Financial Services SpeedRead - Germany: 19 April 2024 edition

Welcome to the third edition of the Germany specific Financial Services SpeedRead, a collection of bite-sized updates designed to help you keep on top of key regulatory developments in financial services over the preceding fortnight. Please get in touch if you want to explore any of the topics covered in this fortnight's edition of Financial Services SpeedRead in more detail.

Financial Markets

1. BaFin: Supervisory notice: BaFin will not prosecute violations of PFOF until the legislative procedure on the exemption has been finalized

On 22 March 2024, the German Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) announced in a supervisory notice that it will not prosecute investment firms that do not comply with the Payment for Order Flow (PFOF) ban regarding domestic clients until the national legislative procedure on the temporary exemption from the PFOF ban is finalized.

PFOF describes the practice of investment firms receiving fees, commissions or non-monetary benefits from third parties for executing orders from clients on a particular execution venue or for forwarding orders of clients to third parties for their execution on a particular execution venue. The national exemption shall be introduced by the Act on the Digitalisation of the Financial Market (Finanzmarktdigitalisierungsgesetz, FinmadiG), containing a draft of Section 138a of the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG). The draft Section 138a WpHG rules that the PFOF ban according to Article 39a(1) Regulation (EU) No 600/2014 (MiFIR) will not apply to domestic investment firms providing services to domestic clients until 30 June 2026.

BaFin emphasized that it will not exempt institutions from complying with the requirements of Article 39a(1) MiFIR. However, BaFin will not prosecute violations of the PFOF ban provided that those firms are in the scope of the envisaged exemption of Section 138a WpHG. Regardless of the national exemption, PFOF is no longer possible for forwarding orders from clients abroad.

2. German Federal Ministry of Finance: Publication: Notification of ESMA on the temporary exemption from the PFOF ban

On 21 March 2024, the German Federal Ministry of Finance (Bundesfinanzministerium, BMF) published a press release on the notification of the European Securities and Markets Authority (ESMA) regarding the temporary exemption from the Payment for Order Flow (PFOF) ban according to Article 39a(2) Regulation (EU) No 600/2014 (MiFIR).

The background to this notification is the newly inserted Article 39a in MiFIR amended by Regulation (EU) 2024/791, which prohibits in its first paragraph the reception of PFOF when investment firms act on behalf of retail and professional clients. The Regulation (EU) 2024/791 came into force on 28 March 2024. However, Member States are entitled to temporarily exempt investment firms from the PFOF ban until 30 June 2026 upon notification of the ESMA.

The BMF emphasized that this exemption only applies to services for domestic clients and that the PFOF ban would be fully applicable as of 28 March 2024 to cross-border services. After the end of the transition period of 30 June 2026, the PFOF ban will apply to services for domestic clients as well.

Banking and Prudential

3. BaFin: Supervisory Notice: Licensing procedure under the Secondary Credit Market Act

On 26 March 2024, the German Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) published a supervisory notice on the Secondary Credit Market Act (Kreditzweitmarktgesetz, KrZwMG) regarding the licensing procedure for financial services institutions.

According to Section 14(1) KrZwMG, a financial services institution is required to have a proper business organisation that ensures compliance with statutory provisions and business requirements. A proper business organisation includes, in particular, the organisational duties set out in Section 14(2) to (4) KrZwMG.

As a proof of compliance with the requirements relating to consumer protection, BaFin expects the submission of the following documents in the course of the licensing procedure:

• corporate governance rules and internal control procedures adopted by the management and set out in writing or in electronic form the purpose of respecting the rights of borrowers and protecting personal data;
• principles adopted by the management and set out in writing or in electronic form for the purpose of protecting and ensuring appropriate treatment of borrowers; and
• internal procedures for recording and processing borrower complaints.

BaFin pointed out that the above do not constitute new requirements, but a reference to the particular importance of these documents in the licensing procedure.

4. Official Journal of the EU: Legislation: Commission Delegated Regulation (EU) 2024/895 of 13 December amending Delegated Regulation (EU) 2015/63 as regards the calculation of eligible liabilities and the transitional regime

On 20 March 2024, Commission Delegated Regulation (EU) 2024/895 of 13 December 2023 amending Delegated Regulation (EU) 2015/63 was published in the Official Journal of the EU.

The amendments to Delegated Regulation (EU) 2015/63 include:

• aligning with the definition of "eligible liabilities" and the calculation of the minimum requirement for own funds and eligible liabilities (MREL) under the Bank Recovery and Resolution Directive (BRRD), as amended by Directive (EU) 2019/879;
• amending the specific cases in which resolution authorities can waive individual entities from MREL at solo level and to instead require MREL at a consolidated level; and
• extending the period in which smaller institutions can contribute with a lump-sum to national resolution funds for one year until 31 December 2024.

The regulation applies from 21 March 2024, with the exception of Article 1(3) and (4) which apply retroactively as of 1 December 2023.

Funds Management

5. Official Journal of the EU: Legislation: AIFMD II

On 26 March 2024, the Official Journal of the EU published Directive (EU) 2024/927 (AIFMD II) amending the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD) and the UCITS Directive (2009/65/EU).

AIFMD II makes several target changes to AIFMD and the UCITS Directive, reflecting the outcome of the AIFMD review. The changes include:

• amending the rules on delegation arrangements where an AIFM delegates risk or portfolio management to third country entities;
• new liquidity risk management requirements for open-ended funds;
• amending rules on investor transparency and supervisory reporting;
• allowing AIFs to appoint a depositary outside of the AIF's home member state in certain circumstances; and
• a new regulatory regime for loan origination funds.

The Directive will enter into force on 15 April 2024, from which member states will have until 16 April 2026 to implement the amendments into their national legislation.

For more information, see our briefing on AIFMD II here.

Senior Managers and Governance

No new entries.

Financial Crime

No new entries.

Retail Services

No new entries.

Payments

6. Official Journal of the EU: Legislation: Regulation (EU) 2024/886 on instant credit transfers in euro

On 19 March 2024, Regulation (EU) 2024/886 of the European Parliament and of the Council of 13 March 2024 (Instant Payments Regulation) was published in the Official Journal of the European Union. The Instant Payments Regulation amends Regulation (EU) No 260/2012 (SEPA Regulation), Regulation (EU) 2021/1230 (Cross-Border Payments Regulation), Directive 98/26/EC (Settlement Finality Directive) and Directive (EU) 2015/2366 (PSD2).

The Instant Payments Regulation requires payment service providers (PSPs) who offer credit transfers to make instant credit transfer services in euro readily available to customers, such that transfers can be made within 10 seconds, 24 hours a day within the same country and also to other EU member states.

As part of the instant credit transfer framework, PSPs will be required to verify the match between IBAN account numbers and the beneficiary's name as soon as possible to alert the payer to possible mistakes or fraud before a transaction is made.

The Instant Payments Regulation entered into force on 8 April 2024. PSPs in the eurozone will need to be able to receive instant credit transfers in euro by 9 January 2025, and to be able to send them by 9 October 2025. There is a longer transition period for PSPs located outside of the eurozone, who have until 9 January 2027 to be able to receive instant credit transfers in euro, and until 9 July 2027 to be able to send them.

Digital Services and Fintech

7. ESMA: Final Report: First package of draft technical standards specifying certain requirements of MiCA

On 25 March 2024, ESMA published its final report on its first package of draft technical standards under the Markets in Crypto Assets Regulation (MiCA). The final report contains five of the six draft technical standards related to investor protection topics included in ESMA's July 2023 consultation paper. These relate to:

• the information to be included in the application for authorisation as a crypto-asset service provider (CASP);
• the information to be included in the notification by certain financial entities of their intent to provide crypto-asset services;
• the information required for the assessment of intended acquisition of a qualifying holding in a CASP; and
• requirements, templates and procedures for complaints handing by CASPs.

The final report on the technical standards on conflicts of interest for crypto-asset service providers will be published at a later stage.

The draft technical standards contained in the final report have been submitted to the European Commission, who will determine whether they should be adopted within three months.

8. ESMA: Consultation Paper: Draft technical standards and guidelines specifying certain requirements of MiCA on detection and prevention of market abuse, investor protection and operational resilience

On 25 March 2024, ESMA published its third consultation package under MiCA, which contains draft technical standards and guidelines specifying certain requirements on the detection and prevention of market abuse, investor protection and operational resilience.

Specifically, the consultation package seeks input on:

• draft RTS on appropriate arrangements, systems and procedures for detecting and reporting suspected market abuse in crypto-assets, including the template to be used for suspicious transaction and order reports;
• draft guidelines on certain aspects of the suitability requirements applicable to the provision of advice on crypto-assets and portfolio management of crypto-assets, as well as the format of the periodic statement for portfolio management activities under MiCA;
• draft guidelines on policies and procedures, including the rights of clients, for crypto-asset service providers providing transfer services; and
• draft guidelines on the maintenance of systems and security access protocols for offerors and persons seeking admission to trading of crypto-assets other than asset-referenced tokens and e-money tokens.

Comments on the consultation paper can be submitted until 25 June 2024 via the response form here. ESMA will publish a final report based on the feedback received, and submit the draft technical standards for approval by the European Commission by 30 December 2024.

ESG

9. German Federal Ministry of Justice: Publication: Draft of a bill implementing the Corporate Sustainability Reporting Directive

On 22 March 2024, the German Federal Ministry of Justice (Bundesministerium der Justiz, BMJ) published a draft of a bill implementing Directive (EU) 2022/2464 with regard to corporate sustainability reporting (Corporate Sustainability Reporting Directive, CSRD) together with a synopsis.

The draft is intended to implement the requirements of the CSRD, which is aimed at introducing sustainability reporting for large and small or medium-sized capital market-oriented companies under accounting law and an audit of this sustainability reporting.

The draft includes amendments, amongst others, to the following acts:

• German Commercial Code (Handelsgesetzbuch), e.g. the replacement of the obligation to provide a non-financial statement with the obligation to add a sustainability report to the management report or the obligation for subsidiaries and branches of companies domiciled in third countries to provide sustainability reports;
• German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, LkSG), the reporting obligation under the LkSG can be fulfilled by submitting a sustainability report;
• German Stock Corporation Act (Aktiengesetz), e.g. obligation of the body of the stock corporation responsible for the audit to monitor and to audit the sustainability reporting;
• German Securities Trading Act (Wertpapierhandelsgesetz), e.g. new provisions on fines and transitional provisions regarding sustainability reporting by companies;
• German Auditors' Ordinance (Wirtschaftsprüferordnung), e.g. amendments to the provisions on the education and training of auditors.

Other

10. BaFin: Announcement: Systemic risk buffer for mortgage credits remains unchanged

On 28 March 2024, the German Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) announced that the systemic risk buffer for mortgage credit remains unchanged, i.e. at 2% of the risk-weighted assets.

This decision was based on an examination carried out by BaFin, which took into account analyses and assessments by the German Central Bank (Deutsche Bundesbank).

The indicator-based analysis revealed that the risks remain high despite the current cyclical weakness of the residential property market and that the loss potential in the banking sector has not been substantially reduced over the past two years. This was confirmed by the residential property stress test carried out as a cross-check.