The Federal Financial Supervisory Authority (BaFin) implements stricter controls on robo-advice, auto-trading and automated portfolio management

Do providers of such services need a licence under section 32 (1) of the German Banking Act (Gesetz für das Kreditwesen – KWG)?

Financial institutions are searching more and more for possibilities to offer  (potential) customers with new and modern services. One possibility is to provide platforms for automated investment advice, automated trading and even automated portfolio management to professional and retail clients. These platforms are usually operated via an independent legal entity without a license under  section 32 (1) German Banking Act.

For the customers the platforms and the provided services are convenient to handle, relatively inexpensive, without any opening hours, and easy to access. Internet-orientated customers do not have to rely on a personal consultant and can be sure that the automated program will provide the best  advice for them.

How do the services work?

How are robo-advice, auto-trading or automated portfolio management defined?

Robo-advice is a service to which the customer can sign-up on an internet based platform. The customer has to sign into a secured environment, where he or she has to answer web-based questions about  personal circumstances, investment knowledge and trading experience. The comprehensive questionnaire might also include questions about the customer´s risk-bearing capacity and/ or personal investment objectives. An underlying algorithm calculates, on basis of the data, a more-or-less customized securities portfolio for the customer. For example, if the customer chooses the category pension scheme, the system would recommend  a rather conservative portfolio. On the other hand a high-risk taking customer would be recommended a portfolio with higher risks that might generate higher interests. The customer has the choice to acquire the proposed portfolio or change parts of it. If choosing auto-trading, the customer is also able to trade on the platform.

Automated portfolio management is provided on similar platforms like robo-advice. However, more information is requested from the customer. The customer has to agree with the asset manager on an investment strategy usually grant the asset manager discretionary power. If the customer  chooses automated portfolio-management, the asset manager manages the portfolio investment for the customer on an ongoing basis.

The illustrated services can vary depending on the respective provider.

Authorization Requirements

Usually, the provider of such services is licensed as an investment broker under section 34f German Industrial Code (Gewerbeordnung – GewO). However, providers should keep in mind that there could be authorization requirements if they are providing financial services per the definition in  section 1 (1a) German Banking Act.

The distinction between investment brokerage and provision of financial services is often difficult and depends on small details in the way they are provided. This increasingly leads to uncertainties amongst providers.

BaFin tried to clarify the uncertainties by publishing two letters  in April 2016. BaFin emphasizes, that the rendering of robo-advisory services and portfolio management normally is prohibited without prior authorisation pursuant to section 32 (1) German Banking Act. This especially applies if investment advice, investment or contract broking is provided. This question always has to be decided on a case-by-case basis.

Our Advice

Since the question whether an authorisation is needed is subject to the specific circumstances of every single case, every provider of robo-advice, auto-trading or automated portfolio management should take legal advice on whether authorisation under  section 32 (1) German Banking Act is required, or if authorisation under section 34f German Industrial Code might be sufficient.

For companies who are planning to set up such platforms it also seems to be advisable to initiate a legal assessment of the planned services at  a very early stage, so that any eventually needed authorisation might be acquired in due time.