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BaFin’s product intervention powers in a new light

Update Banking & Finance 12/2017 - Capital Markets

Section 4b(1) of the German Securities Trading Act (Wertpapierhandelsgesetz, “WpHG”) gives the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, “BaFin”) the right of "product intervention" within Germany.

This means that BaFin is able to prohibit or restrict the marketing, distribution or sale of
(i) certain financial instruments and structured deposits, or
(ii) financial instruments and structured deposits with certain specified features as well as prohibit or restrict certain types of financial activity or practice.

BaFin has recently made use of this provision: 

Firstly, BaFin announced on 28 July 2016 that it was holding a public hearing on a general decree to be issued under section 4b(1) of the WpHG in relation to credit-linked notes. The proposed general decree would have banned the marketing, distribution and sale of certificates linked to credit risks (“credit-linked notes”) to retail clients within the meaning of section 31a(3) WpHG. The submission period for comments ran until 2 September 2016. On 16 December 2016, BaFin announced that the German Banking Industry Committee (Deutsche Kreditwirtschaft,DK”) and the German Derivatives Association (Deutscher Derivate Verband, “DDV”) had put forward a voluntary code on the issuing and distribution of credit-linked debt securities. This step was described as a response by the industry to BaFin’s concerns around investor protection with regard to retail distribution of such products. BaFin accordingly deferred the proposed decree banning the marketing, distribution and sale of products of this type, saying that it would wait six months and then review the effectiveness of the industry’s self-imposed code. On 12 July 2017, BaFin extended this monitoring period to the end of September 2017. Just recently, on 5 December 2017, BaFin announced that following the nine-month review phase it would not be banning the distribution of credit-linked notes to retail clients. BaFin explained its decision by stating that its detailed review of the issuing and distribution of these products up to the end of September 2017 had found that the DK/DDV voluntary code had largely been complied with, thereby ensuring adequate protection for private investors.

Secondly, BaFin intervened with regard to contracts for difference (“CFDs”). On 8 May 2017, it imposed a restriction on the marketing, distribution and sale of CFDs as defined in section 2(2) no. 3 WpHG. The marketing, distribution and sale of CFDs to retail clients pursuant to section 31a(3) of the WpHG was prohibited in cases where such instruments can result in a call liability for retail clients. 

BaFin’s product intervention powers will be boosted from 3 January 2018 onwards. The transposition into German law of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directives 2002/92/EC and 2011/61/EU (“MiFID II”) by way of the Second Financial Markets Amendment Act (“2. FiMaNoG”) will grant the national supervisory authority, i.e. BaFin in Germany’s case, more extensive product intervention powers than today.

Under section 15(1) of the new version of the WpHG, in conjunction with Article 42 of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (“MiFIR”), BaFin will in future be permitted to intervene not only with regard to the financial instruments listed above, but also in the marketing, distribution and sale of investment products within the meaning of section 1(2) of the Investment Products Act (Vermögensanlagengesetz, “VermAnlG”). 

Investment products as defined in section 1(2) of the VermAnlG cover the following instruments, which are not represented by securities within the meaning of the Securities Prospectus Act (Wertpapierprospektgesetz, “WpPG”) and are not structured as units/shares in investment funds pursuant to section 1(1) of the German Investment Code (Kapitalanlagegesetzbuch, “KAGB”):

(i) Shares that grant participation in a company’s profits,
(ii) Shares granting participation in assets held or managed by the issuer or a third party on its own behalf for the account of a third party (trust assets),
(iii) Loans with profit participation,
(iv) Subordinated loans,
(v) Participation rights,
(vi) Registered bonds and
(vii) Other investments that provide interest payments and repayment of capital or asset-equivalent cash settlement in return for the temporary provision of money or offer the prospect of such payments,
provided acceptance of the monies does not constitute deposit-taking business within the meaning of the Banking Act (Kreditwesengesetz, “KWG”).

In particular, BaFin will be entitled to take action under section 15(1) of the new version of the WpHG and Article 42 of MiFIR against anyone, insofar as Article 42 of MiFIR is not directly applicable.

In view of the actual product intervention by BaFin of 8 May 2017 and the planned product intervention in relation to credit-linked notes in September 2016 that has recently been averted, it remains to be seen what use BaFin will make of its extended product intervention powers going forward. There is definitely scope for surprises!


This article is part of the Update Banking & Finance, which you can subscribe to here.

Authors

Oliver Dreher, LL.M. (King's College London)
Tanja Kordys