New practice for cross border financial services rendered by Non-EEA FI's

With a press release dated 16 September 2003 the German Financial Supervisory Authority ("BAFin") has published an official statement on licence requirements for rendering cross-border financial services into Germany ("Announcement"). The Announcement is the result of a process that has lasted for more than eighteen months. During this time the BAFin has consulted foreign financial institutions and their lobby groups as well as the German Ministry of Finance. The Announcement describes the administrative practice the BAFin will apply in the future. This new administrative practice is likely to have a major impact on the business of non-EEA financial institutions with customers domiciled in Germany ("German Customers").

Previous Situation

So far the BAFin deemed cross-border financial services to be provided within Germany and therefore requiring a licence under the German Banking Act as soon as an "essential part of the activity" was carried out within Germany. This was particularly the case where representatives and intermediaries of a foreign financial institution dealt with customers within Germany and had the competence to make business decisions for the foreign financial institution. Except for the public distribution of non-German mutual investment funds and of securities, the provision of financial services via the Internet or other ways of remote access was not considered an activity carried out within Germany.

Newly Announced Practice

With its newly announced administrative practice the BAFin "tightens the screw" on non-EEA financial institutions significantly. In determining whether or not cross-border financial services (and rendered by a foreign financial institution to a German Customer) have to be deemed as being conducted in Germany the BAFin now differentiates by means of the way the business connection has been established. Only in cases where the German Customer has approached the foreign financial institution solely on his own initiative, the financial services are, according to the BAFin, not conducted in Germany and do not trigger a licence requirement. Accordingly the BAFin deems any activity aiming for conducting financial services with German Customers (e.g. e-mails, ordinary mail, website, personal visits, advertising) to require a licence. In order to concretise this rather general approach the BAFin has given more specific guidance with regard to a number of different activities. However, the BAFin has reserved the right to decide on a case-by-case basis when asked for an official ruling.

Specific Guidance

More specific guidance was given with regard to the following business activities and models: Lending business (especially syndicated loans), underwriting business, money transmission services, non-EEA deposit broking, visiting German Customers, usage of an intermediary network, communication by (e-)mail and fax, advertising and Internet presence. The BAFin, for example, decides whether or not an Internet presence (also) addresses German Customers by a large number of indicative criteria such as language, legal, financial or other information specifically for German Customers, German contact addresses, actual business with German Customers, use of disclaimers etc. Advertising is deemed to be aiming for German Customers if it not only promotes the financial institution as such but mentions specific financial products and services. When assessing whether or not a foreign financial institution is aiming for German Customers through domestic intermediaries, the BAFin focuses on the business relationship between the foreign financial institution and the domestic intermediaries. The foreign financial institution is deemed as aiming for German Customers if its business relationship with the domestic intermediaries implies that these intermediaries are used as a distribution network. This is especially supposed to be the case if the intermediaries obtain agency commission and/or promote financial products and services of the foreign financial institution.

Licence Requirements

If financial services rendered cross-border trigger licence requirements, the foreign financial institution has to establish a branch in Germany that has to apply for and be granted a licence under the German Banking Act. The German branch has to keep separate books and all business of the foreign financial institution with German Customers requiring a licence has to be entered into the books of the branch. This applies irrespective of a licence possibly being held by a German subsidiary, as such licence does not comprise business conducted by the foreign parent company.

Exemptions

The BAFin has announced that it is willing to grant exemptions from licence requirements for inter-bank business and business with German institutional clients upon respective applications by foreign financial institutions. The same applies for business procured by a German subsidiary to its foreign parent company.

Necessary Actions

As a reaction to this Announcement all non-EEA financial institutions will have to review their business with German Customers in order to assess if business procedures are in line with the new administrative practice. This applies to the complete range of financial services as well as to all types of promotional activity. Furthermore foreign financial institutions should consider applying for exemptions for certain types of business.