Category: Regulatory Law

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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.

Is as voluntary report of reporting failures possible for the reporting requirements pursuant to AWV and AWG?

Typically an administrative offence exists when a necessary reporting pursuant to the Foreign Trade and Payments Regulation (AWV) was conducted incorrectly, incompletely, not at all, or not in time.

According to the changed rules within the Foreign Trade and Payments Act (AWG), the prosecution of that administrative offence will be ceased if it is a negligent breach of law, the breach was revealed by way of self-monitoring and the responsible authority was notified. Moreover, it is necessary that adequate measures are taken to prevent a repeat failure for the same reason. Pursuant to Sect. 22 para. 4 clause 2 Foreign Trade and Payments Act a notification to the responsible authority will only be regarded as voluntary if the respective authority has not started any investigations, yet.

Because of these changes revising oneself in aspects of abidance by the reporting requirements can be worth it. As a consequence it might be possible to voluntary report discovered failures.


Licensing procedure: management has to commit sufficient time

In the future, in the course of the banking licensing procedure according to KWG (German Banking Act) it has to be proven  that the prospective managers of the institution are able to commit sufficient time to perform their functions. The license application has to include information according to which BaFin (German Federal Financial Supervisory Authority) can assess whether the managers are able to commit sufficient time to perform their functions. Especially the number of further directorships of the manager has to be given, as well as the expenditure of time which has to be donated to them. This has to be set into proportion to the time required for his management function in the new established institution.

Should BaFin come to the conlusion that a manager is not able to commit sufficient time to perform its function, it has to deny the license.

This requirement along with further provisions regarding the obligations and responsibilities of managers and members of the superisory board of an institution will be incorporated into the KWG within the context of the CRD IV (Directive 2013/36/EU) implementation into German law.

It is expected that EBA will publish guidelines on the notion of “sufficient time commitment” (in addition to its guidelines on the assessment of the suitability of members of the management body and key function holders).

Major topics of license applications for AIFM under KAGB

The first license applications of Alternative Investment Fund Managers (AIFM) under the new Capital Investment Code (Kapitalanlagegesetzbuch, KAGB) are on their way. Any form of regulatory license has its own challanges, even so the AIFM license. So far, the following special issues arose:

  1. Additional occupations: Some managing directors of AIFM are still engaged in the management of various property companies or SPVs
  2. Trustworthiness of managing directors: Since some of the property companies or SPVs had (also due to the financial crisis) to start insolvency proceedings, managing directors carrying sometimes the burden of having insolvency experience
  3. Conclusive regulatory business case: Always a neuralgic point, especially in new areas of regulation like AIFs

We expect the regulator’s first feedback on these issues within the next weeks and will report here accordingly.


Changes of Reporting Duties (Part 2)

Changes regarding reporting obligations pursuant to the German Foreign Trade and Payments Regulation (AWV)

Within the scope of the establishment of credit or financial institutions external sector statistics reporting is still to be observed. This topic is subject to substantial changes from July 2013 on.

From this date on the reports could only be filed electronically. Apart from that, the content of the reporting will be extended in order to meet the increased needs for information on both, national and international level. Additionally, there will be changes with respect to the persons subject to external sector statistics reporting obligations.

Not filing the external sector statistics report or filing delayed, incorrect and incomplete external sector statistics reports will still be considered administrative offenses and cause fines.

Please also refer to the Homepage of the Deutsche Bundesbank

Changes of Reporting Duties (Part 1)

Extended Reporting Requirements based on the ‘Financial Information Regulation’

Within the context of the establishment of a credit or financial institution the proper compliance with the German reporting regulations has to derive already from the respective application documentation. That means, one should deal with the German reporting duties at a very early stage. Even EU-Branches pursuant to Sect. 53b German Banking Act should be aware of German reporting requirements since they are also obligated to submit regulatory reports to a certain extent.

Due to the introduction/implementation of the CRD IV package there will be extensive changes regarding the regulatory reporting duties. For example the so-called monthly reports (in future financial information) which have to be submitted quarterly pursuant to Sect. 25 German Banking Act will change.

That means, based on the draft Financial Information Regulation (Finanzinformationenverordnung) there will be additional requirements for credit institutions. According to the current legislation credit institutions which already submit monthly reports for statistical reasons are exempt from the quarterly reports. However, it is planned that also these institutions shall submit quarterly profit and loss statements. Furthermore so-called planned profit and loss figures as well as additional information will be required.

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)

Alternative Investment Fund Managers Directive (AIFMD) – German Implementation Act in preparation

In the near future, collective investment models that do not fall under the UCITS Directive, will be regulated indirectly by the AIFMD. The AIFMD regulates fund managers directly, and thus indirectly also their products, and will be applied from 22 July 2013. In the future, it will apply basically to so-called “alternative” fund managers, such as managers of closed end funds, private equity or non-UCITS investment funds, and on account of European provisions a license will be required.

The German implementation is currently in preparation. According to reports, the current investment law is turned upside down and will be transformed in a so called “Capital Investment Code”. The release of the draft is expected daily.

Acquisition of an institution

When acquiring a qualified participating interest of a credit institution or a financial service institution, different regulatory aspects must be considered. Amongst others, the so-called notification procedure (procedure according sect. 2c German Banking Act and German Holder Control Regulation) must be undertaken. This means, everyone who intends to acquire, directly or indirectly, 10% of an institution’s shares has to conduct the notification procedure at the Federal Financial Supervisory Authority (BaFin). Important is, that the applicant has to initiate the notification procedure as soon as he intends the acquisition.

In the course of the notification procedure, the potential acquirer of a credit institution or a financial service institution has to submit numerous documents to BaFin. The most important document is the business plan, which describes the development of the institution for the next 3 years in words and figures. Also CVs and declarations of trustworthiness of the acquirer or, alternatively, of the managing directors of the acquirer must be submitted. Additional documents relate to the corporate structure of the acquirer and further information about the owner of the acquirer must be given.

Hence, the effort which has to be undertaken by the acquirer during the notification procedure is comparable with the complexity of the application process which has to be undertaken in order to gain a banking license when establishing a bank.

Therefore, from a regulatory point of view, when deciding about whether to acquire or to establish an institution, the acquisition of an institution should not necessarily be preferred. In fact, all circumstances (e.g. organizational structure of the institution to be acquired as well as its existing banking license and intended business operations etc.) should be carefully calculated.

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