Category: Regulatory Law

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Banking Business in Germany – 3rd edition, revised and expanded – now available

I am proud to announce that the latest, the 3rd, 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 and, like the former editions, is endorsed by the State-Government of Hesse.

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. More than 27 authors, 6 months of preparation and 442 pages were required in order to cope with that task. Due to the numerous developments throughout the financial market in the last four years it was necessary to revise and expand more or less every chapter of the book.

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

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.

Emission Allowances: Trading and possible Licensing Requirements

An increasing number of companies will be obliged to submit emission allowances in the future. More companies will participate in trading for the purpose of covering and securing their need for emission allowances. However, certain arrangements of such transactions can trigger a license requirement of the involved entity. Under certain circumstances, the application for a banking license for trading in emission allowances may be required.

The German Supervisory Authority has clarified the scope of the license requirements in a recent guidance notice. By doing so, it aligned its orientation in this matter with the given legal status in Europe.

Therefore, OTC-trades of emission allowances which have to be physically settled do not trigger a licence requirement for the involved parties. However, planned trading activities regarding emission allowances and similar instruments like certified emission reductions (CER) have to be examined carefully. If the trading concerns not only spot contracts, a bank license may be required.

It is likely that in the near future also the stipulation of spot contracts will be subject to licensing requirements. New rules regarding the trading of emission allowances are currently discussed in the European Union and will probably be included in the revised Market in Financial Instruments Directive (MiFID II). The draft of the revised directive is expected to be published in autumn 2011.

EU branches: Without permission at the German market or still under German law obligations?

Basically banks and securities traders from the European Economic Area do not require a separate authorization from the Federal Financial Supervisory Authority (BaFin), if they would like to establish a branch in Germany and / or if they are about to take action in cross-border services. By using this so-called "European Passport", the Authority in the home country of the bank or securities trader reserves the general oversight authority.

Nevertheless; there are also several regulatory provisions in Germany that must be fulfilled particularly by branches. BaFin notifies the bank about these obligations in advance in a so-called standardized "Welcome Letter". However, due to the generic enumeration of the relevant German sections the real content of the obligations that exist for the branch in Germany are often under-estimated.

For example there exist extensive reporting requirements also for branches under the Foreign Trade Regulations depending on their business activities in Germany (see also Article External sector statistical reporting – to be observed when founding a bank?), to conduct statistical reporting, regulatory reporting and / or reports under the Securities Trading Act. In addition, securities traders must consider certain information duties and rules of conduct towards their German customers. It is therefore strongly advisable to take early appropriate organizational measures to ensure compliance with these and other regulations.

External sector statistical reporting – To be observed when founding a bank?

Generally, everyone who is considered resident in Germany according to the Foreign Trade and Payments Act (Außenwirtschaftsgesetz, “AWG”) has to adhere to reporting obligations for specific cross-border transactions according to the German Foreign Trade and Payments Regulation (Außenwirtschaftsverordnung, “AWV”). This means institutions resident in Germany have to file external sector statistical reports (“AWV-reports”) to the German Central Bank.

Basically, AWV-reports have to be submitted to the German Central Bank if, as an example, payments of more than Euro 12,500 are made between non-residents and residents. Cross-border payments could be conducted by means of direct debit, cheques and notes or by cash payments. Even indirect payments such as netting and clearing of receivables and liabilities between non-residents and residents are considered to be reportable payments.

Remarkable for the AWV- reporting system is the fact that even branches of foreign entities could be subject of the AWV-reporting obligation. Branches are considered to be independent business units for external sector statistics purposes (even though they are regarded as one entity along with their head office according to company law). This means that cross-border payments between headquarter and branch may lead to AWV-reporting obligations.

Especially foreign banks which want to enter the German market by e.g. subsidiaries or EU-branches should already have a look into AWV-reporting obligations during the founding or establishment process. This is because AWV-reporting obligations may already arise during the establishing period when providing the German institution with capital or tangible means. Likewise, questions in connection with AWV-reporting should be considered with respect to the set-up and implementation of systems in connection with reporting data flows. Already during the establishing process, it can be analysed (provided the business plan has been determined) to what extend AWV-reporting obligations might impact the involved companies. In so far, it could be examined if an automatic reporting procedure is required or if the occasional manual submission of AWV-reports is sufficient.

In addition to the reporting of payments further AWV-reports such as reporting of direct investment stocks of residents abroad and direct investment stocks of non-residents in Germany have to be submitted. Furthermore, receivables and liabilities towards non-residents have to be reported to the German Central Bank as well provided they exceed certain reporting thresholds.

Adoption of the Law on the Implementation of the Second Electronic Money Directive

The law on the implementation of the Second Electronic Money Directive was adopted on 1 March 2011 and published on 8 March 2011 in the Federal Gazette. Therewith electronic money business is taken out of the Banking Act (KWG) and the licensing requirements have been regulated in the Payment Services Act (ZAG). Also under this law, a licensing procedure must be conducted at the Federal Financial Supervisory Authority, if the establishment of an electronic money institution is planned. For already existing electronic money institutions, which have got a license under the Banking Act, there exist certain transitional provisions. Electronic money institutions, which previously had an exemption under the Banking Act, may continue issuing electronic money until 30 April 2012 without permission according to the Payment Services Act.

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.

The transitional provisions of ZAG are about to expire

On 30 April 2011 the transitional provisions of the Payment Services Act (ZAG) are going to end. According to that, companies who already had a license to provide money transfer business and credit card business before 25 December 2007, and companies who have provided their activities in the area of payment services (for example, the payment authentication business) without a license before 25 December 2007 can make use of the transitional provisions until 30 April 2011. However, starting on 1 May 2011, they require a licence according to the Payment Services Act to carry out the respective payment services. This licensing procedure includes the submission of extensive documentation to the Federal Financial Supervisory Authority (BaFin). Amongst others the submission of documents concerning the proof of the required initial capital, the business plan including a budget planning for the first three fiscal years as well as a description of the internal control mechanisms and the representation of the organizational structure is necessary. Since BaFin has to decide about the application only within three months after the complete documentation was submitted and since it is no longer allowed to conduct payment services according to the Payment Services Act without respective authorization after the expiry of the transitional provision, there might be a need for action.

The Restructuring Act came into force

The Restructuring Act of 9 December 2010 was published on 14 December 2010 in the Federal Gazette. Since 1 January 2011 at the latest all regulations of the Restructuring Act are binding. According to the explanatory memorandum of the Act the provisions of the Act shall regulate the proper wind-up of banks. This Act includes for banks which have run into difficulties the possibility to execute a so called controlled procedure (geordnetes Verfahren) (redevelopment proceedings and reorganization proceedings). In this context, the Federal Financial Supervisory Authority achieves the possibility to demand and enforce the necessary steps from a bank to solve their problems at an early stage.

New regulations for Electronic Money Institutions

On 27 September 2010 the Federal Government published a draft legislation which will serve for the implementation of the Second Electronic Money Directive. The content of the Second Electronic Money Directive is interlocked in a substantial part with the Payment Services Directive and the business activities of payment institutions. The implementation of the Directive shall take place until 30 April 2011. According to the explanatory memorandum of the legislation it is intended to take account the particularities of the electronic money business by creating a special type of institution. Similar to the institutions that provide payment services, it is planned to separate the activities of electronic money institutions from the Banking Act and to regulate them in the Payment Services Act. According to the Second Electronic Money Directive, the classification as a bank is no longer necessary to operate this business.

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