The Federal Financial Supervisory Authority (BaFin) will, for now, not take action against payments by third parties to investment firms (Wertpapierfirmen) for forwarding client orders (known as payment for order flow, or PFOF).
In an announcement dated 22 March 2024 BaFin stated that, should investment firms violate the PFOF prohibition with domestic clients, it will refrain from taking measures or imposing sanctions until the completion of the national legislative process in Germany. The PFOF prohibition, as contained in the amended version of the Regulation (EU) No. 600/2014 of the European Parliament and of the Council (MiFIR), stipulates that investment firms acting on behalf of retail clients and professional clients may not receive any fees, commissions or non-monetary benefits from third parties for the execution of orders from these clients at a particular execution venue (Article 39a(1)(1) MiFIR).
This ban on kickbacks is based on the principle that investment firms working for their clients should strive to obtain the best possible price and the greatest chance of execution for the transactions they carry out. Therefore, investment firms should select the execution venue or counterparty for the execution of their clients’ transactions exclusively from the perspective of achieving the best possible result for their clients. In the case of receiving kickbacks, there is a risk that these client interests are at least not fully taken into account.
EU member states can deviate from the PFOF prohibition until 30 June 2026 (Article 39a(2) MiFIR). Germany, following the announcement by the German Federal Ministry of Finance (Bundesministerium der Finanzen), intends to make use of this option as it pertains to securities orders from clients residing or established in Germany. The corresponding exemption provision is expected to be included in Section 138a of the German Securities Trading Act (WpHG) and is currently in the legislative process (BT-Drucksache 20/10280).
Nevertheless, supervised investment firms must continue to adhere to the PFOF prohibition. However, until the new regulation in Section 138a WpHG comes into effect, BaFin will not penalize any violations, provided that the requirements of the new Section 138a WpHG are met.
BaFin’s supervisory communication is available at this link.
