access from third countries for the provision of investment services to private clients or clients treated as professionals on their request, MiFID II foresees only an optional implementation of the single Member State. MiFID II provides for the establishment of a branch in case of the provision of investment services to these customer groups. It remains to be seen whether the individual Member States will implement the provisions of MiFID II and to what extent cross border investment services to these kind of clients will be possible on the basis of national rules, e.g. in Germany through the so called “Freistellungsverfahren” (exemption procedure).




Banking Business in Germany, 4th edition – now available

We did it again: The 4th revised edition of “Banking Business in Germany” is now available.


Also the new edition was developed in close cooperation between the Association of Foreign Banks in Germany (Verband der Auslandsbanken in Deutschland e.V.) and PwC.

The book’s subtitle tries to explain its ambition in one short sentence:

“A practical guide for foreign banks establishing a subsidiary or a branch in Germany”

True. But actually the book covers much more: It presents a current overview of the economic, regulatory, legal and tax framework that applies to credit institutions and financial service institutions in Germany.

Due to the current numerous developments throughout the financial market it was necessary to shorten the interval for the new edition from four to two years in order to keep up to date. Especially the chapter on prudential supervision in German got more or less completely re-written. The book now also comprises a new chapter regarding the ‘Minimum Requirements for Risk Management (MaRisk)’ published by the German regulator Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). Since regulation is not likely to stop here, you can expect the 5th edition by 2016.

With so many new things to tell, we were concerned that the book might lose its character as a concise guide and become simply to voluminous. We therefore managed to enhance the book’s focus throughout the chapters. In addition, you find now a subject index for ease of use.

The book is available as paperback or e-book.

I hope you enjoy reading the book and look forward to receive your comments.

Requirements for licensing of alternative investment funds managers (AIFM) – Part 2

Outsourcing/delegating of tasks by an AIFM

While the last post addressed the issue of capital requirements (see below), the present blog deals with the question to which extent an AIFM may outsource functions already in the course of the licensing procedure (and later when conducting the business as licensed entity).

The outsourcing or delegating of tasks by an AIFM is possible as far as the outsourcing structure can be justified on objective grounds and certain other conditions, such as a written contract, are fulfilled.

However, an AIFM shall not transfer its functions to the extent that it becomes a mere letter box entity. The now adopted version of the implementing regulation (also known as Level II measures) gives indications under which conditions an AIFM is classified as a letter box entity.

An AIFM is generally required with respect to outsourcing that it maintains the necessary resources and expertise to supervise the outsourced functions and to control the risks associated with the outsourcing. Furthermore, the AIFM must be able to exercise the contractually stipulated information, auditing and managerial rights. The AIFM must also continue to make all important decisions especially with regard to the investment strategy.

To avoid to be classified as a letter box entity, the scope of the outsourced functions should not exceed the scope of the functions performed by the AIFM itself by a substantial margin.

The implementing regulation establishes not only quantitative criteria, such as the amount of assets managed, for evaluating the scope of the outsourced functions. The outsourcing structure is to be assessed by regulators with respect to the fulfillment of certain qualitative criteria. These are inter alia

• the importance of the assets the administration is outsourced to achieve the investment goals of funds

• the configuration of delegates

• the types of outsourced tasks in relation to the tasks retained by the AIFM

• the risk profile of the funds, etc.

The regulation was adopted on 19 December 2012 and shall enter into force after three months, unless the European Parliament or the Council raises objections. It is unlikely that the rules discussed here will change.

An AIFM should analyze its outsourcing structures accurately. It should take into account the requirements set forth in the regulation and adjust its outsourcing structures if necessary before submitting a license application to avoid classification as a letter box entity.

(To be continued)

Requirements for licensing of alternative investment funds managers (AIFM) – Part 1

Funding required for running the business
As already posted on June 2012 (see below), from July 2013 on all collective investment schemes, which are not already covered by the UCITS Directive [Directive for the regulation of collective investment undertakings; Directive 2009/65/EC] are regulated by the AIFMD. Therefore fund managers of so-called “alternative” funds, such as private equity funds or hedge funds generally are required to obtain a license for their activities.

There are numerous requirements that have to be met in order to obtain an AIFM-license by the Federal Financial Supervisory Authority (BaFin). One of these conditions is the availability of adequate capital.

The applying AIFM has to prove that it disposes of adequate capital. In this regard, a distinction is drawn between initial capital and own funds.

The initial capital is at least EUR 300,000 for an internal AIFM. Internal AIFMs are investment companies that have not designated an external management company. The initial capital for an external AIFM amounts at least to EUR 125,000. External AIFMs are management companies that manage at least one AIF. The amount of additional own funds required varies depending on the value of the managed investment funds. For providing the additional amount a relief is provided: 50% of the required additional capital may be replaced by a guarantee. Such a guarantee is, however, only recognized if it is issued by banks and insurance companies which comply with the regulatory requirements established by the European legislator.

It has to be considered furthermore that an AIFM at any time must have own funds which include inter alia a quarter of the cost of general administrative expenses.

Concerned AIFMs should act now on the capital requirements for the licensing procedure and ensure that adequate resources, including where appropriate by providing a guarantee, are available within the licensing process.

(To be continued)

MiFID II draft: Extension of the license obligation to non regulated enterprises?

On 20 October 2011, a draft of the revised Markets in Financial Instruments Directive (MiFID) flanked by the draft of a new Market in Financial Instruments regulation (MiFIR) was published by the EU Commission. The two drafts are hereinafter referred to collectively as "MiFID II". The revision of the existing MiFID is part of reforms designed after the financial crisis to create a safer and sounder financial system.

MiFID II is expected to expand the existing licensing obligation to a larger number of enterprises.

The MiFID II draft plans an extension of the definition of "financial instrument". Under MiFID II, emission certificates will be classified as financial instruments. In addition, any forward contracts on commodities that are traded on organized trading systems, will qualify as financial instruments. The trading of financial instruments, especially for a third party, can trigger a license requirement.

MiFID II aims to ensure that the entire organized trading takes place on regulated market places. Existing commercial systems that are currently not regulated are then expected to be subject to a license requirement.

MiFID II will also restrict the existing exemptions. Currently, commodity dealers use often the so called "commodities dealer exemption", which exempts particular the "Back to back" trading from the license requirement. This exemption will probably be abolished. The so-called "ancillary exception", which can also be used by commodities traders will be redesigned.
It is likely that some market participants, who were not previously covered by a license requirement under MiFID, will face a licensing obligation under MiFID II. Thus there is for commodity dealers in larger scale than before the risk of being subject to licensing requirements.

Companies that could be subject to a license requirement pursuant to MiFID II must face this challenge in time and analyze appropriate solutions. There are different ways to structure the activity carried out so that they still could operate without a license. If a company decides to file a license application, the entire business of the legal entity has to meet the regulatory requirements under the Banking Act, the Securities Trading Act and other regulations, so that in this respect new structures within the company or the group may be necessary.

Banking business in Germany – revised edition soon available

As time goes by …

Time is relative. But from a regulatory perspective the last four years since 2007 brought close to epochal changes. In nearly all areas of the financial industry the measures taken to scope with the financial crisis led to fundamental amendments and new regulations which already transformed the industry sustainably and will further do so in future.

What you can look forward to

Insofar it was high time to start a new edition of the English publication "Banking business in Germany", which was published last time 2007 as 2nd edition. The work offers its readers a detailed and comprehensive overview of Germany in general and its financial industry in particular, including the possible legal forms of an organisation in Germany, the relevant supervisory authorities and supervisory framework, and German tax law and labour relations. The book can be used as a helpful guide to the establishment of banks, branches or representative offices in Germany.

Time line

Also the new edition is developed in close cooperation between the Association of Foreign Banks in Germany (Verband der Auslandsbanken in Deutschland e.V.) and PwC. It is scheduled for January 2012.