The supervisory measures that BaFin adopts for the purpose of averting threats, and administrative fines that are aimed at warning parties subject to supervision of the need to comply with their statutory obligations, are often lumped together and referred to as sanctions. The reason for this is obvious given that in non-legal usage the term "sanction" is associated with each and every supervisory reaction to misfeasance. It seems there is an impression that BaFin imposes sanctions whenever there is a breach of supervisory law. However, such a sweeping understanding of the term fails to do justice to the complexities of German law.

Specific trade supervision of natural persons and legal entities

In addition to market supervision, BaFin exercises specific trade supervision. Although legislators have transferred many other duties to it over the years, the core question in BaFin's day-to-day supervisory practice remains whether measures¹ need to be implemented to ensure the solvency of banks and insurers or to protect financial market integrity and transparency and/or consumers². And if so, the next question is which measures are necessary and appropriate to achieve this objective in each specific case.
BaFin has an extensive catalogue of measures at its disposal; these are set out in specialised legislation such as the German Insurance Supervision Act (Versicherungsaufsichtsgesetz), Banking Act (Kreditwesengesetz) and Securities Trading Act (Wertpapierhandelsgesetz). These measures enable BaFin to take action against both legal entities (undertakings) and natural persons. For instance, BaFin can impose increased capital requirements on a credit institution if its solvency risks are not adequately covered by its existing equity. It can also issue warnings to managers and demand their dismissal if they do not have adequate professional qualifications or are considered unreliable for supervisory purposes. The same is true for members of supervisory boards and persons with key functions at insurance undertakings (section 24 of the Insurance Supervision Act) and investment advisers (section 34d of the Securities Trading Act).

Intervention in the rights of parties subject to supervision

Each and every intervention in the rights of the undertakings and natural persons subject to supervision requires sufficient legal authorisation. The intervention itself usually takes the form of an administrative act (Verwaltungsakt) and generally only occurs after the party concerned has been heard. If, as an exception, the measures are not aimed at individual parties but at a specific group of parties, BaFin may employ a general administrative act (Allgemeinverfügung), as was the case in the recent hearing on restricting trading in financial contracts for difference (CFDs).³ If BaFin's intention is to regulate a range of issues in a generally binding manner, in certain cases specified in law it can issue regulations.

Measures are usually preventive for the purpose of averting threats

The vast majority of BaFin's actions are preventive in nature and are aimed at averting threats. In order to first identify a threat situation, BaFin can request information, require documents to be submitted and order ad hoc audits in addition to conducting regular supervisory consultations and audits. It is not uncommon for organisational deficiencies to be identified as part of such fact-finding interventions, and BaFin subsequently requests that the affected undertaking take remedial action, initially on a non-formal basis. For the most part, the undertakings follow BaFin's informal requests.

However, there are situations in which BaFin must formally intervene to avert threats. In such cases, BaFin might order the undertaking to take a specific course of action or refrain from doing something, or issue orders that concern the members of the governing bodies (e.g. a caution or dismissal request) or the further operation of the business (e.g. prohibit new business from being transacted, suspend an authorisation or permit, order liquidation). These measures, which sometimes encroach heavily on the rights of undertakings or persons, likewise serve to avert threats to the financial system, creditors, consumers or insured persons.

BaFin can enforce orders by means of enforcement measures

If the persons or undertakings concerned fail to follow BaFin's orders, BaFin can – following a prior warning – determine enforcement measures in accordance with section 17 (1) of the Act Establishing the Federal Financial Supervisory Authority (Finanzdienstleistungsaufsichtsgesetz). Coercive fines, which routinely come into consideration, can amount to a maximum of €2.5 million for each instance of non-compliance. Although on first impression coercive fines do appear to bear a resemblance to sanctions in some aspects, they are not classed as punitive administrative actions and serve solely to enforce the duty of a natural person or legal entity to do or refrain from doing something.

Immediate enforcement

The considerable importance of the preventive fact-finding and threat aversion measures employed by BaFin is expressed in particular in section 49 of the Banking Act, section 310 (2) of the Insurance Supervision Act and various provisions of the Securities Trading Act. Here, legislators order that legal remedies against the specified measures and the associated enforcement measures do not have a suspensory effect. In a departure from convention, the enforcement of such measures thus cannot be prevented or suspended solely by filing objections or actions to annul measures. Instead, BaFin can routinely enforce its orders without delay since legislators have recognised their urgency and the fact that they cannot be postponed.

Prevention…

For preventive supervisory actions aimed at averting threats, it is not necessary for an obligation to have been breached. In fact, in the best case scenario, a breach of duty is actually avoided. BaFin does indeed react to violations of supervisory duties – such as reporting obligations – with measures, for example by determining that business processes are poorly organised and consequently ordering a capital add-on to cover the resulting risks until such time as the underlying causes have been remedied. However, such measures serve not to punish specific violations, but rather to avert the resulting threats.

… vs. punishment

A distinction must be made between averting threats and BaFin's power to impose administrative fines for certain violations of duties under supervisory laws.⁴ Punishing violations is exclusively a matter for (punitive) law on breaches of administrative regulations and for criminal law, but the responsibility for the latter lies solely with the prosecuting authorities.

No administrative fines without a law

The principle of "no penalty without a law" (nulla poena sine lege) is anchored in the German constitution and applies in criminal law and law on breaches of administrative regulations (section 3 of the German Act on Breaches of Administrative Regulations (Ordnungswidrigkeitengesetz)). As a consequence, BaFin can only impose administrative fines for such violations of supervisory law as are stipulated in the legislation. European legislation has significantly expanded the catalogue of administrative fine criteria in the recent past, in particular in the Banking Act and Securities Trading Act, and this also applies to the scale of administrative fines.⁵ The scale determines the maximum amount of the administrative fines, which must be appropriate in each specific instance. In grossly simplified terms, this means that the amount of an administrative fine should at the minimum exceed the economic benefit derived from the violation. The maximum fine stipulated in section 39 (4a) sentence 2 no. 1 of the Securities Trading Act is €15 million or 15% of the total revenue of a legal entity or association of persons or up to three times the value of the economic benefit derived from the violation, for example, depending on the severity of the violation.⁶

Different meaning of the term "sanction"

Traditionally, in German supervisory law the term "sanction" refers solely to penalties for administrative offences defined in the specialised legislation. Other legal systems do not recognise this restriction; by convention, they also regard preventive measures as sanctions. This makes it difficult to compare statistics and repeatedly causes misunderstandings. For statistical purposes, BaFin recognises only administrative offence proceedings as sanctions, while other countries use this as an umbrella term for all or numerous legal supervisory measures carrying penalties.

Not condemnation but a reminder to meet obligations

Preventive and punitive administrative actions can be taken against one and the same party for the same violation. In neither case is this a disciplinary measure; no condemnation is intended and the purpose is not to retaliate for an injustice done. Preventive administrative action aims to prevent or remedy an imminent or identified irregularity using administrative law means (averting threats). Punitive administrative action sanctions a violation of the law by imposing an administrative fine as an emphatic reminder to meet obligations in due compliance with the law.

BaFin compared internationally

An issue that is frequently raised is whether the administrative fines imposed by BaFin might be far too low when compared internationally. In the Anglo-American legal system (unlike in Germany), substantial fines or settlements running to tens or hundreds of millions are common, with payments and settlements in the billions in isolated cases.
Any attempt to compare the amounts of the administrative fines must take into account the significant differences in legal traditions, legislative frameworks and assessment methods. As described above, an administrative fine serves as a reminder to meet obligations, not condemnation. In addition, German law does not allow for the possibility of administrative fine proceedings being concluded by way of a settlement without any finding of fault, as is sometimes the practice at supervisory authorities in the United States and the United Kingdom. Furthermore, gross violations of supervisory laws are frequently defined as criminal offences in Germany and are prosecuted by the competent public prosecutor's office, which prevents them from being pursued separately by BaFin.

For these reasons and others, past administrative fines have been comparatively moderate. Nevertheless, as mentioned above, European legislators followed suit after the financial crisis in 2007/2008.

Disclosure requirements

From the standpoint of those subject to supervision, it is not just the measures themselves that are a burden, but also their statutory disclosure. Depending on the measure, such a disclosure may well have considerable effects, for example influencing a company's share price. However, the disclosure of supervisory measures, for instance on the basis of section 60b of the Banking Act, is not an automatic procedure. Rather, the precondition is, in general, that the measure is final, i.e. that no further appeal for relief may be made.⁷ In addition, it must be ensured that there is no invasion of personal privacy or material risk to financial market stability and that no disproportionately high damage will arise when naming the person or undertaking subject to the measure. The same applies to the publication of administrative fine decisions that have become final.

BaFin’s actions are appropriate

In summary, it must be noted that legislators have provided BaFin with a wide range of both preventive and punitive powers that it uses appropriately and with caution. The persons and undertakings subject to such interventions can have these reviewed; objection and complaint procedures ensure that proceedings are subject to checks by authorities and the courts, and by exercising interim relief, cases can be decided by a court on a preliminary basis within a short period of time. Indeed, legal recourse ranges from administrative courts of the first and second instance, through the Federal Administrative Court (Bundesverwaltungsgericht) to the European Court of Justice. By contrast, cases concerning administrative fines are governed by civil law.

Conclusion

Record criminal fines arouse curiosity and attract attention. In contrast to Anglo-American jurisdictions, the German legal system does not traditionally provide for such criminal fines, even if the available scale of administrative fines now makes comparatively high fines possible. However, this does not mean that supervision in Germany is less efficient – it is just not as conspicuous.

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