BaFin is currently working on updating its “guidance notice on managing directors pursuant to the KWG, ZAG and KAGB” (“Guidance Notice on Managing Directors”) as well as its “Guidance Note on members of management and supervisory bodies pursuant to the KWG and KAGB” (“Guidance Notice on Members of Management and Supervisory Bodies”) (together, the “Guidance Notices”). By way of a public consultation, BaFin provided interested parties with the opportunity to comment on the drafts of the updated Guidance Notices. Below, we aim to provide a brief overview of the planned amendments that we believe to be interesting. This post will first consider the amendments regarding the Guidance Notice on Managing Directors. Another post on the amendments regarding the Guidance Notice on Members of Management and Supervisory Bodies will follow shortly.
The Guidance Notices and their significance in practice
The Guidance Notices describe the requirements that, in BaFin’s view, apply to managing directors or members of management / supervisory bodies, as applicable, who are regulated by BaFin pursuant to the German Payment Services Supervision Act (ZAG), German Banking Act (KWG) or the German Investment Management Code (KAGB) as well as the process on how these requirements are assessed. The Guidance Notices are very important in practice, particularly with regard to the appointment of managing directors and members of management / supervisory bodies as the Guidance Notices reflect BaFin’s administrative practice.
Background to the reform of the Guidance Notices
The update of the Guidance Notices was mainly done to incorporate the guidelines of the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA), and more specifically, the “Guidelines on the assessment of suitability of members of the management body and key function holders” (EBA/GL/2017/12) and the “Guidelines on Internal Governance” (EBA/GL/2017/11) (together the “Guidelines”), to the extent applicable, into the administrative practice of BaFin. Additionally, notes on new forms to be used were included (particularly for investment firms) and subsequent amendments of the German Regulation Concerning Reports and the Submission of Documentation under the KWG (Anzeigenverordnung).
Reporting procedure
What has remained in the Guidance Notice on Managing Directors is that any documents and notices have to be submitted in the German language. All documents and notices in a different language require a certified translation. However, the Guidance Notice on Managing Directors no longer contains the statement that for documents in English, the responsible department within BaFin can waive the requirement of a translation. It remains unclear whether or not the possibility of such a waiver still exists.
BaFin states that the period for checking the relevant requirements is four months. In case of any open issues, BaFin can interview the relevant person.
As part of the reporting procedure, management body candidates must declare, among others, if they have been the subject of any criminal investigations in the past. The Guidance Notice on Managing Directors now clarifies that any criminal proceedings that were suspended as a result of permanent procedural impediments (e.g. the statute of limitations) do not need to be declared – unlike proceedings that have only been suspended preliminarily.
Pursuant to the Guidance Notice on Managing Directors, criminal proceedings that were terminated due to insignificance (Section 153 of the German Criminal Procedure Code, StPO) or based on certain conditions (Section 153a StPO), still need to be declared, irrespective of how long ago these criminal proceedings took place. This seems somewhat strange in light of the fact that convictions for criminal offences that have been deleted from the German Federal Central Register do not need to be declared.
As part of assessing conflicts of interest, the Guidance Notice on Managing Directors now includes ties to significant shareholders of the reporting company as a conflict of interest. Furthermore, court proceedings with and competing interests with respect to the reporting company as well as its group companies need to be reported.
Requirements for managing directors
Managing directors shall be
- qualified,
- reliable,
- commit sufficient time to perform their functions.
With respect to these requirements, the guidance note partially contains some further details and additions compared to the previous version.
i. Qualifications
Regarding the qualification, the Guidance Notice on Managing Directors now states that the management body as a whole needs to possess a sufficient degree of the knowledge, skills and experience required for the institution’s business model, its risk appetite and strategy as well as the markets in which it operates. The Guidance Notice on Managing Directors therefore now places an increased focus on the collective qualifications of the management body. With regard to the requirement of collective qualifications of the management body, the Guidance Notice on Managing Directors states that institutions subject to the KWG have to facilitate the individual managing directors’ introduction into their new role and enable them to obtain continued professional training. For the assessment of the management body’s collective qualifications, BaFin has created a suitability matrix that is designed to document the considerations of the KWG institution.
ii. Reliability
With regard to the reliability of managing directors, BaFin, in accordance with the Guidelines, states independence of mind as an important factor for the reliability of the manager. Independence of mind means that managing directors must have the inner strength to assert themselves in groups and to make their own decisions.
One point that speaks against reliability is the existence of conflicts of interest of the managing director. In its Guidance Notice on Managing Directors, BaFin now states that conflicts of interest may also arise if the managing director holds significant shareholdings in group companies of the reporting institution, if close relatives work for group companies of the institution or if there are legal disputes with the institution or a group company. Another new aspect contained in the Guidance Notice on Managing Directors is that a conflict of interest may also arise as a result of a political mandate of the managing director.
iii. Sufficient time available
BaFin clarifies that taking up any further mandates, including political activities, has to lead to a reassessment whether or not the relevant managing director has sufficient time available. Voluntary activities will only not be considered when assessing whether or not there is sufficient time available, if they are merely minor, e.g. pro bono activities at local sporting associations outside of working hours.
Duties of the managing directors
The Guidance Notice on Managing Directors now contains a new paragraph describing some of the duties of the managing directors of KWG institutions.
i. Internal guidelines
The Guidance Notice on Managing Directors states that KWG institutions are required to have a suitability policy, diversity policy, an induction and trainings policy as well as a policy on how to deal with conflicts of interest.
The suitability policy needs to stipulate rules and procedures on how to assess the individual qualification as well as the collective qualification of the management body. The policy has to be adapted to the entire governance framework of the institutions, the company culture as well as the risk appetite of the institution.
The diversity policy is required to contain targets and rules on diversity among managing directors as well as the management and supervisory body. Additionally, the institution needs to implement a diversity policy for staff in order to ensure equal treatment and equal opportunities for staff of different genders.
The induction and training policy needs to contain rules and procedures for the induction and training of the managing directors as well as the management and supervisory body.
The policy on how to deal with conflicts of interest needs to stipulate relevant rules and procedures on how to deal with conflicts of interest for managing directors as well as the management and supervisory body.
ii. Key functions
BaFin also states in its Guidance Notice on Managing Directors that staff holding key functions also need to be suitable and reliable and that these requirements need to be insured through appropriate internal processes. Key function holders are persons who have a key influence on the management of an institution but who are neither managing directors nor members of the management or supervisory body.
Cover picture: Copyright © Adobe Stock / nmann77
