The supervisory law for banking and financial services
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Complexity and diligence in financial services regulatory law
Today's regulatory framework for banking and financial services is highly complex and confusing due to the multitude of national and European legal regulations. High barriers to entry exist for companies wishing to operate in this sector. Even during ongoing operations, considerable effort is required to comply with the various reporting obligations and capital requirements. A key challenge when starting a business or preparing a project is clarifying which licensing and prospectus requirements may be affected.
Given the serious, sometimes criminal, consequences of breaches of these obligations, all activities with potential regulatory implications must be carried out with the utmost care.
In particular, financial service providers, banks, savings banks, payment service providers, investment advisors, asset managers and initiators of funds and capital investments are affected by regulatory issues.
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3Advice on supervisory law
In the area of supervisory law, advice covers in particular the following topics:
Support in the establishment, acquisition, or sale of financial services institutions, as well as the review of business models and projects with regard to their licensing requirements, are central components of our work. Another focus is the licensing process pursuant to Section 32 of the German Banking Act (KWG), also known as the BaFin license. In addition, we offer comprehensive advice on current regulatory requirements, such as Basel III/IV, CRD IV/CRR, MaRisk, MiFID II, PSD 2, the Money Laundering Act (GWG), the Capital Investment Act (KAGB), the Institutions Remuneration Ordinance (InstitutsVergV), and the Payment Services Act (ZAG).
In addition, our consulting services include the preparation and review of prospectuses and support during the approval process in accordance with the provisions of the Securities Prospectus Act (WpPG), the Securities Prospectus Regulation (WpPV), the Capital Investment Code (KAGB), and the Capital Investment Act (VermAnlG). With regard to outsourcing projects, we offer advice, particularly on outsourcing pursuant to Section 25b of the German Banking Act (KWG).
Another focus of our consulting services is the implementation of securities trading law requirements, such as disclosure obligations, MiFID II, Sections 31 et seq. of the German Securities Trading Act (WpHG), insider trading law, and Sections 12 et seq. of the German Securities Trading Act (WpHG) in business processes. This also includes advice on the legally compliant drafting of contracts and forms, as well as on the introduction of remuneration systems in accordance with the requirements of the Capital Requirements Regulation (CRR) and the German Remuneration Ordinance (InstitutsVergV).
We also support special audits under the German Banking Act (KWG) and the German Securities Trading Act (WpHG), as well as audits on issues related to the Money Laundering Act and Know Your Customer (KYC). We also offer in-house training on these topics.
In many cases, the aim is to adapt business models so that no licensing requirements are triggered where this is reasonable and possible. This also applies to prospectus requirements, for example, under the EU Prospectus Regulation 2018 (Regulation (EU) 2017/1129), the Key Information Documents Regulation for packaged retail and insurance-based investment products (PRIIPs Regulation), the Securities Prospectus Act (WpPG), the Capital Investment Code (KAGB), and the Capital Investment Act (VermAnlG).
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BaFin authorisation and business licence in the financial sector
In the financial sector, a specific business license is required for almost every activity. This can either impose very stringent requirements, such as the BaFin license under the German Banking Act (KWG), the German Investment Code (KAGB), or the German Payment Services Act (ZAG), or at least stringent requirements regarding licensing and ongoing operations, as is the case with the licenses under Section 34f of the German Trade Regulation Act (GewO) for financial investment intermediaries and Section 34h of the German Trade Regulation Act (GewO) for fee-based financial investment advisors.
In particular, the BaFin authorization under Section 32 of the German Banking Act (KWG) (BaFin license) requires proof of adequate initial capital and sufficient equity for ongoing operations. Furthermore, suitable managing directors must be appointed. These requirements pose a significant challenge for startups or fintech companies without capital-rich investors.
For payment services, particularly those related to e-money, a license under the Payment Services Supervision Act (ZAG) is required. This license is subject to essentially the same requirements as a BaFin license under the German Banking Act (KWG). However, it is often not recognized that the ZAG also applies to certain business models that involve the provision of payment services. Therefore, a thorough review of the business model is necessary to ensure that no unnoticed violation of the license requirement occurs.
In the area of capital investments, the German Capital Investment Code (KAGB) is relevant when funds are collected for joint investment, regardless of the intended use. Anyone wishing to invest and manage collected funds as an investment management company (KVG) requires a BaFin license. Here, too, it is often not recognized in practice that the KAGB applies in all cases where joint capital is managed – including cases where money is collected from personal acquaintances.
A thorough review of whether the business model is subject to licensing requirements is essential. Violations of these requirements can be prosecuted as criminal offenses, and BaFin can order the repayment of the collected funds, which can have catastrophic consequences for providers and investors.
For a license under Section 34f of the German Trade Regulation Act (GewO) as a financial investment broker and under Section 34h of the German Trade Regulation Act (GewO) as a fee-based financial investment advisor, among other requirements are a professional qualification examination at the Chamber of Industry and Commerce (IHK) and professional indemnity insurance with a coverage amount of at least EUR 1,130,000 per insured event. These requirements also represent a significant hurdle for many affected individuals.
Liability umbrella in the area of investment advice
A "liability umbrella" allows investment advice and brokerage to be provided without direct BaFin authorization. According to Section 2 Paragraph 10 Sentence 6 of the German Banking Act (KWG), this constitutes an exception under banking supervisory law. In this model, investment advice is provided in the name and for the account of a bank or financial services institution that holds BaFin authorization. The investment advisor acts as a tied advisor or broker and must register with BaFin.
By using a liability umbrella, the stringent requirements for BaFin authorization can be circumvented. However, the advisor is bound by the specifications of the liability umbrella in their product selection and advisory activities. In return, the liability umbrella assumes liability and monitors the advisory activities, and it also receives compensation for this liability. In addition, the liability umbrella provides the advisor with documentation that complies with regulatory requirements, which represents significant added value for the advisory practice.
Each advisor must individually weigh up whether the advantages of assuming liability and complying with regulatory requirements outweigh the disadvantages of the commitment and the associated costs. Our specialized advisors are available to assist you in this decision-making process.
Consulting for fintechs in the financial sector
The financial sector has been undergoing profound change for several years, driven primarily by founders with innovative business models in the fintech sector. This development, often described as disruptive, presents companies with new legal and regulatory challenges.
Our specialized lawyers and tax advisors offer FinTechs comprehensive advice, clarifying the legal and tax framework and helping to avoid regulatory pitfalls. Thanks to our many years of experience in successfully advising startups, our clients also benefit from in-depth expertise in the FinTech sector.
We offer comprehensive advice on the appropriate corporate law structuring of your business model and handle the regulatory review, including clarifying licensing and prospectus requirements. Furthermore, we offer integrated corporate law, tax, and regulatory advice, enabling the efficient development and implementation of your business model. This combined expertise accelerates and significantly simplifies the implementation of your projects.
Our advice on financial and regulatory law
Financial and regulatory law represents a highly specialized yet broad field of consulting. It requires comprehensive knowledge and a clear overview of extremely complex legal matters, which are constantly evolving due to innovations and expansions of regulations by European and German legislators. A close combination of expertise in regulatory, tax, and corporate law is essential.
Knowledge of the administrative practices of the Federal Financial Supervisory Authority (BaFin), as the competent supervisory authority, is also crucial. For complex mandates, it is therefore important that they be handled by a cross-disciplinary team of specialized lawyers and tax advisors. This way, clients can expect holistic and coherent advice that covers all relevant legal aspects.
Our specialized lawyers bring many years of professional experience, many of whom have also gained practical experience in the financial sector. This expertise guarantees sound advice and customized solutions that meet the stringent requirements of financial and regulatory law.
Professional advice & support
We offer you professional and comprehensive initial advice in the area of banking and capital market law. Take advantage of your opportunity and avoid mistakes.
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