No-deal Brexit preparations: BaFin criticizes financial entities for missing Brexit preparation with regard to license requirements
As of March 2019, Germany's Federal Financial Supervisory Authority BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht) has criticized some banks, insurers and investment firms for not properly preparing to make adequate adjustments to mitigate the risks of a hard Brexit. In recent months, BaFin has only received 48 applications from financial entities that wanted to relocate their location in the wake of Brexit to Germany. According to the BaFin there are several entities that have only now started to deal with the topic. Without an EU license, UK-based banks, insurers and investment firms can no longer offer their services in the European Union as their passports would no longer work. To avoid major distortions in the event of a Brexit without a withdrawal agreement, BaFin has however indicated that it intends to make use of the option of granting EU licenses for a transitional period. However, BaFin makes it clear that such transitional licenses cannot be used to compensate for insufficient preparation on the part of the entities. The German Brexit Tax Accompanying Act permits the use of transition periods until the end of 2020 at the latest, but BaFin does not want to make full use of this scope and states that the 21-month deadline will not be needed for any entity. The BaFin would therefore assess potential risks to the stability and functioning of the financial market and decide on a case-by-case basis on the scope and duration of transitional periods.
BaFin again makes it clear that the transitional provisions established in the German Brexit Tax Accompanying Act should not be considered as a free ticket. Entities should therefore speed up their preparations and identify potential risks.
Key points for the regulatory treatment of electronic securities and crypto-tokens
The Federal Ministry of Finance (Bundesministerium für Finanzen) has published a key issues paper together with the Federal Ministry of Justice and Consumer Protection (Bundesministerium für Justiz und Verbraucherschutz). It discusses the introduction of electronic securities and the regulation of the public offering of certain crypto-tokens. The measures aim to strengthen the role of the Federal Republic of Germany as one of the leading digitization and FinTech locations.
Introduction of electronic bonds
German law should generally be opened for electronic securities, i.e. the current mandatory documentary embodiment of securities should no longer apply without restriction. The regulation of electronic securities should be technology-neutral, i.e., the issue of electronic securities should also be possible for Blockchain / Distributed Ledger Technology (DLT). The opening is initially limited to electronic debt securities. The introduction of the electronic share should not be dealt with at this time.
Regulation of the public offer of crypto tokens
As part of the public offering of crypto-tokens (Initial Coin Offering – ICO), crypto-tokens have been offered in recent years, which generally do not constitute securities or other financial instruments within the meaning of the German Trading Securities Act. As a result, the issuance of these tokens – unlike the future issue of electronic bonds – will not be subject to existing capital market regulation. At the same time, investing in crypto-tokens constitutes risks for investors. As a consequence, the regulation of the public offer of these tokens is put up for discussion in a key issues paper.
The national regulatory requirement for crypto-tokens in the field of money laundering prevention, which results from the Amending Directive to the 4th Money Laundering Directive (EU) 2018/843 of 30 May 2018, is not the subject of this consultation paper but it is a part of a transposition law on the Money Laundering Directive (addressed separately).
The Federal Ministry of Justice and Consumer Protection and the Federal Ministry of Finance want to get a comprehensive picture of the measures outlined in the key issues paper in order to draw up a draft bill on this basis.
Brexit: BaFin calls on UK investment managers to act now
BaFin issued a statement on 22 March 2019 to the effect that UK-based investment managers which marketed UK-based AIFs or UCITS to German investors on the basis of product-related EU passporting rights will be required to follow the third country notifications procedure to market to German-based retail investors, semi-professional and professional investors. BaFin stated: “If the United Kingdom leaves the EU without an agreement and without a transitional period, these investment funds can continue to be marketed in Germany if in each case a notification procedure is completed for the marketing of third-country funds under section 320, 329 or 330 of the German Investment Code (Kapitalanlagegesetzbuch – KAGB). Such applications can be submitted to BaFin as from now, even though the actual date for the departure of the United Kingdom from the EU and its subsequent status is not known at the present time.”
BaFin's statement suggests not only that the filing must be submitted, but that BaFin has also positively confirmed that the now third-country fund can be distributed to German clients. It is expected that thousands of filings will now be submitted to BaFin. Experience has shown that local German notifications on such filings can take up to six months. The costs caused by the filings to UK-based investment managers cannot yet be predicted.
It is now time for UK investment managers to act and to initiate the third-country notifications procedure as soon as possible in order to continue marketing to German clients.