Germany: BaFin finally decides not to prohibit the distribution of retail credit-linked notes (bonitätsabhängige Schuldverschreibungen)

December 2016: The industry's reaction to the announced distribution ban

At the end of July 2016, BaFin had announced its intention to exercise its right to prohibit a financial instrument for the first time: this act referred to the marketing, distribution and sale of credit-linked notes (previously – according to BaFin misleadingly named – Bonitätsanleihen, now bonitätsabhängige Schuldverschreibungen). The industry had not only commented to these plans as requested, but presented a self-commitment for the issue and distribution of these products in mid-December 2016 and thus reacted to the investor protection concerns raised by BaFin. Based on ten principles, the industry – as represented by the DK and the DDV – has committed itself to, inter alia, improving transparency and advice about risks, increasing quality control for the selection of the reference entity and restricting their distribution to investors with a higher risk appetite.

January to September 2017: BaFin's monitoring of 106 newly issued retail credit linked notes

Consequently, BaFin deferred the planned prohibition and intensively examined during the following six months whether the package of measures proposed by the industry would be effective: this was carried out by checks on securities prospectuses and product information sheets, inspection of advertising and information material as well as product descriptions on the issuers' websites, on-site inspections to ascertain the observation of the principles regarding distribution and evaluations of the investment advice minutes. Overall, the Authority monitored a total of 106 newly issued credit linked notes from a number of issuers.

Sufficient retail investor protection achieved by the certificates industry's voluntary commitment

After having concluded this intensive monitoring phase, BaFin has made its final decision not to introduce a prohibition, but will continue to review adherence to the voluntary commitment as part of its regular market and product supervision. Elisabeth Roegele (BaFin's responsible Chief Executive Director) concluded that this process as seen with retail credit linked notes exemplifies that "BaFin can significantly improve investor protection without introducing a prohibition". Please click here to read more about BaFin's decision.