Tag: license

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Banking Business in Germany: 5th revised edition is now available

I am happy to announce that the 5th revised edition of Banking Business in Germany is now available. You can order it at „Fachverlag Moderne Wirtschaft“ (34,50 EUR). It is also available as an E-Book at ciando (28,50 EUR).

Cover picture of "Banking Business in Germany", 5th revisededition

Banking Business in Germany, new 5th revised edition

 

“Banking Business in Germany” is again a joint project of the Association of Foreign Banks in Germany and PwC.

From the Preface, written by Thomas Schäfer, Minister of Finance of the State of Hessen:

Now in its fifth edition, „Banking Business in Germany“ presents the legal and economic frameworks for the banking sector in Germany.

[…]

With the European Central Bank and the Bundesbank located here, Frankfurt is a leading location for international monetary and currency policy. And since the Single Supervisory Mechanism (SSM) has been placed under the auspices of the European Central Bank in November 2014, the financial centre of Frankfurt as a whole has become even more valuable and attractive for foreign institutions. And so, together with the European Insurance and Occupational Pensions Authority (EIOPA) and the European Systemic Risk Board (ESRB), Frankfurt is not only the centre of European monetary policy, but has also become a centre for regulatory authorities and supervisory agencies that can boast a competitive regulatory environment.

Over the last few years, the main objective of regulatory efforts at international, European and national level has been the rebuilding of trust in the financial markets. The creation of a Capital Markets Union and the implementation of new European requirements for financial market products are just two of the changes we will have to adapt to. I believe that Frankfurt should contribute towards achieving a change of direction: after years with a focus on regulation, it is now time for the simplification and optimisation of framework conditions. If these challenges can be actively addressed, I am confident that Frankfurt will be able to successfully defend its market position among the competition provided by global financial centres.

[…]

We welcome all financial institutions coming to Germany and contributing to this financial market, thereby enabling customers to choose from a diverse range of financial products.

I hope you will enjoy reading this publication and I cordially welcome you to Germany.

 

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.

Banking Business in Germany, 4th edition – now available

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

banking-business-in-germany-auflage-4-cover

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.

Licensing requirements under the Investment Code (KAGB) and the ongoing debate at EU level on the distinction of closed and open ended alternative investment funds (AIFs)

There is currently an ongoing discussion about the criteria of demarcation between closed and open ended funds between the European Commission and the European Securities and Markets Authority (ESMA). The determination of these criteria is relevant not only with regard to compliance obligations of the asset management companies – in particular with respect to rules related to liquidity management-, but also with regard to the application of the transitional provisions of the KAGB.

Depending on whether a fund is classified as open ended or closed, different rules apply. This is in particular decisive for the question whether the management of funds preexisting to the entry into force of the KAGB requires a license according to the KAGB and thus whether the respective manager of an AIF shall submit an application for a license.

ESMA set the frequency of redemption opportunities as a criterion for the distinction between open ended and closed AIFs. An annual redemption frequency should lead to a classification as open-ended AIFs. An AIF should be deemed closed if the redemption possibility is provided less than once annually.

The application of this criterion was rejected by the European Commission; hence ESMA has developed a new proposal (2013/ESMA/1119), which provides that any possibility of redemption of the investor prior to the liquidation of the AIF leads to a classification as open-ended AIF. In addition, ESMA proposes to apply the currently applicable Member States’ law for the transitional provisions. This solution would provide legal certainty for those managers of AIFs that operate without a license on the basis of preexisting investment management contracts.

It remains to be seen how the European Commission will react on this new proposal.

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.

 

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)

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.

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.

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