BaFin

Topic BaFin Katja Marzahn, BaFin

Act on the Strengthening of German Financial Supervision

Date: 18.01.2013 10:00 AM

On 1 January 2013, key components of the Act on the Strengthening of German Financial Supervision entered into force. The governing coalition had come to an agreement to reform national financial supervision at the end of 2010.

The aim of the reform was to adapt the supervisory system to the challenges arising from the financial crisis. However, the division of responsibilities between the Bundesbank and the Federal Financial Supervisory Authority (Bundesanstalt für FinanzdienstleistungsaufsichtBaFin) was to be preserved. With these objectives in mind, the governing coalition agreed on ten key points to be implemented via the amending bill (Artikelgesetz) that was adopted by Germany’s lower house of parliament, the Bundestag, on 25 October 2012. Among other measures, a new Financial Stability Act (Gesetz zur Überwachung der Finanzstabilität – FinStabG) was created and the Act Establishing the Federal Financial Supervisory Authority (Finanzdienstleistungsaufsichtsgesetz – FinDAG) as well as the Regulation on the Imposition of Fees and Allocation of Costs Pursuant to the FinDAG (Verordnung über die Erhebung von Gebühren und die Umlegung von Kosten nach dem Finanzdienstleistungsaufsichtsgesetz – FinDAGKostV) were amended.

The article below provides an overview of the main contents of the FinStabG, which entered into force on 1 January 2013, as well as presenting the changes within the FinDAG. Some of these changes have been effective since the beginning of the year while others will come into effect as per 1 March 2013.

Regulations pertaining to the supervisory structure

According to the ten key points on the reform of national financial supervision, specific rules pertaining to macroprudential supervision by the Bundesbank were to be established and the Bundesbank’s macroprudential supervisory activities expanded. At the same time, the definition of the interface between macro- and microprudential supervision was to ensure a clear separation of tasks between Bundesbank and BaFin as well as a smooth exchange of information between the two. Furthermore, a structured system of collaboration between Bundesbank, BaFin and the Federal Government was to be established via the Financial Stability Commission (Ausschuss für Finanzstabilität), which has replaced the Standing Committee on Financial Market Stability (Ständiger Ausschuss für Finanzmarktstabilität).

The creation of the Financial Stability Commission (section 2 of the FinStabG) represents a core element of the new Act. The Financial Stability Commission will consist of representatives of the Bundesbank, the Federal Ministry of Finance (BMF) and BaFin. It will also include one representative of the Financial Market Stabilisation Agency (Bundesanstalt für Finanzmarktstabilisierung – FMSA) who will not have any voting rights. Due to the Bundesbank’s macroeconomic and financial market expertise, section 1 of the FinStabG confers upon it the responsibility of contributing towards safeguarding financial stability. The Bundesbank is tasked with analysing all relevant factors in order to identify threats to financial stability, suggest respective warnings or recommendations for corrective measures and submit such warnings or recommendations to the Financial Stability Commission. This will place the Financial Stability Commission in a position to issue warnings and recommend corrective action if threats to Germany’s financial stability arise (section 3 of the FinStabG).

As regards cooperation between BaFin and the Bundesbank, section 5 of the FinStabG stipulates a duty to keep each other informed of any observations, findings and assessments that BaFin and the Bundesbank require to perform their respective functions. In addition, the Bundesbank now has the right to obtain information from financial corporations if the information required to perform its functions cannot be obtained from BaFin or other authorities (section 6 of the FinStabG). Section 7 governs the confidentiality requirement applicable to the members of the Financial Stability Commission.

Additional competences for the Bundesbank

In reaction to the challenges of the financial crisis, the Financial Stability Act has established a macroprudential supervisory system in Germany and conferred additional competences upon the Bundesbank to facilitate its supervision of financial market stability. Accordingly, the Bundesbank is now responsible for suggesting warnings and recommendations to ensure timely recognition and early intervention against any threats that may develop into a systemic crisis. Resolutions regarding such warnings and recommendations are passed by the members of the Financial Stability Commission at their quarterly meetings. The Commission is also tasked with defining concerted reactions to emerging threats to financial stability by issuing warnings and recommendations and publishing them if appropriate. The recipients of such warnings or recommendations are obliged to report on the implementation of respective measures.

The Commission thus ensures that a structured and transparent dialogue on financial stability issues takes place between the institutions relevant to the supervision and regulation of the German financial centre. Key information and findings on financial stability are gathered in one place and incorporated into relevant decisions.

Amendment of the FinDAG

The amendment of the FinDAG is also aimed at strengthening national financial supervision. It should be noted that BaFin’s integrated financial services supervision pursuant to section 4 of the FinDAG will remain unaffected. The amendments pertain to the payment structure for BaFin staff (sections 10a and 10b of the FinDAG) and the composition of BaFin’s Administrative Council (section 7 of the FinDAG).

Furthermore, a consumer advisory council has been set up and the complaints procedure for consumers and other customers of supervised enterprises as well as consumer protection organisations has been incorporated into the FinDAG (sections 8a and 4b) for the first time to ensure that consumer issues will play a larger role in BaFin’s supervisory approach. The regulations pertaining to cooperation between BaFin and the Bundesbank under the FinStabG has been complemented with an (escalation) mechanism in section 4a of the FinDAG in order to adopt a uniform approach to complex issues in ongoing supervisory activities.

New composition of the Administrative Council

Pursuant to section 7 (3) of the FinDAG, BaFin's Administrative Council has so far consisted of 21 voting members. This number has been reduced to 17 and the influence of the supervised credit institutions, insurance undertakings and asset management companies (Kapitalanlagegesellschaften) has been reduced. The following table shows the new composition of the Administrative Council as of 1 March 2013.

Composition of BaFin’s Administrative Council
FinDAG, old version FinDAG, new version
Four representatives of the Federal Ministry of Finance (BMF) Three BMF representatives
One representative of the Federal Ministry of Economics and Technology (BMWi) One BMWi representative
One representative of the Federal Ministry of Justice (BMJ) One BMJ representative
One representative of the Federal Ministry of Food, Agriculture and Consumer Protection (BMELV)
Five members of the Bundestag Five members of the Bundestag
Five representatives of the credit institutions Six individuals with professional experience or specific expertise in the credit, financial services, payment services, investment, venture capital investment, insurance, securities or accounting services industry who must not be employed by BaFin
Four representatives of the insurance undertakings
One representative of the asset management companies (Kapitalanlagegesellschaften)

The reduction in the number of financial industry representatives is to increase BaFin’s independence from the supervised enterprises which is a key principle of supervision. The remaining six individuals may hold active positions in financial industry associations or in the supervised enterprises. The Federal Ministry of Finance will select council members exclusively by virtue of their professional expertise. Since such expertise is not transferable, no substitution arrangements have been made.

The interests of the supervised enterprises, who finance BaFin via a cost allocation system, are taken into account by granting industry associations the right to be heard before the individuals with professional expertise are appointed. Furthermore, the associations may submit suggestions for three of the six individuals. Further details will be governed by BaFin's articles of association.

Added consumer protection

The financial crisis has highlighted the need for increased consumer protection. Under the new Act, BaFin will therefore be able to give more consideration to the insights and findings of consumers and consumer protection organisations. For this purpose, a consumer advisory council will be established and a standardized complaints procedure will be mapped out.

The consumer advisory council will be tasked with providing BaFin with advice and insights from a consumer perspective. Such insights may be gained by recording and analysing consumer trends and reporting them to the Executive Board. However, the consumer advisory council is not entitled to any hearings. Its activities are exclusively of an advisory nature. The council will have twelve members consisting of representatives from academia, members of consumer and investor protection organisations as well as staff of extrajudicial dispute resolution entities and employees of the Federal Ministry of Food, Agriculture and Consumer Protection. The councillors will be appointed by the Federal Ministry of Finance.

Complaints procedure

Customers of supervised enterprises or qualified institutions pursuant to section 3 (1) sentence 1 no. 1 of the Injunctions Act (Unterlassungsklagegesetz) may submit complaints to BaFin for alleged infringements of regulations if compliance with such regulations is supervised by BaFin. BaFin is now under obligation to comment on such complaints within a reasonable period of time. Where necessary, BaFin may obtain a statement from the enterprise in question. However, the complaints procedure may not be used to assert individual legal claims. Instead, its purpose is to harness the insights gained by customers and consumers for the benefit of BaFin’s supervisory activities.

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