BaFin’s latest adjustments to the MiFID conduct of business obligations

BaFin's latest adjustments to the MiFID conduct of business obligations | Dr. Anna Izzo-Wagner from Annerton | PayTechLaw | Cover picture: santiago-silver

According to the newly amended FAQ of the German Federal Financial Supervisory Authority (BaFin) on the MiFID II conduct of business rules pursuant to Sections 63 et seq. German Securities Trading Act (Wertpapierhandelsgesetz, WpHG), investment services providers must in future comply with a prior disclosure obligation with regard to benefits, despite the consent of clients to receive the information on costs and fees incurred only after the transaction has been concluded on a permanent data medium. In addition, according to BaFin’s new FAQ, securities account transfers may now generally take a maximum of three weeks.

 

1. FAQ on MiFID II conduct of business rules according to Sections 63 et seq. WpHG

Since the implementation of  Directive 2014/65/EU on markets in financial instruments (Second Markets in Financial Instruments Directive – MiFID II) in 2018, uncertainty has repeatedly arisen in day-to-day banking practice among the employees of individual investment services companies in dealing with the requirements of the Directive.

In order to curb these uncertainties, BaFin published the first fundamental decisions regarding the rules of conduct pursuant to Sections 63 et seq. WpHG.

BaFin’s FAQs are currently divided into 12 subsections and regulate the new topics that have arisen in the course of MiFiD II, such as the processing of client orders and benefits. BaFin updates and supplements its FAQs on an ongoing basis with a view to current problems and events on the market. The most recent revision of the FAQ took place on 13 April 2022 regarding two key points, which we would like to explain to in this article.

 

2. Adjustment of the disclosure obligations regarding benefits in business transactions via means of distance communication

Pursuant to the BaFin’s regime on benefits, investment service providers must disclose benefits received from other parties in connection with a service to the client in advance. Pursuant to Section 70 (2) sentence 1 WpHG, the term “benefits” includes commissions, fees and other monetary benefits as well as all non-monetary advantages. In addition, benefits must also be disclosed in the cost information as part of the service costs. Due to an amendment to the WpHG in the course of the so-called Crowdfunding Accompanying Act last year facilitated the provision of advice by telephone or video. As a result, investment advisors had to provide the clients with the so-called Ex-ante cost disclosure, which lists the exact costs of a securities transaction, is henceforth no longer mandatory to be submitted prior to the conclusion of the transaction. Due to the change in the law, it is now possible to submit this in the future – provided that the client agrees to it (Section 63 para. 7 sentence 12 WpHG). In practice, this raises some questions for the institutions affected by this regime of benefits.

On 13 April 2022, BaFin has now supplemented its FAQ regarding the rules of conduct with regard to benefits.

Under letter K number 5 of the FAQ, Bafin clarifies whether contrary to Section 70 para. 1 sentence 1 no. 2 WpHG (disclosure obligations regarding benefits), it is permissible if, in the case of a transaction concluded by means of distance communication, any benefits together with the costs and fees do not have to be disclosed until immediately after the transaction has been concluded, provided that the requirements under Section 63 para. 7 sentence 12 WpHG (possibility of subsequent cost information when using means of distance communication) are met.

According to the new FAQ, an investment services firm must now disclose benefits prior to the provision of the service even if the client consents to receive the information on costs and fees incurred only after the transaction has been concluded on a durable medium.

Subsequent disclosure, which is possible under certain conditions for the costs associated with the transaction, is thus not permissible precisely with regard to the benefits. An analogous application of Section 63 (7) sentence 12 of the WpHG, which allows for the possibility of subsequent cost information when using means of distance communication under the conditions listed therein, to the disclosure obligation pursuant to Section 70 (1) sentence 1 no. 2 of the WpHG is also to be rejected due to the lack of fulfilment of the analogy requirements (unplanned regulatory gap in a comparable interest situation).

With regard to the type and scope of the benefits, according to the amended FAQ, a verbal disclosure is sufficient to comply with the duties of good conduct. However, it is a prerequisite that any conflicts of interest are disclosed.

Analysis: The daily practice of the institutions regulated by MiFiD II has already in the past increasingly raised questions on the part of the institutions that require clarification in connection with the use of telecommunication means. For example, under letter B of the FAQ, a series of already clarified topics on individual questions relating to telephone recording obligations (so-called Taping) can be found. Also, in connection with benefits, BaFin last made two further amendments on March 1st 2021 under letter K of its FAQ with regard to the duration of recording and the recording obligation in customer exploration. The latest amendment of 13th March 2022 is in line with these topics and is also intended to provide more clarity on the part of the institutions in the fulfilment of their conduct of business obligations within the meaning of MiFiD II in daily practice. From the perspective of the institutions affected by these obligations, this addition is to be welcomed from the point of view of legal certainty.

 

3. Inclusion of time specifications for the processing of securities account transfers

Consumers who want to invest their money in securities need a securities account. When looking for a suitable securities account, potential investors can choose from a steadily growing number of providers and can also find out about their conditions via comparison portals and online tools in order to identify the right provider for the securities account. The customer service of the securities account provider, the securities account management and order costs and the trading options and market access offered are likely to stand out as the most important selection criteria. Since the conditions of the providers vary greatly, there may be good reasons for a change of custody account and the transfer of securities to a new custody account.

With regard to the duration of such a custody account transfer, BaFin noted in its FAQ that it already follows from the standard of Section 69 (1) no. 1 WpHG, which regulates the processing of customer orders, that securities account transfers must generally be executed “without delay”. In its amendment of 21st March 2022 under letter J number 1 of the FAQ, BaFin now added that a securities account transfer should in future regularly take a maximum of three weeks.

However, the transfer of a securities account is somewhat more complicated if there is a certain cross-border connection. The securities of an investor do not necessarily all have to be in a domestic depository; under certain circumstances they can also be in depositaries abroad. In this case, the transfer channels are very different. For the transfer of securities held in custody abroad, the same instructions from both the transferring and the selling institution to the foreign depository are usually necessary. The investor must therefore usually expect a longer processing time when transferring foreign securities.

The new amendments to the FAQ take this into account by stipulating that in the event of delays, for example because securities are held in securities abroad, the commissioned institution is obliged to inform the client immediately. Accordingly, the client must receive an interim report within five working days after the expiry of the maximum period of three weeks, which is now provided for, in which the client must also be informed of the reason for the delay, among other things. At this point, the FAQs also refer to the general principles for processing customer orders in Art. 67(1)(c) of Delegated Regulation (EU) 2017/565.

In order to be able to guarantee this protection, BaFin also examines whether the requirements for the processing of securities account transfers are complied with. Within this framework, BaFin examines:

  1. whether the institutions take appropriate measures to prevent a backlog in the processing of securities account transfers.
  2. whether, in the event that an institution is unable to process securities account transfers in a reasonable period of time, this is due to organisational reasons, such as a lack of resources.

Analysis: Many complaints that BaFin has received in recent years in the securities sector have related to the transfer of securities accounts, in particular to their duration. In the years 2020, 2021 and the beginning of 2022, a large dissatisfaction manifested itself on the part of consumers in this regard (see here: BaFin article on the topic of consumer protection from 17.03.2020 (in German)). Especially in times of stronger market movements, consumers felt slowed down by this circumstance. BaFin aims to curb these grievances with the help of the amendments described.

4. Conclusion

a) On the adjustment of the disclosure obligations with regard to benefits in the case of business transactions via means of distance communication:

With the additions to the FAQs regarding benefits, sufficient clarity has been created for the institutions concerned regarding their duties of good conduct in the context of the use of means of distance communication, which is to be welcomed on the part of the institutions from the point of view of legal certainty. Thus, another “pain point” of the institutions in connection with the practice-relevant topics of benefits and the use of means of distance communication could be clarified in a binding manner.

 

b) To include timelines for processing securities account transfers:

With the additions to the FAQs regarding donations, sufficient clarity has been created for the institutions concerned with regard to their duties of good conduct in the context of the use of means of distance communication, which is to be welcomed on the part of the institutions from the point of view of legal certainty. Thus, another “pain point” of the institutions in connection with the practice-relevant topics of benefits and the use of means of distance communication could be clarified in a binding manner.

Conversely, this means more time pressure and effort for the institutions, which now have to process the securities account transfers within a fixed time frame of a maximum of three weeks. The supervision by BaFin also contributes to increasing the pressure on the institutions. The institutions concerned would be well advised to design appropriate processes and mechanisms to meet the new requirements. One aspect of this would be, for example, the establishment of efficient information management in the event of delays in the transfer of securities accounts.

 

Cover picture: Copyright © Adobe Stock/santiago-silver

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