Employee and Complaints Register

The Employee and Complaints Register (see info box) is an effective tool of collective consumer protection. It allows BaFin to check directly and at short notice whether investment services enterprises are complying with their conduct of business obligations when providing investment advice to retail clients. This is because the complaints of which the companies have to notify BaFin are an indicator of potential deficiencies (see Table 4 "Number of complaints notified").

BaFin therefore analyses them on an ongoing basis to identify any accumulations and investigates the associated advice and complaint records. The supervision focuses on establishing whether the buy, sell or hold recommendations made are suitable.

Table 4 Number of complaints notified¹

Number of complaints notified

Source: BaFin

The employee notifications (see Table 5 "Number of employees") and their identification numbers give BaFin an idea of staff turnover in investment advice and distribution. Companies may only notify BaFin of investment advisers and sales officers, if they have positively established and documented their reliability and expertise for the activity in question. The employees may only be assigned to the activity once their details have been reported.

Table 5 Number of employees²

Number of employees

Source: BaFin

If the notifications submitted to the register give rise to doubts about the expertise or reliability of an employee or employees draw attention to themselves as a result of violations of supervisory requirements, BaFin will initiate investigations and put the accusation to the company and the employee concerned. In most of these cases, the companies will take remedial action of their own accord, for example by retraining the employees in question, removing them from the reportable activity, or terminating their employment. Otherwise, BaFin may prohibit them from deploying the employee for a period of up to two years. In cases where such employees started work at other investment services enterprises without their new employer being aware of the violations, BaFin took action in the course of the year.³

The Employee and Complaints Register is complemented by on-site supervision. In the course of the year under review, BaFin visited 153 head offices and branches, where it spoke to 810 employees, of whom 229 worked in investment advice and 207 in sales management.

Supervisory priority area: sales policies and objectives

The sale of financial instruments and the protection of customer interests have conflicting priorities. Investment services enterprises are required to set, implement and monitor sales policies and objectives in such a way that customer interests are not compromised. They also have to document these sales control measures.

At the end of 2013, BaFin published on its website information about whether sales policies and objectives exist and how sales officers should be categorised. The concept of sales policies and objectives is also applied, for example, where there is only an indirect link to the recommendations made by investment advisers. This means that soft guidance issued to employees of institutions suggesting that they should address certain classes of financial instruments falls under the term of "sales policies and objectives" in the same way as hard weekly targets for teams of advisers that the company derives from its overall planning.

BaFin regularly examines the sales structures in the branches.⁴ The discussions on site are conducted routinely or in response to specific events – for example following information provided by whistleblowers. In order to get an additional overview of the sales practices, BaFin took a look at institutions it had selected according to risk criteria in 2016, focusing on, among other things, the question of whether they had sales policies and objectives in place that exceeded the remit of organisational and work instructions. This was motivated by the fact that when team leaders apply undue pressure in order to reach or exceed sales targets faster, there is a risk that customer interests will be compromised. It is therefore important that the institutions have effective control systems in place with which, firstly, the sales function itself and, secondly, the compliance function under the Securities Trading Act monitor sales control compliance (first and second lines of defence).

For selected inspections, BaFin not only initiated an analysis of the documentation status and of discussions with employees on the issue of sales policies and objectives, but also ordered a check of the internal communication. For selected periods, the auditors it had engaged examined the entire e-mail correspondence of those sales officers who work at key interfaces in the sales hierarchy. Because of the extremely large volume, they used keyword analysis in the examination of the e-mail texts and file attachments and looked into similarity patterns, some of which they also identified with the help of software.

The audit revealed that the organisation in the audited companies was generally suited to preventing customer interests from being compromised as a result of sales policies and objectives. In isolated cases, sales officers needed additional training or control systems had to be standardised. In one case, BaFin examined the configuration of sales policies and objectives of the institutions, which went beyond their internal sales control.

Measures and administrative fine proceedings

Measures

At the end of 2016, BaFin investigated in 23 ongoing proceedings the insights it had gained into unreliable investment advisers and sales officers. In one case, an employee's expertise had been called into question. In another, BaFin issued a warning after an investment adviser had repeatedly violated the conduct of business rules, which have to be observed when giving investment advice. The company's internal controls had independently flagged up the case as well. In a second case, the warning procedure had not been completed at the end of 2016. In this case, BaFin investigated repeated complaints in the Employee and Complaints Register, found repeated violations and identified the employee concerned, who had changed companies.

Administrative fine proceedings launched by BaFin

BaFin launched seven administrative fine proceedings in 2016, primarily because of violations of the conduct of business rules as well as organisational and transparency requirements; it concluded eight proceedings by imposing an administrative fine. A total of 10 proceedings were discontinued, 6 of them for discretionary reasons. A total of 65 proceedings were still pending from the previous year.

Administrative fine proceedings before the Local Court in Frankfurt am Main

In a trial before the Local Court (Amtsgericht) of Frankfurt am Main, a case was heard relating to four intentional violations of the investment advice documentation requirements.⁵ The credit institution concerned had issued an internal organisational instruction to the effect that customers who received advice at a meeting they attended in person should, at their request, be allowed to enter into a transaction immediately without previously having had sight of the investment advice minutes. Counter to the view taken by the credit institution, it was, however, not permissible to extend the exceptional rules that apply to investment advice given by telephone to face-to-face advice. These exceptional rules are reserved for cases where the investment advice is provided and the transaction is concluded using means of communication that do not permit the minutes to be presented in the intervening time before the transaction is concluded.

The Local Court of Frankfurt am Main imposed administrative fines totalling €32,000.

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