Introduction The number of financial institutions that have announced the relocation of their EU headquarters from the UK to Germany has increased during the last weeks. In the meantime, some of the largest US and Asian institutions have confirmed their plans to expand their operations in Germany, and we expect others to follow soon. How can we assist? This briefing shall provide you with an overview of a number of issues that may be of interest for your decision to expand your operations in Germany. We are well aware that some of the topics may be of more, others of less relevance for your organization, and that each case presents its own challenges. However, this note should provide a practical guide through some of the questions that you will likely have to consider. We kindly invite you to raise points with us that are of special interest to you or on which you would like to obtain more detailed advice. Setting up a business in Germany Are you interested in… These may be some of the aspects which may be of interest for you: …using an existing bank or investment firm or do you intend to create a new (additional) firm? Have you assessed in detail whether the existing licensed entity you intend to use (if any) has all necessary licenses? Certain steps may require immediate action, and clarity on the outcome of the Brexit negotiations may come too late to initiate solutions. Have you identified points in time at which certain decisions must be made? Have you considered to set up an investment firm (e.g. a broker-dealer) instead of a bank and the timeline for the licensing process? Note that newly licensed institutions are typically subject to increased own funds requirements. …which type of corporation and corporate structure can be chosen? German law provides for different types of partnerships, private and public limited companies. Are you aware of the pros and cons of each form? Can we assist you with finding an ideal group structure? Introduction How can we assist? Setting up a business in Germany Doing business in Germany Operating a business in Germany Welcome to Germany – How we can support financial institutions newly establishing in Germany I am open to dialogue with financial institutions in assessing the conditions for moving business units to Germany. And I go as far as to say that – in many respects – these conditions are attractive. Andreas Dombret Member of the Executive Board of the Deutsche Bundesbank Freshfields Bruckhaus Deringer LLP 2 …the two-tier structure? What does the two tier-structure mean in practice? The supervisory board is not involved in the operational day-to-day management and does not take management decisions. …the type of business that would have to be transferred to Germany and the necessary local operations? The future location of products and services needs to be assessed diligently against the background of regulatory requirements. Front and back office functions are subject to specific regulation. You may also wish to distinguish between licensable and unregulated client facing roles. …how to transfer business to Frankfurt? What is to be considered with respect to a cross-border asset transfer or are other transaction structures available? Is it possible to rely on deemed consents when transferring client relationships? Which type of documentation must be prepared and when/how should you inform your clients? What is the timeline for a transfer and until when do you have to take the decision on potential branch transfers? …which authorities will supervise your business and operations? Depending on their size, business and group structure, German banks can be supervised by the ECB, BaFin and Deutsche Bundesbank. You should know which authority will have the last say on decisions that may concern your future business. If you establish branches in other EU countries, you should be aware of the competences of home and host state authorities and their expectations concerning local branches which, in practice, differ significantly. ..the ECB onboarding process? How will the ECB take over supervision over your bank? How long does the onboarding process typically take? What are the specifics of the ECB’s asset quality review (AQR) and stress testing? How must one read and understand the ECB’s decisions? Is there room for negotiation with the ECB? How does the ECB carry out its interviews with senior managers and what type of preparation is advisable? …how to make the best out of the relocation, i.e. with waivers, exceptions, exemptions and simplifications are available? European and German regulatory law provides for a number of waivers (e.g. from capital, large exposure, liquidity and leverage requirements) which are sometimes difficult to identify. For example, all CRR investment firms (including those which dealing on own account and offering underwriting services) domiciled in Germany are exempted from the CRR liquidity requirements (i.e. LCR and NSFR). We can help you to identify the waivers that apply to your future set-up. The clock is ticking. So we urge you to act now and make plans in order to thrive in a post-Brexit world. Danièle Nouy Chair of the Supervisory Board of the ECB Freshfields Bruckhaus Deringer LLP 3 …what to consider with respect to future booking models and intragroup back-to-back hedging? The ECB and BaFin are skeptical with respect to certain booking models, such as back-to-back and remote booking. On the other hand, BaFin currently proposes for an extension of the applicable exceptions for intragroup large exposures with respect to back-to-back transactions. What does this mean in practice and which limits should be taken into account? …internal models, SREP, ICAAP and ILAAP? Is it possible to transfer internal capital and liquidity models currently applied at other group institutions? How long does it take to apply for internal models? What is the ECB’s position with respect to internal models after its targeted review of internal models (TRIM)? How to deal with and interpret the ECB’s expectations concerning SREP, ICAAP and ILAAP? …which set-up will ensure compliance with upcoming laws such as CRD V, CRR II and BRRD II? The regulatory landscape is changing constantly. Which laws are at the horizon that you may wish to take into account when creating your future European organization? …who may be a senior manager of a bank or broker-dealer in Germany and whether there are specific corporate governance requirements? How does a German management board work and what are the ECB’s/BaFin’s expectations regarding its members? This requires a careful case-by-case analysis to determine how many senior managers must be German residents and whether and to which extent senior managers can have their main office and place of residence abroad. Which are the applicable mandate limitations (i.e. number of board memberships), are intra-group exceptions or special exemptions available? Which committees must be established at supervisory board level? …the German Minimum Requiremnets on Risk Management (MaRisk)? These guidelines set out BaFin’s expectations concerning business strategy, internal controls, special functions (e.g. internal audit, risk control and compliance), the operational and organizational structure, business continuity planning and backup facilities. BaFin intends to issue comparable guidelines on bank IT systems (BAIT). A core concept of the MaRisk is the separation of functions which, among others, requires a strict separation of front and back office functions. …what German co-determination means? Co-determination is an employment law instrument giving employees the right to influence the decision making process of their employer through representation on the firm’s supervisory board. We can advise you on different options to deal with the employee participation. Freshfields Bruckhaus Deringer LLP 4 …what the works council is? The works council is part of the employee participation. It is the representative body of the employees. It is not mandatory, but employees have the right to establish a works council. Labour unions often play an important role in the work of works councils. We can familiarize you with the details of the relevant legal regime and the German peculiarities relevant for your sector. …whether your (UK) staff will get/retain their working permissions? Which steps to take if no special deal is negotiated in this regard and how to prepare for the worst-case? …to which extent you can rely on freelancers and temporary employees? Freelancers give you more flexibility, because many rules that apply with respect to employees do not apply to them. Another option is to hire employees through a temporary employment agency. However, these models are subject to certain limitations. Doing business in Germany Are you interested in … These may be some of the aspects which may be of interest for you: ...the effects of transferring your customer agreements and customer accounts into a German environment? With your own and your customers’ assets being transferred to Germany, you may face a different legal regime on a variety of topics. This will include security interests, set-off, segregation of assets, agency rules, the applicable law on rights in rem, and many other on which you may want to obtain input. …the deposit and investor protection and the top-up German private deposit protection scheme? The basic deposit and investor protection is harmonized across Europe. However, in Germany many banks are members of the top-up deposit protection fund of the Association of German Banks (Einlagensicherungsfonds). This is a special private scheme with extensive rights that must be considered in a restructuring of business. …new product opportunities, and new demands by your German or other European customers? Acting from a platform in Germany may give you access to new products and may lead to a demand from your customers for different offerings. For example, the Deutscher Rahmenvertrag für Finanztermingeschäfte (DRV) may be a complement to the ISDA Master Agreement for your institution. Are you interested in the pros and cons? …how to carry out business from Frankfurt across the EEA? Are you aware of BaFin’s and the ECB’s expectations when it comes to the EU passport for financial services, and have you determined which organizational and conduct rules apply in each cross-border scenario? Do Following a period of wait and see as to how the separation of Great Britain from the EU may evolve, the Brexodus is taking shape now. […] The German Verband der Auslandsbanken expects that 3,000 to 5,000 new jobs will be created in Germany within the next two years as a consequence of Brexit. Börsen-Zeitung, 12 July 2017 Freshfields Bruckhaus Deringer LLP 5 you intend to offer services from a UK branch of a bank with headquarters in Frankfurt to EEA clients? …the German environment for protection of banks and customers in insolvency and other crisis scenarios? With your move to Germany, a different recovery and insolvency regime will apply to your institution. Are you prepared to answer the relevant questions that your customers might raise? Also, you may want to learn something about the new Sec. 104 of the German Insolvency Code. This recently revised provision has significantly changed the legislative framework for closeout netting in Germany. And what about your role as a prime broker, dealer or account bank in Germany? …non-call protection and PIKprovisions in German financing transactions? Under German law, non-call protection (e.g. makewhole premia) cannot validly be agreed where the underlying loan has a floating interest rate and charging of interest on interest in connection with PIK provisions is restricted. Are you sufficiently aware of these restrictions and available workarounds that achieve your economic objectives? …upstream/cross-stream credit support and financial assistance in German financing transactions? Due to mandatory capital maintenance rules, a German limited liability company must not provide up-/crossstream credit support if doing so would cause its registered share capital to be (further) depleted. Noncompliance can lead to personal liability of the managing directors, and your management may request protection against that. Do you know enough about the German law limitation language and potential pitfalls for financiers? …business with consumers? Mandatory German consumer protection rules apply, amongst other things, to loans to consumers and in case of so-called doorstep transactions and transactions which are executed solely through electronic means. We are happy to help you keep track of these constantly changing legal regimes. …fund products and their distribution in Germany? The German Kapitalanlagegesetzbuch (KAGB) has broadened the range of German open-end and close-end fund products. Are you interested in the various options? Specific rules apply to the distribution of fund products form EU Member States. The rules for the distribution of fund products form non-EU Member States are different. …the protection of your claims and the realization of your collateral in restructuring and insolvency scenarios? We have broad experience in restructuring and insolvency matters and would be happy to advise you on related risks. Freshfields Bruckhaus Deringer LLP 6 Operating a business in Germany Are you interested in … These may be some of the aspects which may be of interest for you: …the German rules on compensation and bonuses? BaFin will publish its revised bank compensation regulation in Q3/2017. What is to be expected? …the German bank separation framework? Broadly speaking, the bank separation rules apply to German credit institutions or regulated groups including a credit institution with total assets exceeding EUR 90bn. If this threshold is exceeded, these groups are no longer allowed to engage in proprietary trading, not fully collateralized lending and guarantee business with highly leveraged AIFs and high frequency trading on German trading venues (except for market making), unless they separate those activities into a separate and ring-fenced financial trading institution. Similar frameworks are in place in France and Belgium, and a European bank separation regulation is still on the lawmakers’ agenda. …whether it is allowed to record banker’s communications? German data protection rules are quite strict. Therefore, certain rules must be adhered to if you intent to record calls and other communications between bank employees and with clients. …the German bank secrecy? You will not find German bank secrecy in statutory law. It is based on contract and commercial custom, and can therefore be derogated by contract or consent. …security of information systems and access rights management? One of the “hot topics” on the regulatory agenda. BaFin is currently carrying out an consultation on a heightened IT security requirements. …legal/regulatory environment for transfer and storage of electronic data? The transfer and storage of electronic data is subject to limitations and requires justification. …outsourcing? The ECB and BaFin have announced that they will not accept shelf companies. They expect adequate risk management and a solid local structure (onshore risk management). To what extent do you intend to rely on cross-border outsourcing? Do you intend to rely on control functions which are located outside Germany? Does BaFin allow for double-hatting of key function holders? We will not accept shell companies in the euro area. Danièle Nouy Chair of the Supervisory Board of the ECB freshfields.com This material is provided by the international law firm Freshfields Bruckhaus Deringer LLP (a limited liability partnership organised under the law of England and Wales) (the UK LLP) and the offices and associated entities of the UK LLP practising under the Freshfields Bruckhaus Deringer name in a number of jurisdictions, and Freshfields Bruckhaus Deringer US LLP, together referred to in the material as ‘Freshfields’. For regulatory information please refer to www.freshfields.com/support/legalnotice. The UK LLP has offices or associated entities in Austria, Bahrain, Belgium, China, England, France, Germany, Hong Kong, Italy, Japan, the Netherlands, Russia, Singapore, Spain, the United Arab Emirates and Vietnam. Freshfields Bruckhaus Deringer US LLP has offices in New York City and Washington DC. This material is for general information only and is not intended to provide legal advice. © Freshfields Bruckhaus Deringer LLP, July 2017 …recovery and resolution planning? Regulators require banks to identify potential changes to recovery plans with a particular focus on critical functions and critical shared services. …bank levy and supervisory fees? There is a European and a German framework for bank levy calculation. You will have to analyze which applies to your business. Supervisory fees may vary depending on the status of your business as a banking or investment business. …taxation of banks? Corporate income is subject to corporation tax, solidarity surcharge (a surcharge that was imposed to generate funds for reconstruction of eastern Germany) and trade tax. For financial institutions a special trade tax privileges exist.