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Digital markets, funding and payment services

Innovative funding solutions and business models related to payment services are typical areas in which fintech companies conduct business in Germany. Regulators have been struggling for some years to find a position on collective investment schemes balancing regulation to protect investors, in particular retail investors, and to allow innovative solutions that may also serve retail investors' interests. Eventually German legislators concluded that the regulatory requirements applicable for already known investment business models shall generally (subject to limited privileges) also apply to collective investment schemes.

i Peer-to-peer-lending

Whether and which regulatory rules apply for peer-to-peer-lending depends on the specific business model.

Crowdfunding based on donations the investors make to support a special project (crowd-sponsoring) is generally not subject to financial regulation. If, however, the investor benefits financially from his or her investment, for example by participating in future profits of the project (crowd investing) or by being reimbursed with or without interest (crowd-lending), special regulations apply. Such regulations may be distinguished as falling under supervisory law, consumer law and capital market law.

Supervisory law

Peer-to-peer lending in form of crowd investing or crowd lending may entail consequences under German financial supervisory law for the lender, the borrower and the platform. The key concern relates to possible licensing requirements. In particular, the licensing requirement for lending business must be considered. A licence requirement is triggered if the lender acts commercially or in a manner that requires a commercially established business operation. It is sufficient if the lender intends to repeatedly engage in the lending business to make profits.

The taking of deposits commercially or on a scale that requires a commercially established business operation is also subject to a licensing requirement. These requirements may become relevant for all involved parties, for example the platform if it keeps the funds extended by the lenders until the funds are transferred to a single or several borrowers. If the platform performs such function and transfers funds from the investors to the borrowers, the platform may also be subject to a licensing requirement under the ZAG for providing payment services. The licensing requirement under the KWG may become relevant for the investors who provide the funds extended to a single or various borrowers too. Even the borrowers may be subject to a licensing requirement for conducting the deposit taking business when they receive the funds from the platform or the investors.

Given these regulatory restrictions, peer-to-peer-lending business models in Germany typically include a fronting bank that holds a licence for the lending and deposit-taking business. In these models, the fronting bank extends the loans to the borrowers, and the bank refinance the loans by selling the repayment claims arising under them to the platform for on-selling to investors or directly to investors who ultimately receive the repayment claim against the borrower. The various business transactions between the involved parties relating to the extension of a loan are interdependent by way of conditions precedent. Therefore, the bank is only obliged to extend the loan if investors have committed to provide sufficient funds for the purchase of the repayment claims arising under the loan. The platform, which is typically a fintech company, is acting in this model as a broker that brings together investors and borrowers.

Such structure is usually not critical for the investors as they only acquire a repayment claim, which is as such not subject to a licensing requirement, provided that the acquisitions do not occur under a framework agreement. In the latter case, a licensing requirement for providing factoring business could be triggered. For the borrowers this model is not problematic either. One might consider whether they engage in deposit-taking business. However, it is generally recognised under German law that it does not constitute deposit-taking to borrow funds from a licensed bank. The fronting bank has in this model the necessary licences so the remaining question is whether the platform performs business activities subject to a licence requirement. The platform might conduct the factoring business if it acquires the repayment claims from the bank prior to selling them on to investors. Usually, however, the factoring business can be avoided by certain structural arrangements. In this case the regulated activities of the platform consist of brokering loans (between the bank and the borrowers) and investments (between the platform or the bank and investors as purchasers of the repayment claims). These are activities which can be structured to avoid regulation under the KWG and to ensure that 'only' the licence requirements under Sections 34c and 34f GewO need to be met. BaFin considers the repayment claims brokered by the platform to be financial assets within the meaning of the VermAnlG and, therefore, financial instruments within the meaning of the KWG so that, in principle, the brokering activity could also be subject to a licensing requirement pursuant to Section 32(1) KWG which is, however, typically avoided by taking advantage of an exception.

Consumer law

In Germany, as in the European Union generally, relatively strict consumer protection rules apply. This is also the case for consumer loans. Consequently, a direct contract between the lender and the borrower brokered by a peer-to-peer lending platform triggers far-reaching information obligations for the lender under Section 491 et seq. BGB, provided that the lender acts commercially and the borrower is a consumer. Given the typical structure for peer-to-peer lending platforms in Germany, the fronting bank implemented in the structure must typically comply with these obligations.

Further, given that peer-to-peer lending platforms typically offer their services online, the consumer protection rules on distance selling must be considered (Section 312a et seq. BKG). These rules are based on EU law and should in general not differ in the EU Member States.

Capital market law

Generally speaking, the WpPG and the VermAnlG has to be considered if the regulatory framework for crowdfunding and crowd-lending platforms is analysed under German law from a capital market point of view.

The VermAnlG generally applies to profit participating loans, subordinated loans and all other investments that grant a claim to interest and repayment. If such investments are publicly offered, a prospectus or at least an information sheet concerning the investment must be published, unless certain exceptions apply. One of these is explicitly directed to internet platforms engaging in crowd-investment (Section 2a VermAnlG). Under this exception, the obligation to publish a prospectus does not apply to investments that are only brokered via the internet and do not exceed low thresholds ranging from €1,000 to €10,000 per investment. Even if this exception applies, an information sheet must be published.

Should a crowdfunding platform issue or publicly offer securities within the meaning of the WpPG, a prospectus must, subject to certain limited exceptions, also be published. The WpPG obligations, however, have not yet gained material significance in the German fintech market, except for the very few fintech companies using securitisation to refinance. This might change in the future owing to the rise of ICOs.

ii Payment services

The payment services sector was one of the first in the German financial industry where fintech companies became active and visible. This is one of the reasons for fragmentation of the payment services market, which has recently begun to consolidate. Nevertheless, the revised Payment Services Directive (EU) 2015/2366 (PSD II), which has been implemented into German law with effect from 13 January 2018, is expected to offer new business opportunities especially for nimble fintech companies. The reason for this expectation is that account information services and payment initiation services as new payment services have been introduced under the revised ZAG. The providers of such services now have a legal claim for access to payment accounts against the banks that maintain such payment accounts for their customers. This is perceived as a potential game changer because the traditional banks can no longer prevent their competitors from accessing the accounts of customers who consent to such access (open banking).

This opportunity, however, comes with additional regulatory burden. Providing payment services is generally subject to a licence requirement, unless certain exceptions apply. The scope of this licence requirement has been expanded to comprise the providers of account information and payment initiation services even though these service providers do not acquire at any time possession of their customers' funds. On account of this consideration, the regulatory requirements for a licence to provide payment initiation or account information services are less strict than for a licence to provide traditional payment services.