Banking Law

Outlook On Financial Regulations And Supervisory Practice In Germany And The EU

By Renate Prinz on 03. April, 2025

Posted In Banking Law, Financial Services

The new article by Renate Prinz in Finextra examines the regulatory framework of the European Union for the year 2025 and offers valuable insights into future developments and challenges.

Read the full article here.

ZuFinG II – The Next Step Towards Strengthening Germany as a Financial Hub?

By Annabelle Rau on 10. October, 2024

Posted In Banking Law, Crypto Regulation, Financial Services, Payment Services

Following the initial steps with the Future Financing Act (“ZuFinG I“), the Federal Ministry of Finance presented the draft of the Second Future Financing Act (“ZuFinG II-E” and “Draft Bill“) on 27 August 2024. The Draft Bill aims to further develop the German financial market and revise some of the existing regulations. The primary focus is on facilitating access to the capital markets and relieving financial actors from excessive bureaucracy.

New Regulations for Payment Service Providers Regarding Customer Funds

Payment service providers are required to safeguard customer funds they receive according to the methods outlined in the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG). This can be done, for example, through an escrow account with a credit institution, as well as through insurance or a guarantee. ZuFinG II-E now introduces an additional provision, allowing customer funds to be deposited with the Deutsche Bundesbank or any other central bank of an EU member state. This gives payment service providers another option for safeguarding customer funds compliant with insolvency law.

To protect customers, the Draft Bill further proposes explicit regulations, whereby the received funds will be legally protected if they are held in a segregated account. Until now, this protection was based only on general, non-codified rules for escrow accounts. Payment service providers will likely need to review and potentially adapt their processes in light of the new regulations. However, these amendments also provide greater flexibility by offering an additional method for safeguarding funds. Furthermore, customer protection is enhanced through the explicit provisions, leading to increased legal certainty for payment service providers as well.

Loosening Employment Protection for High Earners in the Financial Sector

The conditions for high earners in the financial sector are set to become more flexible. ZuFinG II-E proposes loosening employment protection for individuals with very high incomes in the financial sector. This includes employees whose annual fixed remuneration exceeds three times the contribution assessment threshold for general pension insurance (Section 159 of the German Social Code VI) and who are not managing directors, plant managers or similar senior executives.

Specifically, high earners who are risk-takers will be treated similarly to executive employees in terms of employment protection. This means, for example, that the employer may submit an application for termination of the employment agreement in return for severance pay, which does not require any substantiation.

Such a regulation already exists under current rules for risk-takers at significant credit institutions. The limitation to significant institutions will now be lifted and extended to include securities institutions, asset management companies, and insurance companies, among others.

Further Measures to Reduce Bureaucracy: Less Effort, More Efficiency

Additionally, ZuFinG II-E seeks to further promote the reduction of bureaucracy in financial supervision through the following measures:

Simplifying cross-border services: The Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – “BaFin“) will no longer be required to substantively review the notification of cross-border services provided by German investment firms. Instead, BaFin will simply forward the notifications to the competent authority in the host member state without a detailed examination.
Higher threshold for large exposures: The reporting threshold for large exposures and loans will be raised from EUR 1 million to EUR 2 million.
Facilitations for crowdfunding: An amendment to the German Asset Investment Act (Vermögensanlagegesetz – VermAnlG) will extend the prospectus exemption for crowdfunding offerings to also cover offers of cooperative shares.
Removal of the list for crypto securities:
- Under ZuFinG I, the requirement to publish entries of crypto securities in the German Federal Gazette was abolished to reduce the bureaucratic burden and costs for issuers.
- According to the Draft Bill, the public list of crypto securities maintained by BaFin will also be abolished to save costs and reduce the effort required by BaFin to maintain the list and by issuers to submit notifications.
Removal of the Employee and Complaints Register (Mitarbeiter- und Beschwerderegisters – “MBR”) at BaFin:
- The obligation for institutions to notify BaFin of their investment advisors, sales representatives, and compliance officers, as well as to report complaints to the MBR, will be removed, which will reduce the administrative burden on both institutions and BaFin.
- The obligation for institutions to only employ competent and reliable staff for the relevant tasks remains unchanged and is unaffected by the abolition of the MBR.

Looking Ahead: What’s Next?

The Draft Bill is still in the legislative process and is expected to undergo several amendments. However, financial sector participants can already consider how they might adapt their internal processes to comply with the upcoming regulations. In particular, the proposed bureaucratic relief and enhanced options for safeguarding customer funds present attractive opportunities for more efficient and flexible business practices.

BaFin Declines to Act Against PFOFs (For Now)

By Dr. Frederic Peine | Renate Prinz on 18. April, 2024

Posted In Banking Law

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.

Licence requirement for credit service providers – services for non-performing loans now require a licence

By Renate Prinz on 28. February, 2024

Posted In Banking Law, Financial Services, NPL

When the Secondary Credit Market Act (Kreditzweitmarktgesetz) came into force on 30 December 2023, services relating to non-performing loans, i.e. loans that are no longer being settled or are at risk of default, will require a licence. Companies that already provide credit services today had to register with BaFin in February and state that they will continue to provide these services and now have until April to submit a licence application. A transitional regulation will then apply to them, under which the services can initially still be provided without a licence. In addition, the sale of NPLs by credit institutions will be subject to clear rules, particularly with regard to the standardised communication of information on the NPLs sold.
BaFin has published FAQs on the new regulation.
These summarise initial information on the licensing requirement and licensing procedures. BaFin has also drawn attention to the changed submission deadlines.

Update for securities institutions: German Securities Institutions Owner Control Ordi-nance published

By Annabelle Rau on 17. January, 2024

Posted In Banking Law, Financial Services

On January 15, 2024, the German Securities Institutions Owner Control Ordinance was published in the Federal Law Gazette and thus entered into force today, January 16, 2024.

Owner control procedures for securities institutions

The Securities Institutions Owner Control Ordinance regulates the material and formal requirements for the acquisition of a significant shareholding in a regulated securities institution (so-called owner control procedure).

A significant or qualified shareholding is defined as the direct or indirect holding of shares in a company that represents at least 10% of the capital or voting rights of this company or that otherwise enables the exercise of significant influence over the management of this company.

Specification of the notification of the acquisition of shareholdings by the ordinance

Anyone intending to acquire such a significant shareholding or increase an existing shareholding must notify BaFin (Section 24 (1) WpIG). The Securities Institutions Owner Control Ordinance specifies how this notification must be made.

The checklists in the ordinance are useful in particular, e.g. for

Notification of the acquisition or increase of a significant shareholding by a natural person
Notification of the acquisition or increase of a significant shareholding by a non-natural person

The regulation now contains notification forms for both constellations. In addition, it contains the forms for information on the required reliability of the interested acquirer, on the presentation of complex shareholding structures and on the disposal or reduction of a significant shareholding.

Outlook

With the entry into force of the German Securities Institutions Owner Control Ordinance, there is now finally an owner control procedure tailored to securities institutions. The previously necessary recourse to parallel regulations from other German supervisory laws no longer applies. Interested acquirers should familiarize themselves with the requirements for the acquisition of a significant shareholding in a securities institution at an early stage to be able to initiate the process with BaFin as well prepared as possible.

ESG, home office and real estate transactions – BaFin publishes 7th MaRisk amendment

By Annabelle Rau on 06. July, 2023

Posted In Banking Law

The German Federal Financial Supervisory Authority (“BaFin“) published the seventh amendment to the Minimum Requirements for Risk Management of Banks (“MaRisk“) on June 29, 2023.
The MaRisk codify BaFin’s administrative practice on risk management for German banks, in particular with respect to business organization and outsourcing, and in doing so substantiates the statutory requirements of Section 25a of the German Banking Act (“KWG“).
The amendments range from requirements of the European Banking Authority (“EBA“) for lending and monitoring to exceptions for securities trading in the home office and the managing of ESG and real estate risks.

Loans: New stricter requirements for review and documentation in lending and monitoring in line with EBA guidelines.
Home office: Securities trading is now to be permitted permanently from the home office under certain requirements.
ESG: Sustainability risks are to be taken into account in the banks’ risk management in the future.
Real estate: For the first time, BaFin has defined own requirements for the management of bank-owned real estate.

Integration of EBA guidelines for lending and monitoring
BaFin has now integrated all EBA requirements for lending and monitoring into the MaRisk and thus into its administrative practice. This has added a number of formal requirements for banks in terms of processes, particularly for lending.

These include, among other things, more differentiated and more specific rules for the lending process. When granting loans, for example, a distinction will now have to be made between the category of borrower (e.g. secured consumer loans or loans to small and micro enterprises) and the type of financing involved (e.g. financing of commercial real estate or project financing).

Integration of EBA guidelines for lending and loan monitoring
BaFin has now integrated all EBA requirements for lending and monitoring into MaRisk and thus into its administrative practice. This has added a number of formal requirements for banks in terms of processes, particularly for lending.

In the context of risk classification and the drafting of contracts that is based on it, banks will have to examine more criteria in the future when determining the creditworthiness of customers. In addition, security assessments will have to be carried out even more carefully in the future as part of the drafting of contracts. If there are doubts about the potential customer’s ability to repay the loan, the reduction in creditworthiness must be calculated by means of simulations and taken into account accordingly when drawing up the contractual terms and conditions.

Securities trading now permanently possible from the home office
During the Covid 19 pandemic, BaFin had permitted securities trading from the home office under certain conditions. The 7th amendment to the MaRisk will now make this possible on a permanent basis, although the conditions formulated during the pandemic must still be met:

Specifically, securities traders’ home workplaces must be located in specified locations and enable confidential business transactions.
In addition, it must be ensured that trading can be relocated to the business premises in the event of (technical) impairments in the home office.
Furthermore, a sufficient presence of other traders on the business premises shall be ensured at all times.
In addition, all business transactions executed outside the business premises must be specially marked and brought to the attention of an area of the institute that is independent of the traders.

Appropriate consideration of ESG risks
Furthermore, the sustainability criteria of environmental, social and governance (“ESG“) have now found their way into the MaRisk and thus into the banks’ risk management. The practical requirements for dealing with risks now regularly include that the effects of ESG risks must be considered appropriately:

To determine these risks, banks should use scientifically based scenarios, which they can source from generally recognized institutions or networks and apply to their own business model, for example.
In any case, banks should not base their considerations on their own assumptions about climate change or the transition to a sustainable economy.

The wording of “appropriate consideration” refers to the proportionality principle and makes it clear that there cannot exist a “one size fits all” solution for sustainability risks. According to BaFin, smaller institutions can thus carry out a simpler ESG risk assessment depending on how they are exposed to ESG risks, for example, due to their business model. It is then possible, for example, to limit the risk analysis to the most affected risk positions or portfolios.

Managing the banks’ own real estate transactions
Since many banks have purchased real estate in the booming real estate market in recent years, BaFin has now included a new module in the MaRisk in which it formulates a large number of requirements for the assessment, valuation and risk analysis of real estate investments.

For example, in future the market value of real estate acquired by banks for their own portfolios must be determined by experts. In addition, the institution must analyse the relevant economic aspects before acquiring or constructing real estate and, in particular, include risks in the assessment.

Nevertheless, the requirements only apply if an institution’s real estate portfolio accounts for more than two percent of its total assets or exceeds the threshold of EUR 30 million. In addition, real estate funds are not affected by the new requirements.

Transition periods for the new MaRisk requirements
The new version came into force on the publication date on June 29, 2023. The amendments to the MaRisk that merely serve to clarify BaFin’s administrative practice (e.g., on the home office) already started to apply when they came into force. For the implementation of the amendments that entail new requirements (e.g., on real estate transactions), there is a transition period until January 1, 2024.

Stability through regulation

By Renate Prinz on 15. May, 2023

Posted In Banking Law, Crypto Regulation, MiCAR

The financial industry is once again facing uncertainty and turbulence, caused in particular by the demise of some banks and problems in the crypto scene. In view of the current regulatory density, the question arises whether this is sufficient to ensure the stability of the financial industry and whether it can actually help to create market security and trust. Renate Prinz classifies the current developments in the Börsen-Zeitung.

Click here to read the full article in German.

The year is drawing to a close – what’s new for 2023?

By Renate Prinz on 19. December, 2022

Posted In Banking Law, Financial Services, Funds

As the year draws to a close, it is worth taking a look at new regulations at the start of the year: As of January 1, the new Regulatory Technical Standards (RTS) on the EU Disclosure Regulation will apply to financial market participants and financial advisors. With the Disclosure Regulation, which already came into force in March 2021, respective companies must prove how sustainable their products are, the extent to which ESG criteria, i.e. ecological and social standards and good corporate governance, are observed and pursued and which strategies are applied here.

The Disclosure and Taxonomy Regulation applies to financial market participants, especially in the fund sector, but also to insurance companies offering insurance investment products, credit institutions and investment services companies providing portfolio management, as well as providers of pension products and financial advisors in these areas.

Important points of the disclosure regulation remained unclear and left questions unanswered. This is now to be remedied by the technical standards, which were already adopted in August 2022. These will once again specify with more detail what information is to be disclosed about individual financial products, how it is to be disclosed and, in particular, how information is to be disclosed about how significant environmental impacts are avoided.

From January 1, 2023, the Regulatory Technical Standards on the Disclosure Regulation must be taken into account. However, this will not be the end of the story – the EU Commission has already initiated a review to revise the RTS, with a particular focus on financial products that invest in nuclear energy and gas.

More information can be found here with further links to more detailed information.

ESG risks & Co. in the 7th MaRisk update

By Annabelle Rau on 14. October, 2022

Posted In Banking Law, Sustainability Risks

On September 26, 2022, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – “BaFin“) published an amended draft of its circular “Minimum Requirements for Risk Management” (Mindestanforderungen an das Risikomanagement – “MaRisk“), which is now open for consultation.

MaRisk codifies BaFin’s administrative practice on risk management for German banks, particularly with regard to business organization and outsourcing, and in doing so specifies the statutory requirements of Section 25a of the German Banking Act (Kreditwesengesetz – „KWG“).

The draft of the 7th MaRisk amendment includes, among other things

the implementation of the European Banking Authority (“EBA”) guidelines on credit allocation and supervision;
specific requirements for real estate transactions by banks;
basic rules that credit institutions must comply with when using risk models;
ESG risk management requirements.

BaFin for the first time explicitly imposes binding requirements on banks for the treatment of ESG risks

BaFin had already provided banks with guidance on the management of sustainability risks in its leaflet on dealing with sustainability risks. It defines the term “sustainability” in terms of “ESG” (environmental, social and governance). However, the guidance still served as a summary of non-binding “good practice” approaches. By incorporating these approaches into MaRisk, they can become part of BaFin audits in the future.

This means that banks will have to develop an approach to sustainability risks that is appropriate to their business model and risk profile. This involves adapting existing processes and developing new measurement, management and risk mitigation tools for sustainability risks.

In line with the proportionality principle of MaRisk, simpler structures, processes and methods may suffice if the risk profile is less complex. However, the more significant the sustainability risks are for a credit institution, the more elaborate the instruments must be.

Banks are also to take the impact of ESG risks into account in risk classification procedures. However, as long as this proves to be impracticable, separate ESG scores can also be used in the assessment of creditworthiness and credit assessment, according to BaFin.

The consultation will run until October 28, 2022. BaFin and Deutsche Bundesbank are accepting comments by e-mail to konsultation-06-22@bafin.de and B32_MaRisk@bundesbank.de with the subject “Consultation 6/2022”. The new version of MaRisk will then replace the currently valid Circular 10/2021.

New BaFin circulars on liquidity standards

By Renate Prinz on 02. September, 2022

Posted In Banking Law

In August, BaFin published new circulars on the quantitative liquidity standards of the CRR (Capital Requirements Regulation), which, in particular,

address the regulatory treatment of off-balance sheet products in the structural liquidity ratio (Net Stable Funding Ratio – NSFR or “simplified NSFR”) as well as
adjust the materiality criteria for annual reporting (Art. 23 of Delegated Regulation 2015/61).

The two circulars are relevant for all institutions to which Article 6 (2) CRR apply and which are classified as “Less Significant Institutions (LSIs)” pursuant to Article 6 (4) SSM Regulation, as well as for all institutions pursuant to Section 1a German Banking Act (KWG) which are not CRR credit institutions, but which are classified as CRR credit institutions with regard to the application of certain standards (Section 1a (1) KWG).

The adjustment of the materiality criteria is intended in particular to relieve many institutions of the reporting obligation, to ensure that reports only have to be submitted by institutions for which the respective product groups are also relevant in terms of substance, i.e. higher thresholds for the materiality criteria and more precise determination of the products and services covered by Art. 23 (1) a) – h) IR 2015/61 and associated liquidity outflows.

The liquidity standards distinguish between liquidity coverage ratio (LCR) and the structural liquidity ratio (NSFR). The NSFR is intended to hedge structural, longer-term liquidity risk, i.e., to ensure that institutions have sufficient and stable funding over the long term to reduce their stress sensitivity. Accordingly, institutions must have a minimum level of stable funding. The LCR, on the other hand, addresses short-term liquidity and ensures a liquidity buffer for a stress scenario of at least 30 days, with the respective stress scenario being specified by the supervisory authority.

Circular 6/2022 has been applicable since publication on August 1, 2022 and is to be taken into account for the first time for the reporting date of March 31, 2023. Circular 7/2022 applies from August 15, 2022.

To access the circulars, click here:

Circular 6/2022

Circular 7/2022

A summary of the measures and further background explanations can be found here.