Establishment of Banks Blog

“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.

Now: ECB and BaFin decide together about authorisation and notification procedures of credit institutions

The European banking supervision has started. Since November 4, 2014 the Single Supervisory Mechanism (SSM) has begun its work. The SSM comprises the European Central Bank (ECB) and the national competent authorities (NCAs) of euro area countries and other participating countries (participating Member States).
The three main aims of the SSM are to:

• Ensure the safety and soundness of the European banking system
• Increase financial integration and stability
• Ensure consistent supervision

The SSM is responsible for the supervision of around 4,700 credit institutions (supervised entities) within participating Member States. In doing so, the main role of ECB is the supervision of the “significant” entities while the NCAs supervise the “less significant” entities (whereby ECB is also entitled to supervise this entities to ensure the consistent application of high-quality supervision standards). The NCAs are assisting with the supervision of the “significant” entities. The SSM conducts a regular review to determine whether or not a supervised entity fulfils specific conditions and qualifies as “significant”. Notwithstanding the fulfilment of these conditions, the SSM may declare a supervised entity as “significant” to ensure the consistent application of high-quality supervision standards. ECB is also involved in the supervision of cross-border entities and conglomerates.
Furthermore, the prevailing SSM Regulation states that ECB ultimately decides about common procedures, such as the authorisation procedure, withdrawals of such authorisations and the assessment of acquisitions of qualifying participations. The credit institution (or Acquirer) is initiating the filing process with the NCA. The NCA notifies ECB of receipt of the application for authorisation within 15 working days (5 working days for the intention to acquire a qualifying participation). Since the authorisation procedures cannot be finalised until the application documents are filed completely (!), the applicant should ensure that the application is complete and well structured. Once the application is filed completely, it will be subject to a complementary assessment by ECB and the NCAs. If the NCA is satisfied that the application complies with the national conditions for authorisations, it proposes ECB a draft decision with its assessment and recommendations. ECB will ultimately decide about approval or rejection of the application following the usual decision-making procedure. In case of rejection of an application or if additional conditions need to be imposed, a hearing procedure will be initiated by ECB. The applicant will be notified by either ECB or the NCA about the final decision.


The new European Single Supervisory Mechanism (SSM)

The introduction of the Single Banking Supervisory Mechanism (SSM) led to a substantial shift of supervisory functions from BaFin to ECB. Since November 4th 2014, ECB is not only the competent authority for the final decision within licensing procedures of deposit-taking credit institutions, the assessment of intended acquisitions or disposals of significant holdings in deposit-taking credit institutions but also amongst other things for supervising significant deposit-taking credit institutions. Thus, the new SSM is a first significant step towards unified supervisory practices in the European Union.

Regarding this topic, see also our article from April 9th 2015.

Court Ruling of the BGH concerning the Definition of Deposit Business re left monies in Companies

The German Federal Court of Justice (Bundesgerichtshof – BGH), ruled in its decision recently that left monies in companies (in this ruling especially the German “GmbH & Co. KG”) may be regarded as deposit business for which a banking license is needed. Doing deposit business without such license may create a compensation claim and even can result in criminal penalties for the managing directors.

In this ruling the plaintiff – a member of a winemaker society – demanded compensation from the director of the debtor company (here a German GmbH & Co KG) for monies he left with the company.

The Court decided in favor of the plaintiff. In their ruling, the judges defined the undetermined term of deposit business as a business where an entity receives unsecured monies based on standardized loan (or similar) agreements from several (non-bank) investors.

Although the ruling only affected its own case it raised furore in the German corporate practice. Companies should be aware that the requirement of a banking license is based on undetermined complex terms and the German regulators are willing to use administrative, civil, and criminal measures to act against anyone who does banking business without the necessary license. Therefore, companies which plan to do business with monies of others similar to this ruling should evaluate the planned business in detail before.

Banking set-ups – in search of a suitable outsourcing partners

In the recent past we have seen different new bank set-ups as well as license and product expansions for existing banks

There will be some questions which the banks have to have in mind. E.g. should all necessary functions, tasks and activities be done by the banks or could it be done by an external provider?

If a bank decides to outsource portions of the task, many companies offer such support. The scope extends from marketing and sales through call-center services and back office units for opening an account, deposit or loan business as well as IT operations, development and infrastructure.

The following questions and aspects are to be considered:

  • What is the core competence of the bank and for which service should an outsourcing ensue?
  • Which providers are there and how does a suitable provider selection take place (long-list, short-list, proof of concept, scoping/GAP analysis)?
  • How could the bank become secure during the selection process a maximum in transparency through quality, costs, reliability and a provider’s future security
  • What does a project for the integration of the external provider have to look like? How long does such a project last? What are the additional costs? What are the pitfalls?
  • Which information about the provider, whose tasks and performance must be known during the service from the outsourced bank, and which service must stay within the bank in order to be sure that a stable banking service can always take place, and that the authorities give their approval?

PwC has recently supported new bank set-ups and license and product expansions and also gave comprehensive advice to its clients on the above mentioned topics.

Get in contact with us and profit from our knowledge and experience.

MiFID II and future regulation of commodity traders

The “Market in Financial Instruments Directive” (MiFID ) is currently being revised and will be final adopted as so-called “MiFID II” by the European Parliament later this or next month.

The definition of the term “financial instrument” is expected to be extended . For example, according to the draft, emission allowances will be classified as financial instruments . In addition, basically all physically settled commodity derivatives that are not stipulated bilaterally will be classified as financial instruments, with the exception of certain electricity, gas , coal and oil contracts.

According to the draft the current exemption for commodity traders will be deleted (Article 2 para 1 lit. k). This exemption currently allows to carry out certain trading activities in commodities derivatives without a license. Further, the so-called ” ancillary activity ex-cemption”, which is also used by commodity traders will be extensively revised and is likely to be rather limited in its application (Article 2 para 1 lit. i). For example, investment services will be allowed to be performed only for customers or suppliers of commodity traders which want to make use of the exemption. In addition, these investment services may only relate to commodity derivatives , emission allowances or derivatives thereof.

As a consequence, according to the current MiFID II draft, activities carried out by commodity traders without a license may be subject to a license requirement from 2017 on. Although not yet all the details of future regulation have been clarified, it makes sense to analyze in time the trading, advising and portfolio management activities in relation to a possible future license requirement.

The EU-Manager Passport pursuant to Sect. 53 and 54 KAGB shall prospectively include the provision of services and non-core services

In the course of the AIFMD’s (Directive 2011/61/EC) transposition into national law, Article 33 AIFMD has been interpreted differently. Some competent authorities were of the opinion that the provision of services and non-core services pursuant to Article 6 para. 4 AIFMD could not be part of the EU-Manager Passport. Other competent authorities, as for example the English FCA, took the position, that Article 33 AIFMD very well allows the so called passporting of MiFID services and non-core services.

These different interpretations of Article 33 AIFMD were taken into account. In the context of negotiations on EU-level regarding the draft of MiFID II consent was reached to clarify and amend Article 33 AIFMD. It will be explicitly stated in Article 33 AIFMD that an EU-AIFM is allowed to provide services and non-core services according to Article 6 para. 4 AIFMD in another member state by using the passport procedure.

Even though the provision is still at draft stage on EU-level, national competent authorities already reacted on the clarification. For example, the Central Bank of Ireland explained in its FAQ’s re AIFMD (ID 1019), that the passporting of services and non-core services pursuant to Article 6 para. 4 AIFMD is permitted from now on.

Also in Germany the transposition of the planned amendment is to be expected soon. A respective adjustment of Sect. 53 and 54 KAGB (German Investment Act) is already part of a Federal Ministry of Finance’s draft regarding an act to adjust financial market’s laws (dated 4 March 2014).

Access to the German markets should be easier for Swiss banks

Already in August 2013 Germany and Switzerland have agreed to facilitate the market access for Swiss Banks in Germany. Through an intensive cooperation with the supervisory authority between both states, the exemption process should be tightened and push on forward. The procedure releases the Swiss banks from the German licensing requirements, if they fulfill certain conditions. Swiss banks can now acquire customers in Germany without having a branch. Within the planned German-Swiss tax treaty both states have negotiated an easier market access in 2011. However, the tax treaty failed in 2012 in the German Bundesrat.
For a long time it was unclear whether the planned financial market directive “Markets in Financial Instruments Directive” (MiFID II) would cancel the facilitated market access in Germany. As the first drafts of MiFID II stipulated that banks from non-EU-countries have to establish a local branch in the state where they intend to operate. According to these plans they are allowed to offer their services only over such branch to an EU-customer. However, it won’t come this far: on 14 January 2014, representatives of the European Parliament, the Council of the Ministers and the European Commission have agreed that a branch is not necessary for market access in advising private clients.
In order to make use of the exemption process Swiss banks must fulfill some conditions. The identification of the customer must be carried out by genuinely, trustworthy third parties. Furthermore, Swiss banks have to comply with the German investor and consumer protection regulations in the case of transitional business preparations in Germany. In addition, the Federal Supervisory Authority (BaFin) may participate in audits through Swiss Financial Market Supervisory Authority FINMA in Swiss banks.

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.

License procedure of AIFM under KAGB: Experience from the first months

Nearly half a year went by since the Kapitalanlagengesetzbuch (German Investment Act; “KAGB”) entered into force in July 2013.  Time for a first resume of the issues which crystallised in the due course of the license procedures for Alternative Investment Fund Managers (“AIFM”) since then.

Capital requirements and regulator’s usance in this area

While most of the draft applications complied with the general capital requirements pursuant to section 25 KAGB, it was sometimes necessary to remind of existing regulator’s usance in order to avoid otherwise predictable feedback by the regulator on this issue.  Occasionally applicants omitted that the volumes requested by section 25 par. 1 and 4 KAGB are minimum requirements, which can be missed, especially in case of starting losses.

Also it must be recognised that the regulator expects a sustainable business case:  This expectation includes usually that the own funds necessary to cover the starting loss were already provided by the initial capital contribution. Any additional capital contribution during the planning period of the planned figures filed with the application should therefore be avoided.

Appropriateness of the managing directors

As in all regulatory license procedures, the regulator ascribes also under the KAGB highest importance to the reliability and competence of the managing directors.

The regulator turns its attention especially to whether the approved business experience of the managing directors covers all types of assets and funds applied for. In single cases even two managing directors for each type of asset/fund were requested. Similar to the rules under the former Investment Act, the regulator requests also under the KAGB a corresponding restriction of the license application and thereby the later license to individual types of assets/funds. Especially in case of expansive business models the scope of license should therefore be considered carefully.

However, regarding the managing directors’ reliability the regulator seems rather pragmatic: Initially there were concerns that especially managing directors from the former unregulated business of closed funds could, due to their “insolvency experience” gathered there, would receive intensive feedback from the regulator regarding their reliability. In the current practise, however, only few remarks were recorded. The same applies regarding the number of additional activities due to parallel managing director positions in the individual AIF-companies, where also only few enquiries were raised; however, many managing directors already waived such parallel positions in anticipatory obedience.

Organisational requirements

With regard to the business organisation of the AIFM, the regulator especially picked up planned outsourcing arrangements. The transformation of existing business models usually involves either to add the AIFM as a most confined extension to the existing structure or the existing organisation is transferred to the new licensee thereby retaining a minimum structure for settling the unregulated former business which enjoys grandfathering. In both cases the smaller unit usually receives services from the bigger organisation under various outsourcing agreements. It was not always ensured that the regulated AIFM must be vested with appropriate authority to give directives and monitoring rights. In some case the unregulated unit was even designed as a fall back solution for the rather small organisation of the AIFM. The regulator did not appreciate such approach in the licensing procedure.

General observations

The license procedure takes usually more time than most of the applicants were expecting. Some applicants filed their applications already in July and still await the end of their license procedure. During this time some applicants felt being subjected more restrictive requirements compared to other license applications. At time one could get the impression that the coordination process between the regulator’s individual staff in charge for the application is still in an early stage. It remains to be seen how the regulator’s practise is going to even out. This would be helpful since another wave of applications can be expected to be filed during the now starting second half of the grandfathering period.