In collective consumer protection, BaFin focused on a number of supervisory issues in 2016 by, among other things, conducting comprehensive market investigations into these aspects. BaFin is prompted to carry out individual investigations, for example, by complaints, ongoing supervision, as well as findings made by the European Supervisory Authorities and the supervisory authorities of other EU member states. In such cases, BaFin subjects the supervised companies to a general survey, followed by a systematic analysis of the responses received. BaFin follows up any aspects deserving of further attention at individual institutions, for example during on-site supervision. If the analysis flags up serious or systemic undesirable developments, BaFin will also take supervisory measures against single or multiple entities. BaFin may also formulate best, good and bad practices and circulate this information among the supervised companies.

Transparency deficits in closet indexing

One of BaFin's market investigations in 2016 dealt with the issue of closet indexing (see info box). To this end, it examined German equities funds with a volume of €10 million or higher and an equities ratio of at least 51%. ESMA had previously conducted an investigation with a similar remit.

BaFin's investigation comprised a quantitative part, which was purely based on key indicators, and a qualitative review. During the quantitative analysis, BaFin first identified potential closet indexing funds using only specific key indicators. The aim of the qualitative review was to examine selected potential closet indexing funds to ascertain whether the asset management companies involved are in fact engaged in closet indexing.

Once the qualitative investigation had been completed, the number of funds that gave rise to concerns was reduced to a few individual cases.

However, the management fee charged by these investment funds was significantly lower than that normally levied for actively managed funds. In addition, they are no longer actively marketed.

BaFin demands greater transparency

Given the results of the investigations, BaFin does not see any need at present to intervene in the remuneration structures of the asset management companies. It is, however, demanding greater transparency from the fund industry.

For retail funds with an equities ratio of at least 51%, asset management companies will in future have to disclose in the prospectus whether they are actively managed or merely track an index. Where companies use a benchmark, they have to name it and explain whether and by how much the fund is expected to under- or outperform the benchmark. In addition, a chart will have to show how the fund and the benchmark used have performed in relation to each other over an extended period.

Asset management companies will in future also have to provide clearer information on the management approach they pursue. This is because they will have to include the additional disclosures in the prospectus, which is a liability document. Up to now, fund prospectuses have not generally provided any specific information on this aspect. The tighter transparency requirements will allow investors to make a better assessment of the activity of fund products.

Focus on credit-linked notes

In another market investigation, BaFin has dealt with what have up until now been referred to as credit-linked notes. They are a subform of the certificates investment type, under which investors invest in the creditworthiness of a reference company. Compared with other investment products, the structure of credit-linked notes is very complex: the interest rate and repayment of the cash amount invested are dependent on the credit risks of the reference company. It is normally difficult for retail clients to estimate whether a credit event will occur in relation to the underlying reference liability.

Issuers surveyed

For this reason, BaFin has investigated to what extent and in what form credit-linked notes are issued and what kinds of volumes are also marketed to retail clients in the investment advice business. To this end, BaFin sent out a survey to issuers of credit-linked notes at the beginning of March 2016. Among other things, the survey covered the volume of the credit-linked notes issued, the average coupon and the origin of the credit risks used in the structuring. BaFin also surveyed approximately 100 companies selected as a sample and asked them about the distribution of credit-linked notes. Among other things, BaFin was interested in the proportion of retail clients who are sold credit-linked notes – whether as a result of investment advice or without such advice. The companies were also asked if the investment advisers used had been specially trained in this area.

Products targeted at retail clients

The feedback revealed that issuers issue credit-linked notes specifically for distribution to retail clients and often recommend them when giving investment advice. It also showed that investment advisers recommend credit-linked notes to investors of all levels of risk appetite, i.e. also to clients with a low risk appetite. From BaFin's perspective, it seems doubtful whether the investment advisers did in each case provide the required level of information on the product features and the risks inherent in the product.

Planned prohibition hearing

The findings from its investigation prompted BaFin in summer 2016 to conduct a hearing on the potential prohibition of the marketing, distribution and sale of credit-linked notes to retail clients. The associations of the affected issuers and distributors responded by publishing a comprehensive voluntary undertaking in order to counter the concerns raised. On this basis, BaFin announced in December 2016 that it would suspend its planned ban and examine the effect of the voluntary undertaking.

Payment protection insurance for consumer loans

In another investigation conducted in the second half of 2016, BaFin took a close look at the issue of payment protection insurance in order to get an idea of the nature and features of this type of insurance. In particular, BaFin wanted to find out to what extent the purchase of payment protection insurance was optional, how contracts were initiated, how much they cost, and how these costs were disclosed.

To this end, BaFin sent extensive sector-specific questionnaires to a total of 66 insurance undertakings and banks. The questions related to product design, as well as contract initiation, implementation and performance. Insurance undertakings were asked in addition to submit sample costings and information on risk and policy acquisition cost results. The analysis of the extensive documentation had not yet been completed at the time of going to press.

Invoking interest rate adjustment clauses

Contractual interest rate adjustment clauses for variable-rate consumer loans were the subject of another market investigation conducted by BaFin. The survey, which was launched at the end of June 2016, is intended to find out whether institutions systematically put customers at a disadvantage by passing on changes in interest rates on consumer loans to customers with an unreasonable delay.

To this end, BaFin wrote to 50 private banks, savings banks and cooperative banks. 13 of the institutions surveyed replied that they did not grant variable-rate consumer loans.

Following in-depth analysis of the other 37 responses, there were indications for a total of 7 institutions that the contract clauses used contravened applicable case law or failed to fully meet the applicable legal requirements. BaFin will continue to pursue this issue.

Dealing with handling charges on policy loans

BaFin conducted an industry-wide survey in 2016 to establish how insurance undertakings deal with handling charges when granting policy loans (see info box).

In particular, BaFin wanted to establish the volume of handling charges levied by insurance undertakings now and in the past and to what extent the case law of the Federal Court of Justice (Bundesgerichtshof – BGH) dating from 2014 has been implemented (see info box "Case law of the Federal Court of Justice").

BaFin included in its investigation all 82 insurance undertakings that reported policy loans in their portfolio as at 31 December 2014.

Positive picture

The analysis of the survey paints a positive picture as these types of handling charges did not play a major role for the vast majority of the 82 insurers. If levied at all, these charges were low, amounting to no more than €50.

More than 70 insurance undertakings have either never levied such handling charges or discontinued the imposition of handling charges long before 2014. Only a small number of insurance undertakings were still levying handling charges at the time the Federal Court of Justice handed down its ruling. These undertakings have also since stopped this practice.

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