Financial Services

FinmadiG and KMAG – Implementation of European crypto-financial market regulation in Germany

By Annabelle Rau on 29. January, 2024

Posted In Crypto Regulation, Financial Services

The German legislator has responded to the harmonization of European financial market regulations: In October 2023, the Federal Ministry of Finance published the draft bill for the Act on the Digitization of the Financial Market (Finanzmarktdigitalisierungsgesetz – “FinmadiG“), followed by the publication of the government draft of the FinmadiG just one month later.

MiCAR, DORA and money transfers – what does the FinmadiG implement?

The FinmadiG is intended to implement the following EU regulations on digital financial market regulation:

  • Markets in Crypto-Assets Regulation (“MiCAR”): The first EU-wide uniform set of rules for markets in crypto assets (we provided information here, for example)
  • The EU DORA package (Digital Operational Resilience Act): The financial sector-wide EU regulation of cybersecurity, ICT risks and digital operational resilience
  • Revision of the EU Transfer of Funds Regulation (TFR): Including regulating the collection and disclosure of customer information in crypto transfers

New regulations on the terms “crypto assets” and “crypto custody business”

The FinmadiG is intended to harmonize the German definition of crypto assets with the European MiCAR standard. The term crypto assets will be removed from the catalogue of financial instruments of the German Banking Act (“KWG“), which means a realignment of the regulatory coverage of crypto assets. In future, crypto assets as defined by MiCAR will be directly covered and regulated by MiCAR.
At the same time, a new term – cryptographic instrument – will be introduced. This is intended to cover digital assets that do not fall within the scope of MiCAR (e.g. security tokens within the meaning of MiFID II) and must therefore continue to be regulated by the KWG and the German Securities Institutions Act.
Consequently, the previous national crypto custody business will also be renamed “qualified crypto custody business”. In future, it will apply to the custody of crypto assets that do not fall under MiCAR but qualify as cryptographic instruments within the meaning of national regulations.
In future, both issuers and providers of crypto services will therefore have to check exactly which crypto asset term the respective tokens fall under and which supervisory regime will subsequently apply.

MiCAR supervision by BaFin: the new Crypto Markets Supervision Act (KMAG)

The German Federal Financial Supervisory Authority (“BaFin“) is responsible for the supervision of crypto assets, issuers, and service providers within the meaning of MiCAR. To regulate its powers and sanctions in connection with the new regulation, a separate Crypto Markets Supervision Act (“KMAG”) is to be created.
The KMAG also addresses the possibility of a simplified licensing procedure for institutions that are already regulated. The exact structure of the simplified procedure is then to be regulated by a separate ordinance to be issued by the BMF.

Digital resilience of the financial sector: implementation of DORA

DORA addresses the digital operational resilience of financial companies in a standardized manner to create a common framework for the effective management of cyber security and ICT risks. BaFin recently published its own DORA information page on this.
To implement DORA, the FinmadiG provides for numerous amendments to national supervisory laws. This also includes authorization bases for BaFin orders in the event of violations of DORA as well as the introduction of administrative offenses that can be punished with a fine.

Crypto and money laundering: implementation of the TFR

The FinmadiG also aims to adapt national regulations to the requirements of the updated EU Funds Transfer Regulation. In future, crypto service providers will have to collect, transmit and make available information on the originators and beneficiaries of the transfers of crypto assets they carry out. In addition, such crypto service providers will continue to be considered obliged entities under money laundering law within the meaning of the Money Laundering Act (“GWG“).

Outlook

The form in which the implementation proposals of the FinmadiG will find their way into legislation remains to be seen. In particular, the dual regulation of crypto assets under MiCAR on the one hand and security tokens under MiFID II on the other, which was already laid out in MiCAR, will continue to challenge legal practitioners in the future. It is to be hoped that the German legislator will find a way of implementation that is comprehensible and legally secure in practice.

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.

United Kingdom’s digital pound meets public backlash – Why?

By Annabelle Rau on 17. July, 2023

Posted In Financial Services

It’s not only the EU with its plans for a digital Euro that’s addressing the matter of Central Bank Digital Currency (“CBDC“). The UK has also unveiled an ambitious roadmap for the introduction of a ‘Britcoin’ by 2030. In a conversation with Cointelegraph, Annabelle Rau sheds light on the impacts of CBDCs on privacy, financial inclusion, and the risks of bank runs.

Follow this link to the full version of the article on Cointelegraph.

ESG query obligation will also apply to German investment intermediaries (Finanzanlagenvermittler)

By Annabelle Rau on 03. February, 2023

Posted In Financial Services, Financial situation intermediary

ESG is also coming to German investment intermediaries!
On November 11, 2022, the German Federal Ministry of Economics presented a draft bill for a Regulation Amending the Trade Notification Regulation and the Financial Investment Intermediaries Regulation. As a result of the amendment, German investment intermediaries licensed under Section 34f of the German Trade Regulation Act (Gewerbeordnung – „GewO“) will have to ask their customers about their sustainability preferences in the context of investment advice and take these into account in a suitability test.

Alignment of the ESG query obligation with the European regulatory standard
Since August 2022, investment advisors and financial portfolio managers licensed under the German Banking Act (Kreditwesengesetz – “KWG“) have been required to ask their clients about their sustainability preferences and to recommend only financial instruments that meet these sustainability preferences (we reported here).

The background to this was a delegated act of the European Commission on MiFID II (“Delegated Regulation”), which imposed an ESG query obligation on European banks and investment firms.

However, the German Investment Intermediaries Regulation (Finanzanlagenvermittlungsverordnung – “FinVermV“), which applies to German investment intermediaries, has so far only referred “rigidly” to a specific version of the EU regulations – the newly imposed ESG query obligation therefore remained without consequence for national investment intermediaries.

The draft legislation now provides for a so-called “dynamic” reference to the EU-Regulation “as amended”. This means that future amendments to the Delegated Regulation will automatically apply to investment intermediaries licensed in Germany.

What does this mean in concrete terms for German investment intermediaries?
In future, German investment intermediaries will have to obtain information from their customers about their sustainability preferences when providing investment advice and then take this information into account and document it when assessing the suitability.

The sustainability preferences to be determined are divided into three categories:

  • Do the financial instruments contain a minimum proportion of environmentally sustainable investments as defined in the Taxonomy Regulation (Regulation (EU) 2020/852)?
  • Do the financial instruments contain a minimum proportion of sustainable investments within the meaning of the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088)?
  • Do the financial instruments take into account the main adverse impacts on sustainability, thereby excluding financial instruments with certain negative impacts (e.g. human rights violations and greenhouse gas emissions)?

Further changes for German investment intermediaries
In addition to the new obligation for sustainability exploration, the draft bill provides for further amendments to the FinVermV:

  • The catalog of professional qualifications that are treated as equivalent to the necessary expert examination (Section 4 (1) FinVermV) is expanded to include the successfully passed final examination as a businessman or businesswoman for insurance and financial investments.
  • The written form requirement for the negative declaration (Section 24 (1) sentence 5 FinVermV) is replaced by a text form requirement.
  • The subject of “sustainable financial investment products” will be included in the subject area catalog of the qualification examination for German investment intermediaries.

The draft bill still needs to be agreed within the German government, but it can be assumed that the new regulations will be implemented. However, it is not yet known when the regulation will come into force and when the new rules will apply to financial investment intermediaries.

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.

BaFin on the new sustainability exploration in investment advice and financial portfolio management

By Annabelle Rau on 17. August, 2022

Posted In Financial Services

In a publication dated August 3, 2022, BaFin referred to the now applicable obligation of investment advisors and financial portfolio managers to conduct customer exploration with regard to the sustainability preferences of customers.

  • Customer exploration now also includes sustainability factors, which is why the suitability check and declaration is expanded to include the aspect of the customer’s sustainability preference.
  • The background is the Delegated Regulation (EU) 2021/1253 of the European Commission, which regulates the inclusion of sustainability factors, risks and preferences in certain organizational requirements and conditions for the operation of securities firms.
  • In practice, this means that investment advisors must now ask their clients about their sustainability preferences and may only recommend financial instruments to them that meet these sustainability preferences.
  • Sustainability preferences are divided into three categories:
    • environmentally sustainable investments within the meaning of the Taxonomy Regulation (Regulation (EU) 2020/852)
    • sustainable investments within the meaning of the Disclosure Regulation (Regulation (EU) 2019/2088).
    • according to whether a financial instrument should take into account the most significant adverse impacts on sustainability, thereby excluding financial instruments with certain negative impacts, such as human rights violations and greenhouse gas emissions.
  • Concrete specifications on the design of the exploration are still pending, but are expected with regard to guidelines of the European Securities and Markets Authority (“ESMA“), which are only available in draft form so far.

BaFin points out that it will closely monitor the implementation of the new regulations and – where necessary – request securities companies to make improvements. Compliance with the new regulations will also be examined in the annual audit under the German Securities Trading Act.