BaFin has already applied it in several instances: it has, for example, restricted the marketing, distribution and sale of financial contracts for difference (CFDs) and has threatened a ban on the distribution of credit-linked notes.

This article provides an overview of which criteria BaFin uses when it applies the tool of product intervention.

A change in supervisory law

The creation of product intervention powers was a systematic further development of supervisory law, since it allowed measures to be taken in relation to individual financial products. Before that, BaFin dealt primarily with persons and undertakings active on the market, for whom specific obligations and prohibitions apply. Now, however, the product itself can be regulated under certain conditions, even if participating undertakings such as issuers or intermediaries are in compliance with the requirements placed on them.

This also means a change for the issuers, namely that they can still be subject to some degree of monitoring by BaFin when the prospectus approval procedure for the financial product issued is already concluded. This also applies if they – unlike banks and investment services enterprises, for example – are not subject to ongoing supervision of BaFin. The possibility of a product intervention measure exists irrespective of the prospectus regime. This is because the scope of examination for a product intervention measure and the goal of such a measure are different from the scope of examination and goals of the prospectus approval procedure. For example, within the scope of the prospectus approval procedure, BaFin examines neither the correctness of the prospectuses' contents nor the product itself with regard to investor protection considerations. Therefore, the fact that a prospectus has been approved does not preclude a product intervention later on.

How does a product intervention come about?

The legal basis for BaFin's product intervention powers laid down in section 4b of the WpHG (only available in German) provides for several grounds for product interventions: BaFin can intervene if a financial instrument gives rise to significant investor protection concerns, if it poses a threat to the financial or commodity markets or the stability of the financial system or if a derivative has detrimental effects on the price formation mechanism in the underlying markets. In BaFin's supervisory practice to date, it is only the significant investor protection concerns which have played any role.

There are a wide range of triggers which prompt BaFin to examine whether a particular financial product gives rise to significant investor protection concerns. To this end, the authority not only makes use of the findings it gains from market surveillance but also evaluates information received from external sources. Thus, for example, complaints received from investors may lead to BaFin analysing particular financial products. Furthermore, media reports or information received from consumer protection bodies may be a reason to perform relevant examinations. Last but not least, BaFin often becomes aware of new financial products before they are issued: namely through the prospectus approval procedure. The documentation submitted as part of this procedure may also contain indications of significant investor protection concerns.

Criteria for investor protection concerns

In the interests of a uniform application of product intervention rules, BaFin draws on the set of criteria contained in Article 21 of Commission Delegated Regulation (EU) 2017/567 in order to assess when a financial product gives rise to significant investor protection concerns. This includes criteria such as the complexity and transparency of the product, the type of clients to whom the product is marketed or sold, the risk-return ratio, pricing, market liquidity and selling practices, as well as issuer-specific criteria such as the issuer's financial and business situation or the significance of the product as a funding source for the issuer. The list of criteria is not conclusive, which means that BaFin can also consider other factors when examining investor protection concerns.

From the beginning, BaFin has considered its product intervention powers as something which should be exercised only as a last resort. This means that not all points of criticism in relation to a financial product may lead to an intervention measure. BaFin has stayed true to this approach: in all examinations performed to date, it has analysed significant investor protection concerns by reference to several of the criteria listed in the Delegated Regulation.

Clarification of the facts

If BaFin decides to follow up on information received regarding potential investor protection concerns, the first step it takes is usually to obtain more information on the matter. To this end, it can often make use of mandatory documents required by law such as prospectuses for securities and for non-securities investment products as well as the product information sheets of the issuers. The providers' websites also often provide important information.

Occasionally, however, BaFin also makes use of information that is not publicly available in order to confirm – or invalidate – the existence of investor protection concerns. For this purpose, it can request the furnishing of particulars, the submission of documentation and the handing over of copies from anyone. The legislature clearly stipulates that BaFin can also exercise this power if it intends to examine whether the conditions for a product intervention measure are met. On this basis, BaFin usually receives all the information it needs. Only in one instance did an issuer refuse to furnish particulars. However, the competent administrative court (Verwaltungsgericht) confirmed that BaFin's request for particulars was lawful.

Not all cases end with a product intervention measure

Not all cases in which indications for an examination of significant investor protection concerns exist at the beginning end with a formal product intervention measure. In some cases, the concerns can be completely invalidated while in others the threshold for "significant investor protection concerns" is not reached. For example, not every misunderstanding on the part of an investor about how a financial product works justifies BaFin judging the product to be non-transparent. If the examination shows that the features of the product are adequately described in the product conditions or other documents such as prospectuses, then there are no grounds for significant investor protection concerns.

However, even if BaFin is of the view that a product gives rise to significant investor protection concerns, this does not always lead to the issuing of a product intervention measure. For legal reasons, the affected issuers or providers are always informed in advance if such a measure is imminent. This is because BaFin is legally obliged to hear them and offer them the opportunity to respond before issuing the measure.

In this situation, issuers or providers sometimes decide to desist from any further issuance or distribution of their product. For example, issuers may withdraw an application for prospectus approval already made. It is also possible that they may suspend distribution activities already begun. Such a course of action can render an intervention measure redundant. This is also legitimate because, for one thing, BaFin is obliged to announce product intervention measures on its website and, secondly, a product intervention measure would result in costs for the procedure being imposed on the affected party. Without the formal conclusion of the intervention procedure, the issuer is spared from both of these.

Voluntary commitment: credit-linked notes

Experience has shown that the recipients of a warning about a potential product intervention measure being issued can deal with investor protection concerns (without actually ceasing to distribute their product) to such an extent that a formal measure is rendered unnecessary. One example of this is the banking and derivatives industries' voluntary commitment to undertake significant changes regarding the issuing and distribution of credit-linked notes. In doing so, the industry associations concerned were reacting to BaFin's official hearing in relation to an intervention measure.

After publication of the industry standards, BaFin decided not to issue a product intervention measure for the time being. First, it will examine by the end of September whether the voluntary commitment is adequate for the level of investor protection desired. It will then decide whether the intervention measure originally planned is still necessary.

Such an end to a planned product intervention measure should not be seen as some sort of "horse trading" or as a bad compromise. BaFin does not see consumer protection measures taken by issuers and providers as something that can be the subject of negotiation. However, when examining product intervention measures it is obliged to always consider all the facts. It must therefore also assess voluntary commitments with a view to whether an intervention measure is still necessary and appropriate. Only if at the end of the examination the product still gives rise to significant investor protection concerns may BaFin issue the intended measure.

Ultimately, the consumer protection effect of product intervention powers cannot therefore be linked solely to the number of intervention measures issued. Even the "orderly retreat" of issuers or other measures taken by providers, which serve the purpose of consumer protection, are the result of product intervention powers being exercised.

Intervention measure: restriction on the distribution of CFDs

Significant investor protection concerns may, however, also lead to the actual issuing of an intervention measure. This was shown by the restriction on the distribution of CFDs, which was ordered by BaFin.

This is by no means the end of BaFin's work, however. It now has the duty to monitor whether the parties concerned implement the measure and actually comply with the order.

Investor responsibility

The fact that product intervention powers can only be exercised as a last resort means that the tool cannot bring about a situation where only products that are unobjectionable in every way will be offered on the market. Other elements of supervisory law such as provisions relating to prospectuses and transparency, as well as rules of conduct, are therefore equally important pillars of financial investor and consumer protection.

All of these support investors in their financial investment decisions – even though the investors remain responsible for their own decisions.