Generally, financial services firms in Germany (Finanzdienstleistungsinstitute) are mandatory members of a protection scheme (Entschädigungseinrichtung der Wertpapierhandelsunternehmen - EdW). Members of this protection scheme are obliged to make regular financial contributions.

In 2005 Phoenix Kapitaldienst GmbH became insolvent and the EdW is due to pay out to Phoenix investors compensation which totals more than 100 million Euros. However, the EdW has insufficient funds to cover the entire amount due.

In exceptional circumstances, like the Phoenix insolvency, the EdW is entitled to demand additional contributions from all its existing members.

This means that firms established in Germany are currently subject to higher than usual contributions to the EdW. This is particularly pertinent to those firms considering whether they should establish a presence in Germany. Additional contributions to the EdW are due from all financial services firms irrespective of whether they were established in Germany before or after the Phoenix insolvency.

For clients who wish to do business in Germany the additional contribution to the EdW may prove prohibitive. Instead the preferable option may be to establish a financial services firm in another EU member state (like the UK) and then use the EU passport to offer services in Germany.

The German financial industry hoped that an amendment to the Deposit Insurance and Investor Protection Act (Einlagensicherungs- und Entschädigungsgesetz - EAEG) would change the “de-facto” suspension of the establishment of new German financial services firms. However, in a recent draft of an amendment act to the EAEG, the EdW is still entitled to claim special contributions from members that joined after Phoenix went into insolvency. The BaFin confirmed that this is the political consensus whilst acknowledging that this is likely to deter financial services firms from being licensed in Germany.