New supervisory regime for investment firms through the WpIG

PayTechLaw_Neues Aufsichtsregime für Wertpapierfirmen durch das WpIG_Jo Panuwat D

According to the government draft, investment firms will be subject to a completely new supervisory regime – the Securities Institutions Act (Wertpapierinstitutsgesetz, WpIG) – from 26.6.2021. The regime for credit institutions will thus no longer apply to investment firms – with the exception of bank-like large investment firms; for these, the rules of CRR credit institutions will continue to apply.


1. What and whom does the new WpIG regulate?

The current government draft of the new Securities Institutions Act (Wertpapierinstitutsgesetz, WpIG) transposes European requirements (Directive (EU) 2019/2034 on the supervision of investment firms) into national law. The draft law focuses on the principle of proportionality: BaFin is to intensify supervision in proportion to the size of the investment firms and the riskiness of certain business models. The underlying goal is to strengthen financial stability and financial market supervision.

Proportionate to the size and importance of the securities institutions, the WpIG essentially contains requirements with regard to initial capital and further capital requirements, the business organisation as well as the management board and the remuneration policy.

So far, the supervisory requirements for investment firms are already part of European regulations and their national implementation – in Germany, the regulations are mainly found in the German Banking Act (Kreditwesengesetz, KWG). In contrast to credit institutions, however, investment firms have a business model with a different risk profile. This is because investment firms are financial companies that offer a securities-related financial service and – unlike a credit institution – do not accept deposits.


2. Which investment firms are affected by the WpIG?

Following the principle of proportionality, the WpIG provides for different requirements for investment firms of different sizes.

As a result, three size classes (large, medium and small investment firms) were formed for investment firms:

  • Class 1 bank-like – Large investment firm (balance sheet total EUR 15 billion or more or balance sheet total is below this threshold but the investment firm belongs to a group and the balance sheet total of all group entities together is EUR 15 billion or more),
  • Class 2 Medium-sized investment firms,
  • Class 3 Small investment firms engaged only in activities that do not give rise to interconnectedness.

The following criteria in particular shall be used to distinguish between classes 2 and 3. If one of the criteria is not met, an investment firm falls into class 2:

  1. the balance sheet total of the investment firm is less than EUR 100 million
  2. the total annual gross income from investment services and activities of the investment firm is less than EUR 30 million
  3. the amount of assets under management is less than EUR 1.2 billion
  4. the amount of customer orders processed is below
    (a) EUR 100 million/ day for spot transactions; or
    (b) EUR 1 billion/ day for derivatives
  5. the amount of assets under custody and administration is zero
  6. the amount of client funds held is zero
  7. the amount of the daily transaction value from the trade is equal to zero

Large Class 1 investment firms are essentially subject to prudential requirements. Their business models and risk profiles are comparable to those of major credit institutions. Moreover, given their size, business models and risk profiles, large investment firms may pose a threat to the stable and orderly functioning of financial markets. Thus, large investment firms are subject to the provisions of the CRR.

In future, Directive (EU) 2019/2034 and its national implementation in the WpIG will apply to medium-sized and small investment firms in classes 2 and 3. This is intended to create a simple, understandable and clear legal system in particular for approx. 750 small and medium-sized investment firms that have to comply with lower requirements than credit institutions or large investment firms, which is completely detached from the KWG.

There are currently no class 1 investment firms, only licensed class 2 and 3 investment firms. As a result, a maximum of 70 investment firms and thus a maximum of 10% of all investment firms licensed in Germany fall into class 2, the rest into class 3.


3. Essential regulations

The classification into different classes primarily has repercussions on the capital requirements of the investment firms:

Class 1 investment firms are subject to the applicable capital requirements of the CRR. Another special feature is a notification requirement for large investment firms for so-called key functions: Such a notification requirement is necessary because these key functions are increasingly of outstanding importance alongside the managing directors. Holders of key functions are persons who have a significant influence on the management of a large investment firm but who are not directors. They include, in particular, the heads of internal control functions. Other key function holders may include heads of major lines of business, branches in the European Economic Area, subsidiaries in third countries and other internal functions, provided they are identified as a key function by firms using a risk-based approach.

A new system of capital requirements is introduced for class 2 investment firms: The system for these capital requirements is fundamentally different from the system used for investment firms that are subject to the scope of application of the CRR. In essence, the focus is more on the activities of the investment firms and not on balance sheet values. Consequently, the new system is based on different measures than in the area of banking supervision. Therefore, no risk weightings are used to determine the capital requirements (unlike in the case of counterparty risks in the banking sector). It is therefore a question of risks for the investment firm itself, for its clients and for the market. The calibration of the new capital requirements for class 2 investment firms was therefore carried out in such a way that the total capital requirements relieve class 2 investment firms.

In addition to the implementation of these principles with regard to capital requirements, the WpIG also contains, in proportion to the size and importance of investment firms for financial stability, essentially

  • Initial capital requirements,
  • Requirements for business organisation and certain notification obligations,
  • Supervisory powers of the competent supervisory authorities (especially: with regard to the solvency of investment firms and capital and liquidity requirements),
  • Benchmarks for assessing the adequacy of internal capital requirements – the internal capital and liquid assets of MSEs must be adequate in terms of quantity, quality and distribution to cover the risks to which MSEs are exposed -,
  • Requirement for the board of directors and supervisory bodies of investment firms with regard to internal corporate governance; and
  • Rules on the remuneration policy towards certain categories of staff of the investment firms.


4. Future permit procedure

The supervisory authorisation or licensing procedure was previously regulated uniformly, also for investment firms, in Section KWG.

According to the central provision of Section 15 WpIG, a licence under the WpIG is required in particular for anyone who provides investment services within the meaning of Section 2 (2) sentence 1 numbers 1-10 or the ancillary investment services of Section 2 (3) numbers 1, 2 and 4 in Germany without exceeding the above-mentioned thresholds. Securities services here are, for example, the financial commission business, the issuing business, investment brokerage, investment advice, contract brokerage, the operation of a multilateral trading facility, financial portfolio management, proprietary trading or the placement business. Relevant ancillary services include the safekeeping and administration of financial instruments (excluding units of account and crypto assets) for others (including custody), the granting of loans for the performance of securities services and foreign exchange transactions.

Section 15 refrains from repeating the wording “on a commercial basis or to an extent that requires a commercially established business”, as this wording is already part of the facts in Section 2(2).

A licence pursuant to section 15 WpIG cannot be combined with a licence pursuant to section 32 KWG, sections 10(1), 11(1) ZAG, section 8 VAG or section 20 KAGB.

However, the thresholds provided for in Section 32 (1) KWG must be observed. According to this, an investment firm can exceed the threshold to become a KWG institution in the course of time and must then submit an application for permission according to § 32 KWG. According to section 32 (1) no. 1 KWG, the threshold is exceeded if the monthly average of the company’s total assets calculated over a period of 12 months exceeds EUR 30 billion and the company engages in issuing business, proprietary trading or proprietary business.


5. Transitional provisions and outlook

The current draft of the transitional provision of the WpIG also contains transitional provisions for existing investment firms. These were previously granted a licence under Section 32 KWG. So that these companies do not have to reapply for a licence according to Section 15 WpIG, the licence according to WpIG is deemed to have been granted for them. A rewriting of the previous licence is not provided for.

The authorisation requirement under section 32 KWG is to take a back seat to the authorisation under the WpIG. However, if these small and medium-sized investment firms grow later in the course of their business development beyond the legally determined thresholds and thus tend to become systemically relevant, they should again be subject to supervision under the KWG in accordance with the provisions.

Credit institutions will remain free to conduct securities business. Nothing will change for them compared to the existing legal situation; the WpIG does not apply to them.

The same applies to financial services institutions specialising in financial services that are not covered as investment services by the WpIG (e.g. finance leasing, factoring, crypto custody, investment management).


Finally, the WpIG will also make it necessary to adapt existing circulars, such as BaFin’s “Minimum Requirements for Risk Management – MaRisk”, or to replace them with corresponding new circulars; at least with regard to the areas that are relevant for investment firms.



Cover picture: Copyright © Adobe Stock / Jo Panuwat D

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