Topic Consumer protection Product intervention
Article from BaFin's 2017 annual report
Section 4b of the German Securities Trading Act (Wertpapierhandelsgesetz), old version, gave BaFin a legal basis on which it was authorised to issue product intervention measures. This law anticipated Article 42 of Regulation (EU) No 600/2014 (MiFIR), which has been directly applicable since 3 January 2018.1 With this product intervention tool, BaFin can restrict, or prohibit altogether, the marketing, distribution and sale of certain financial instruments if these present a significant investor protection concern or a threat to the stability or integrity of the financial system or financial market, or a derivative has a negative impact on the price formation mechanism in the underlying markets. In practice, only one of the three criteria, the existence of "significant investor protection concern", has to date led to product intervention procedures.
Launch of product intervention procedures
Product intervention procedures may be triggered by insights BaFin has gained in its own market surveillance, prospectus approval procedures or ongoing supervision. In addition, other conceivable triggers for launching product intervention procedures are external sources of information, such as complaints from investors or submissions by consumer protection bodies. Product intervention has now established itself as a fixed component of BaFin's supervisory practice and has already been used several times.
Restriction on the distribution of CFDs
By way of the General Administrative Act of 8 May 2017, BaFin imposed restrictions on the marketing, distribution and sale of contracts for difference (CFDs) to retail clients. CFDs may only be offered and distributed to this group of clients if they do not entail any obligation to make additional payments. In this way, the risk of loss for retail clients remains foreseeable, because it is limited to the capital invested.2
The parties for which the General Administrative Act is intended were given a three-month period, until 10 August 2017, to implement the restriction. After the expiry of this deadline, BaFin reviewed the Act’s implementation and found that it was not satisfactory in all cases.
BaFin publishes Guidance Notice
BaFin therefore published a Guidance Notice on 29 November 2017 with guidelines on implementing the CFD restrictions , highlighting the issues it deemed problematic. The guidelines are intended to help issuers of CFDs to amend their contract terms and conditions in such a way that retail clients are not subject to any additional payments obligation. In particular, BaFin explained once again that issuers must expressly and unconditionally rule out the obligation to make additional payments for retail investors. In addition, it pointed out that it is irrelevant whether the term "additional payments obligation" is used. Other terms, too, such as "deficit", "shortfall", "difference" or "negative balance" as well as other paraphrases fall under the prohibition to impose an additional payments obligation if they conceal contract terms and conditions that require retail clients to settle a negative balance on their CFD account.
BaFin will continue to examine on an ongoing basis whether the issuers are complying with the requirements of the General Administrative Act and the guidelines. If necessary, it will enforce compliance by means of administrative enforcement, i.e. by imposing coercive fines, for example.
Voluntary undertaking by issuers of credit-linked notes
The voluntary undertaking by issuers of credit-linked notes shows that product intervention procedures do not necessarily have to end in a restriction or ban in order to accommodate the interests of consumer protection.
In a market investigation conducted in the first half of 20163, BaFin had found that issuers issue credit-linked notes specifically for distribution to retail clients. Compared with other investment products, the structure of credit-linked notes is very complex, because the credit risks of reference undertakings determine the interest rate and repayment of the amount invested. For this and other reasons, BaFin found that the targeted distribution to retail clients was problematic and launched a public hearing in the summer of 2016 on the potential prohibition of the marketing, distribution and sale of credit-linked notes to retail clients.
The industry associations of the issuers affected, the German Banking Industry Committee (Die Deutsche Kreditwirtschaft) and the German Derivatives Association (Deutscher Derivate Verband), responded by publishing a voluntary undertaking by the industry to counter the investor protection concerns raised at the hearing.
This prompted BaFin to suspend the planned ban and to monitor – initially for a nine-month period, until the end of September 2017 – whether the industry abided by its voluntary undertaking. With respect to issuance, BaFin did not find any violations. There were only isolated violations of distribution-related principles. These violations were not of a systematic nature, but could be attributed to individual misconduct. Overall, therefore, the industry's general commitment to abide by the standards of the voluntary undertaking has been confirmed. For this reason, BaFin decided at the end of 2017 to extend the suspension of the ban it had originally intended. However, BaFin will continue to monitor compliance with the voluntary undertaking.
Proceedings against individual issuers
In addition to product intervention by way of the General Administrative Act, BaFin also conducted product intervention proceedings against individual issuers. BaFin discontinued some of the proceedings without issuing a product intervention measure, because it had found during the analysis of the prospectus or as a result of requests for information and submission of documentation that there was at least no "significant investor protection concern" within the meaning of section 4b of the Securities Trading Act, old version (see info box "Request for information and submission of documentation"). In other cases, the issuers addressed discontinued the offerings concerned of their own accord so there was no need to issue formal product intervention measures.
Request for information and submission of documentation
At the beginning of 2017, an issuer opposed a request for information and submission of documentation from BaFin by seeking urgent injunctive relief before the Administrative Court (Verwaltungsgericht) of Frankfurt am Main. It justified its refusal to provide the information requested in particular by claiming that BaFin, in its request for information and submission of documentation, had not presented sufficient factual indications within the meaning of section 152 of the German Code of Criminal Procedure (Strafprozessordnung) to ensure that the requirements for issuing a product intervention measure in accordance with section 4b of the Securities Trading Act were met. In its ruling on the application for urgent injunctive relief, the Administrative Court stated explicitly that that was not a prerequisite for the lawfulness of a request for information and submission of documentation in accordance with section 4 (3) of the Securities Trading Act. The court found that it merely had to be plausible that BaFin saw a need for questions to examine "whether, to what extent or in what way a measure in accordance with section 4b of the Securities Trading Act seems appropriate or necessary". "The purpose of requests for information and submission of documentation" was "specifically to ascertain whether the prerequisites for such a measure are met at all". The Administrative Court considered BaFin's request for information and submission of documentation to be obviously lawful and therefore rejected the issuer's application.
