Both articles enter into force on 2 January 2014 and amend the Banking Act (Kreditwesengesetz – KWG) and the Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG).

The articles define in more detail certain requirements which senior managers are required to meet in light of their general responsibility to establish a proper system of business organisation. They also introduce the possibility of criminal sanctions for the first time. These sanctions apply if senior managers fail to fulfil their duties.

Specific assurance requirements (Sicherstellungspflichten)

Articles 3 and 4 of the Ringfencing Act lay down specific assurance requirements to be met by senior managers in compliance with the statutory requirements for proper business organisation (section 25c (4a) and (4b) KWG, section 64a (7) VAG). Senior managers are responsible for establishing the strategies, processes, procedures, functions and concepts explicitly laid down in the KWG and VAG. These requirements are so essential for proper business organisation and effective risk management that their breach can jeopardise the stability of an institution or undertaking.

Articles 3 and 4 amend the provisions on proper business organisation in the KWG and the VAG (section 25a (1) KWG and section 64a (1) VAG), which apply to the institution or undertaking, by inserting due diligence requirements directed specifically at senior managers. In substance, the requirements are based on the organisational requirements for senior management already laid down in the KWG and the VAG and defined in more detail in the Minimum Requirements for Risk Management (Mindestanforderungen an das Risikomanagement) in Banks (MaRisk (BA)) and in Insurance Undertakings (MaRisk (VA)). Their status has now been elevated to that of law.

Current law

The avenues available to hold senior managers of institutions and undertakings criminally liable if their undertaking experiences financial difficulties as a result of mismanagement are currently inadequate. Until now, breaches of duty in establishing proper business organisation, and in particular adequate risk management systems, have been subject to regulatory sanctions only. However, such breaches can not only jeopardise the stability of the institution or undertaking concerned, but can also pose a threat to the financial system as a whole.

The specific requirements for business organisation vary from one institution or undertaking to the next. Exactly how stringent the assurance requirements for senior managers need to be in this context must therefore also be assessed on a case-by-case basis. This is essential for adherence to the principle of proportionality.

If BaFin determines that senior managers are not meeting the requirements incumbent upon them, it may order under section 25c (4c) KWG or section 64a (8) VAG that appropriate measures be taken in order to remedy the identified deficiencies within a reasonable period of time.

Criminal sanctions for deficiencies

Articles 3 and 4 of the Ringfencing Act also establish criminal sanctions for senior managers who breach the due diligence requirements incumbent upon them (section 54a KWG or section 142 VAG). The conditions of criminal liability are met if a senior manager wilfully and culpably breaches any due diligence requirement under section 25c (4a) or (4b) KWG or section 64a (7) VAG and thereby causes, at least negligently:

• a threat to the existence of the institution, its parent undertaking or an institution of the same group¹⁾ (section 54a (1) and (2) KWG); or
• the undertaking to become insolvent or over-indebted²⁾ (section 142 (1) and (2) VAG); or
• the undertaking to be in a position where it is only able to avert insolvency or over-indebtedness by accepting State aid within the meaning of Article 107(1) of the Treaty on the Functioning of the European Union (section 142 (1) and (2) VAG).

However, a senior manager will be liable to criminal prosecution only if BaFin had previously issued an enforceable order under section 25c (4c) KWG or section 64a (8) VAG and the senior manager contravened this order. This constitutes grounds for exemption from punishment under section 54a (3) KWG and section 142 (3) VAG. In other words, a senior manager can be subject to criminal sanctions only if the institution's or undertaking's financial difficulties arose because the senior manager did not comply with BaFin's order.

Range of punishment

If a senior manager wilfully causes financial difficulties for an institution or undertaking, he or she may be sentenced to imprisonment for up to five years or fined.

Where a senior manager negligently causes a threat to the existence or causes the insolvency or over-indebtedness of an institution or undertaking, he or she may be sentenced to imprisonment for up to two years or fined. The same applies if a senior manager negligently causes an undertaking to be in a position where it is able to avert insolvency or over-indebtedness only with the help of State aid within the meaning of Article 107 (1) of the Treaty on the Functioning of the European Union.

Footnotes

1) See section 48b (1) KWG for the definition of "threat to existence".

2) See section 17 (2) and section 19 (2) of the Insolvency Code (Insolvenzordnung – InsO) for the definitions of "insolvency" and "over-indebtedness" respectively.