Establishment of Banks Blog

Calculation of the contributions to the German deposit guarantee scheme – Overview and preview of the new contributions regulation

When establishing or acquiring a bank in Germany, a regulatory business plan must be provided to the German Federal Financial Supervisory Authority which contains, amongst other things, the expected costs. These costs include the mandatory contribution payments to the German deposit guarantee scheme Entschädigungseinrichtung deutscher Banken GmbH (EdB).

As of recently, the contributions to the EdB (these include non-recurring/one-off payments, annual contributions, special contributions, special payments) are no longer calculated according to the Deposit Guarantee Scheme and Investor Compensation Act (Einlagensicherungs- und Anlegerentschädigungsgesetz – EAEG) in conjunction with the EdB contributions regulation (EdB-Beitragsverordnung – EdBBeitrV). As part of the implementation of the Directive 2014/49/EU of the European Parliament and Council of 16 April 2014 on deposit guarantee schemes (DGDS), the previous Deposit Guarantee Scheme and Investor Compensation Act was “split” into the Deposit Guarantee Scheme Act (Einlagensicherungsgesetz – EinSiG) and Investor Compensation Act (Anlegerentschädigungsgesetz – AnlEntG). The Investor Compensation Act secures the liabilities from securities transactions whereas the Deposit Guarantee Scheme Act (EinSiG) secures the deposits.

The contributions of the CRR credit institutions are now calculated according to the EinSiG in conjunction with a new contributions regulation yet to be released which will contain the specific calculation methods (like the previous EdB contributions regulation). The general contribution model consisting of annual contributions, non-recurring/one-off payments, special contributions and special payments shall remain unchanged however.

A transitional regulation applies to the annual contributions for the calculation period 2014/2015 (1 October 2014 to 30 September 2015) which shall still be calculated according to the previous provisions.

In order to ensure consistent application of the DGDS, the European Banking Authority (EBA) was supposed to issue guidelines to specify methods for calculating the contributions to deposit guarantee schemes. Accordingly, on 28 May 2015, the EBA issued Guidelines on methods for calculating contributions to deposit guarantee schemes (EBA/GL/2015/10). They recommend specific and in detail the methods to be used for calculating the annual contributions. It remains to be seen how the expected contributions regulation will look like. However, considering the implementation history, it can be expected that the new EdB contributions regulation will mostly adopt these guidelines.

The guidelines recommend the calculation of the annual contributions of an institution which is a member of the deposit guarantee scheme according the following formula:

Annual contribution of a member institution = Contribution rate x Aggregated risk weight for member institution x Covered deposits for member institution x Adjustment coefficient

There is the possibility that the annual contributions will be higher in the future. Furthermore, it is unclear how the non-recurring/one-off payment, which is mandatory when being allocated to the EdB, will be calculated. This payment could also be higher in the future.

The deposit guarantee schemes, including the EdB, shall reach a target level of 0,8 % of the amount of the covered deposits of its members.

As soon as the new contributions regulation is available, we will provide you with an update here so that you will be able to determine the amount of the contributions for the target figures in the regulatory business plan.

 

EU-Passport: BaFin publishes forms for notification procedure

CRR-credit institutions or securities trading firms may conduct banking business or provide financial services in another EEA state via a branch or by providing cross border services without being obliged to apply for a license at the host member state’s competent authority. As a precondition, the company has to be licensed by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin), the license has to cover the planned business in the host member state, the company is efficiently supervised in Germany and undertook the notification procedure at BaFin.

The concept of the EU-Passport is not new as it was already introduced into the German Banking Act (Kreditwesengesetz – KWG) in 1992 based on the 4th KWG-Amendment implementing Directive 89/646/EEC into German law. CRD IV (Directive 2013/36/EC) continues this fundamental concept of freedom of establishment and freedom to provide services. CRD IV appoints the European Banking Authority (EBA) to develop draft regulatory technical standards and draft implementing technical standards in order to detail the information to be given to the competent regulatory authority and to establish standard forms, templates and procedures.

Based on these standards and templates developed by EBA, which were published in the Official Journal already in 2014, BaFin published the forms „EWR-Dienstleister: Formular zur Dienstleistungs-Notifizierung“ (Services Passport Notification Form) and „EWR-Dienstleister: Formular zur Notifizierung einer Zweigstelle“ (Branch Passport Notification Form) on 16 July 2015.

In case a CRR-credit institution or securities trading firm licensed in Germany plans to conduct banking business or to provide financial services in another EEA state via a branch or by providing cross border services, these forms have to be used for the notification procedure according to section 24a KWG in connection with section 12 Regulation Concerning Reports and Submission of Documentation under the Banking Act (Anzeigenverordnung – AnzV).

 

Revised Directive on Payment Services (PSD2)

There is new activity within the project to update and amend the provisions of the Directive on Payment Services. On 5 May 2015, the Parliament and Council agreed on a new proposal for a revised version of the Directive on Payment Services following trilogue negotiations between the Commission, the European Parliament and the Council of Ministers.

Already in July 2013, the Commission had drafted a proposal for a “Directive of the European Parliament and of the Council on payment services in the internal market and amending Directives 2002/65/EC, 2013/36/EU and 2009/110/EC and repealing Directive 2007/64/EC” (so-called PSD2).

According to this proposal some actual regulated exemptions of the current German Payment Services Act would be limited. The German Payment Services Act is based on the current available EU-Regulation (PSD) which will be repealed by the new one.

That means, companies which are currently allowed to use an exemption, might need a regulatory licence to provide their services in future. In case of a licence requirement these companies would be under the supervision of BaFin. This would lead to massive consequences for the company. Hence the respective company should take care of the possible consequences and changes at a very early stage.

Although the new directive needs to be implemented into German law first – since an EU directive is not directly applicable in Germany – in the past, the German legislator has been constantly making efforts to transform EU directives into German law faithfully.

Revised Deposit Guarantee Schemes Directive implemented in Germany

The implementation act changes the definition of deposits eligible for compensation, introduces new reporting requirements and extends information requirements.

 

The revised Deposit Guarantee Schemes Directive (Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014, DGS Directive) provides new and largely harmonized rules at EU level for deposit protection. It aims to protect as many deposits as possible in favor of comprehensive consumer protection and in the interest of financial stability. The provisions form one of the pillars of the European Bank Union and are connected closely to the regulations on bank recovery and resolution.

The law transposing the DGS Directive : is expected to be published in the Federal Law Gazette soon and will enter into force entirely on 3 July 2015. It replaces the existing Deposit Guarantee and Investor Compensation Act (Einlagensicherungs- und Anlegerentschädigungsgesetz – EAEG) by the new Deposit Guarantee Act (Einlagensicherungsgesetz – EinSiG) and the Investor Compensation Act (Anlegerentschädigungsgesetz – AnlEntG). Due to the new regulations, depositors in principle will have a right of compensation for their covered deposits up to an amount of EUR 100,000 and in certain cases even up to an amount of EUR 500,000. This would be the case e.g. with deposits which were made due to the sale of private property for the period of up to six months after the credit on their account.

The newly introduced definition of “deposits eligible for compensation” of EinSiG based on the specifications of the DGS Directive is not completely congruent with the current notion of deposits eligible for compensation pursuant to the current EAEG. For example, in future deposits eligible for compensation will be also deposits denominated in foreign currencies and not only deposits in the currency of a Member State of the European Union or in Euros. Furthermore, also deposits of larger companies, currently excluded from compensation, will be eligible for compensation. In addition, in future set-off or retention rights of the CRR-credit institution will not be considered.

Credit institutions are obliged to flag their deposits eligible for compensation so that they can be identified for each depositor immediately. There are also future reporting obligations with regard to the so-called “covered deposits“, which are determined in reference to the deposits eligible for compensation. The first report on the amount of covered deposits with the reference date 31 July 2015 has to be delivered already on 1th September 2015 due to a provision of the (European) Commission Delegated Regulation No. 2015/63. It could be therefore appropriate to review the existing internal bank system used to survey the deposits eligible for compensation and to adapt them if necessary.

In addition, new information obligations towards depositors are introduced. E.g., the reception of the new “depositor information template” must be confirmed by the depositors. In this context, the internal processes related to the customer service might have to be adjusted to fulfill the new requirements.

 

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).

 

 

 

SSM licensing procedure – first impressions

On November 4, 2014, the Single Supervisory Mechanism (SSM) became effective. It entrusts the European Central Bank (ECB) with the final approval of a credit institutions licence application. Here some first impressions from one of the SSM licensing procedures currently on the way:

Theory and practice of an SSM licensing procedure

While the corresponding EU-provisions describe ECB’s involvement in an SSM licensing procedure as having 10 (20) working days for its final approval once the national application procedure came to a positive preliminary result, the practice is rather different. In reality, ECB will be involved in an SSM licensing procedure from the first day the applicant approaches the national competent authority (the national regulator). Thereafter, ECB and the national regulator will liaise closely. The national regulator will remain the first point of contact for the applicant in the daily operations of the licensing procedure. However, ECB will join the meetings with the applicant once the application is filed.

Learning by doing

Beside this basic approach, ECB and national Regulators seem still busy with establishing their internal procedures and aligning them with each other. ‘Learning by doing’, sometimes paired with ‘try and error’, seems to be one of the best practices currently used. As an example, we experienced a situation where the national regulator cancelled a meeting for preparing the application on short notice by ECB. We were told that ECB would not allow any bilateral meetings between the applicant and the national regulator. We found such strong influence of ECB at this stage rather surprising. Especially so, since the application was not filed at that moment and, thus, the SSM procedure had not even started. Obviously, also our contact persons at the national regulator were baffled by ECB’s approach: They struggled in this situation to explain their next steps. A week later we were informed that there was a misunderstanding between the national regulator and ECB: ECB thought the application had already been submitted.

Digitalisation of application to come?

We also had the chance to have a first glance at the web portal which ECB currently develops for the national regulators to submit information on the application during the SSM licensing procedure. It seems that currently there is a lot of data keying expected from the national regulator’s staff. Maybe over time this will lead to a boost in digitalisation requirements regarding the format of an application.

It will be interesting to see which further usance for the SSM licensing procedure will develop from this ongoing liaising process between ECB and national regulators.

Our new Brochure about the regulatory market entry to Germany – This is how you can clear the regulatory hurdles to starting up your banking business

The desire to operate a bank (deposit-taking credit institution) is one of those projects that should be prepared carefully well in advance. In Germany, the banking sector is subject to comprehensive and stringent regulations – which is why it is important to have in-depth knowledge of these regulations and include them in the planning. In Germany, in general there are four possible approaches for the market entry in the banking sector. Your company can establish or acquire a bank or, by using the European Passport, set up a branch or provide cross border services.

Our new Brochure provides information on the regulatory requirements, which have to be considered during the different procedures, as well as the hurdles that must be overcome during the process.

 

Islamic Banking: BaFin grants licence to Kuveyt Türk

The Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, hereinafter BaFin) has granted a licence for running banking business in Germany to Kuveyt Türk Bank AG (hereinafter KT Bank), a German subsidiary of the Turkish bank Kuveyt Türk Katilim Bankasi A.S.. KT Bank will be the first credit institution in Germany, which will offer banking products according to Islamic jurisprudence (covered by Sharia) to retail-clients. Whether other banks will follow this example, remains to be seen.

Despite BaFin will not handle the application to run a credit institution according to the Sharia different than the application to run a non-religious credit institution, some regulatory specifics have to be considered when it comes to Islamic Banking.

Regulatory Business Plan

Already from the regulatory business plan, which will be enclosed with the application, BaFin has to understand the specifics of Islamic Banking. The planned banking businesses, the business operations and the risk management need to fulfil the requirements of the Sharia as well as the rules of the domestic regulatory law.

Deposit Protection

One obstacle for the permission to run an Islamic Bank might be the deposit protection requirement. In Germany, all deposits are protected up to EUR 100,000 by 100 %. This indispensable rule for deposit business will be hardly fulfilled by classical Islamic banking products. The main idea of an Islamic deposit account is to establish an economically interesting business without offending against Riba. For that profit-sharing models (often Mudarabah) are set up, which enable bank clients (investors) participation to the profit of a bank. However, according to conservative Islamic scholars the investor of such a profit-sharing model has to bear the risk of total loss of the investment. Modern Islamic scholars on the other hand believe that with a “Two-Tier-Mudarabah” or with a guarantee by a deposit insurance system it is possible to have a Sharia compliant deposit business which fulfills the deposit protection requirement.

Double Charge to Stamp Duty Land Tax (see also PwC Islamic Banking tax country report islamic-finance-tax-booklet)

Another – still unsolved – issue with Islamic Finance products (like Murabaha) is the double charge to stamp duty land tax. It is well known that we have a high demand for Islamic mortgages in Germany. The main issue with such mortgages is that the bank has to acquire the property before it can resell it with a cost-plus to the client. Such financing technique will trigger the double charge to stamp duty land tax once land property is acquired and resold.

In UK and France this tax issue in connection with Islamic Finance was seen early and handled by the legislation. Already in 2009 the French lawmakers realized the need for regulating Islamic Finance products. On August 24, 2010 the French legislation enacted a special regulation for covering tax issues of specific Islamic Finance products (Sukuk, Ijara, Istisna, Murabah). In 2003 the UK Labour Government has introduced the adaption of tax regulation for Murabaha financing. Since then double charge to stamp duty land tax will not be triggered once a land property needs to be acquired for the sole purpose of reselling it to the client. In Germany however we have no legislation covering the special tax issues concerning Islamic Finance products.

Prospectus and Islamic Banking

One more legally critical aspect in connection with Sharia compliant participation-products is the requirement to publish a prospectus. Soon – after implementation of the Kleinanlegerschutzgesetz – the list of financial instruments which require a prospectus will be widened. Many Islamic Banking / Islamic Finance products could then require a prospectus.

The above mentioned examples should give a sketchy overview of some regulatory issues when it comes to Islamic Banking and Islamic Finance. However, banks need to consider more regulatory challenges once they plan to do Islamic Banking and Islamic Finance.

Reporting on risk bearing capacity after the establishment of a bank

 

With their establishment credit institutions will face further reporting duties. After the German Ministry for Finance (Bundesfinanzministerium für Finanzen) has amended the “Verordnung zur Einreichung von Finanz- und Risikotragfähigkeitsinformationen nach dem Kreditwesengesetz“ (Finanz- und Risikotragfähigkeitsinformationsverodnung = Finance and Risk Bearing Capacity Information Regulation – FinanzRisikoV) of December 6, 2013 (last amendment December 19, 2014), credit institutions in Germany will be obliged to file reports on their risk bearing capacity.

Reporting Dates

On February 25, 2015 the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) has enacted “Allgemeinverfügung zur Einreichung der Informationen zur Risikotragfähigkeit“ (GZ: BA 54 – FR 2204 – 2010 / 0004), which sets the reporting dates for risk bearing information reports of credit institutions, as follows:

  1. For credit institutions, which have to file annually reports on risk bearing capacity information, the reporting dates will be December 31 of each year. The first reporting date will be December 31, 2015.
  2. For credit institutions, which face higher reporting frequency and therefore are also obliged to file semiannually reports on risk bearing capacity information, the reporting date will be June 30 of each year. The first reporting will be June 30, 2015.

⇒BaFin prolonged the reporting date for these reports for this year to November 30, 2015.

From the reporting date on, the credit institutions will have seven weeks to file their report.

Who has to report?

Credit institutions (and their superordinated companies) are obliged to file reports on their risk bearing capacity. Financial institutions are only obliged to file their quarterly reports on financial information (containing of balance sheet and profit and loss statement).

EU/EEA-branches are expressly excluded from the duty to file risk bearing capacity information.

Content and shape of the Report

The reports should be filed electronically with the Deutsche Bundesbank using special forms.

“Kleinanlegerschutzgesetz”: The end for Crowdfunding and „Banking without a Bank“?

Crowdfunding, which by now is not only practiced in the Anglo-Saxon area, will already be stronger regulated in this year. In the recent years a market has developed in Germany, which offers individuals businesses typical of banks (e.g. Deposit and Credit Business as well as Financial Services) without the necessity to have (direct) business proceedings with a bank. Through commercial it was intended to make individuals believe, that it is possible to invest without a bank in a project and to achieve big profit out of it. On closer examination, it becomes clear that in most of the cases it is neither a classic crowdfunding project nor “banking without a bank”, since all crowdfunding marketplaces in Germany cooperate with a regulated partner (credit institution, payment service institution, or financial services institution). Proper prospectus are rare as well as information on a project once the public offering is finished.

In the following months the German legislator will implement through the “Kleinanlegerschutzgesetz” a package of measures, which will build the foundation for stronger regulation of and more transparency on the German crowdfunding market.

The draft law, as adopted by the German Federal Cabinet on 12.11.2014, will bring the following major changes:

  • Specification and extension of the obligation to publish a prospectus,
  • extension of the information of personnel relations of the initiators,
  • the obligation to provide specific information also after the public offering finishes,
  • ban on advertisement for public places (e.g. public transportation, public posters, flyers),
  • the establishment of a Product-Governance-Process,
  • additional powers to the German regulator BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht = German Federal Financial Services Authority).

For shareholder loan and investments, which are economically equal to such investments which require a prospectus, will prospectively require a prospectus approved by BaFin. This prospectus will be valid only for 12 months maximum and will afterwards need an update and approval by BaFin. Every investment should have a minimum duration of 24 months and a cancellation period of at least 12 months.

Specific exemptions will be available for classical crowdfunding, thus investing in start-ups. Shareholder loan and subordinated loan shall not require a prospectus for crowdinvesting up to 1 million Euro, as long as they are offered through an internet market place and each investor is only investing up to EUR 1.000 (or up to EUR 10.000 once the investor proves own assets of more than EUR 100.000). However, the provider is obliged to provide to each investor at least a so called “Vermögensanlagen-Informationsblatt” (a one pager describing the investment to the investor).

Besides extensive supervisory and prohibition powers, BaFin will be empowered to ask the issuer of an investment to certify its accounting with an external auditor. Delate publication of financial statements can be punishment with a penalty up to EUR 250.000. BaFin will provide information about such measures for all investors on its Webpage.