On October 26, 2020, the German Federal Ministry of Finance (Bundesministerium der Finanzen – BMF) and the German Federal Ministry of Justice and Consumer Protection (Bundesministerium für Justiz und Verbraucherschutz – BMJV) presented the draft bill for a law to strengthen financial market integrity (Finanzmarktintegritätsstärkungsgesetz- FISG). The declared objective of the act is to strengthen the confidence in the financial market. One reason for this are “recent events”, as the ministries rather neutrally and cautiously phrased it.
In this blog post we would like to take a closer look at the draft bill and the planned changes by concentrating on what we consider to be the most important topics.
Financial statements control
The draft bill aims at a fundamental reform of the financial statement control procedure for capital market-oriented companies in favor of a procedure that is more strongly influenced by state sovereignty.
Up to now, the legality of company financial statements has been checked by way of a two-stage procedure. In the first stage, an inspection body organized under private law and commissioned by the state gets involved if there are concrete indications of a violation of accounting regulations and at the request of the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – “BaFin”). The panel is supported by the association “Deutsche Prüfstelle für Rechnungslegung DPR e.V. (DPR)”. The participation of the companies in the first stage of the procedure is voluntary. BaFin will get involved at the second stage if the company does not voluntarily participate in the audit, does not agree with the result of the audit or if there are significant doubts about the accuracy of the audit results or the proper conduct of the audit by DPR. The audit can also be enforced.
The powers of BaFin to order an audit of the financial statements or the report that was the subject of the audit by DPR are to be considerably extended compared to the current legal situation. In addition, BaFin should be able to publish both the order for the audit of the financial statements and the reason for this order in the German Federal Gazette (Bundesanzeiger) and on its website, provided that there is a public interest in doing so. The financial statements and reports of the two previous fiscal years may also be the subject of the audit. BaFin would then be able to demand information and the submission of documents from the audited company as well as from the members of its executive bodies and from auditors as well as invite obligated parties to a hearing. If there are concrete indications of significant violations of accounting standards, BaFin would also be able to conduct searches of residential and business premises. BaFin would therefore be able to make a request for a hearing. Thus, sections 107 et seq. WpHG-E (draft of the German Securities Trading Act) would grant extensive powers to BaFin.
In addition, sections 331a et seq. HGB-E (draft of the German Commercial Code) provide for adjustments to the law on financial statement offences. According to these amendments, a corporate officer who provides an incorrect affidavit concerning a financial statement and an auditor who issues an incorrect audit certificate each face imprisonment of up to five years. These provisions are intended to ensure “sufficiently deterrent sanctions”.
Financial transaction investigation
Section 31 para 5 and 5a GwG-E (draft of the German Money Laundering Act) and section 31 para. 2a and 2b AO-E (draft of the German Tax Code) provide that the German Central Office for Financial Transaction Investigations (Zentralstelle für Finanztransaktionsuntersuchungen) is enabled to automatically access selected basic tax data from the tax authorities. This is intended to make it easier to identify possible links with money laundering and terrorist financing and to speed up the processing of reports compared to the manual requests for information that have been necessary up to now.
Outsourcing
The draft bill also provides for amendments in various supervisory laws to clarify and expand BaFin’s powers in the field of outsourcing.
Amendments will be made in particular to the German Banking Act (Kreditwesengesetz – “KWG”) and the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – “ZAG”). In Section 1 para. 10 KWG-E and Section 1 para. 10a ZAG-E, outsourcing companies are first defined as companies to which an institution has outsourced activities and processes for the execution of banking transactions, financial services or other services or payment services that are typical for institutions and e-money business. This also includes such companies’ subcontractors where further outsourcing of the aforementioned activities and processes has taken place. Section 25b para. 4a KWG-E and Section 26 para. 3a ZAG-E then stipulate that BaFin may issue instructions directly to outsourcing companies to which material activities and processes are outsourced in order to prevent or stop violations of regulatory provisions. BaFin is given powers of intervention both towards companies in Germany and abroad. In the future it would be irrelevant for BaFin’s powers of intervention whether the outsourcing company is a regulated or non-regulated company.
In accordance with Section 25b para. 1 sentence 4 KWG-E and Section 26 para. 1 sentence 7 ZAG-E, institutions must also maintain an outsourcing register as part of their risk management, which covers all material and non-material outsourcings. In addition, in case of outsourcing to a company in a third country, it must be contractually ensured that the outsourcing company appoints a domestic authorized recipient to whom BaFin can serve publications and notifications.
The draft bill also provides in Section 24 para. 1 no. 18 KWG-E and Section 28 para. no. 10 ZAG-E for new or extended notification obligations of the institution towards BaFin with regard to material and non-material outsourcing.
Should the draft be implemented in this way, there would be a need for action: In particular, institutions would have to introduce an outsourcing register, implement processes for dealing with the new or extended notification obligations and adapt existing outsourcing agreements. It would make sense to complete the implementation requirements arising from the present FISG and the planned MaRisk amendment for the area of outsourcing in a coordinated manner “in one go”.
Consumer protection
The topic of “grey” capital markets is also addressed in the draft bill. Consumer protection is to be increased in the area of business models of precious metal suppliers and custodians through changes in the German Asset Management Act (Vermögensanlagegesetz – “VermAnlG”), as in the past there has been misuse resulting in damage to numerous investors in this area.
According to Section 1 para. 2 no. 8 VermAnlG-E, investments which grant or promise interest and repayment or interest and the surrender of precious metals or any other financial compensation in exchange for the temporary provision of money or precious metals shall be considered as investments. It follows that for such transactions there would be an obligation to publish a prospectus and an investment information sheet (Vermögensanlagen-Informationsblatt – VIB) in the future.
Avoidance of conflicts of interest
Although BaFin is to be granted extensive powers, there is one aspect where restrictions are to be introduced for BaFin employees in order to increase confidence in the financial market. How does that fit together? According to Section 11a FinDAG- E (draft of German Financial Services Supervision Act), employees of BaFin shall be prohibited from private trading in certain financial instruments. In the future, busy investors should therefore not apply for a job at BaFin.
Outlook
The next step will be to discuss the draft bill with the Federal Government. Of course, we will keep an eye on the legislative process regarding the FISG and keep you informed about further developments on our blog.
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