Chief Executive Director Dr Thorsten Pötzsch about the Act to Strengthen Investor Protection

“Transparency as the recurrent theme“

Dr. Pötzsch

@BaFin

The Act to Strengthen Investor Protection (Anlegerschutzstärkungsgesetz) makes the grey capital market more transparent for investors. For Dr. Thorsten Pötzsch, transparency is a recurrent theme that runs throughout the Act. In this interview, BaFin’s Chief Executive Director, who is also currently Interim Head of BaFin’s Securities Supervision Sector, explains how the new legislation will make it easier for investors to make up their own minds where to invest their money.

Dr. Pötzsch, what can investors expect from the Act to Strengthen Investor Protection?

They can expect better protection, above all from the increase in transparency on the grey capital market that the new legislation provides. Transparency is a recurrent theme that runs through the entire Act. The legislators have taken the right approach here in my opinion, as they are making it easier for investors to decide for themselves how and where to invest their money. But greater protection does not mean that the lawmakers are releasing investors from their responsibility.

Surely investors could still come to grief on the grey capital market.

Yes, they could. Investors must always bear in mind that capital investments might not perform in line with the issuer’s projections and forecasts. You have this risk with all investments on the capital market. The higher the prospective returns, the higher the risk. And there’s something else investors should bear in mind: no matter how much regulating and monitoring we do – we will never be able to entirely prevent criminal activity.

Would it not be better to impose a general ban on grey capital market products?

As always, it’s a question of what can be deemed proportionate. Imposing a general ban on grey capital market products might be construed as a step towards paternalism.

While on the subject of bans: at least blind pools may no longer be offered to investors in future, barring a few exceptions. Is that protection or does that constitute paternalism?

There’s always a fine line between protection and paternalism and we have to tread very carefully. But here, negotiating this fine line has been successful as the ban in question really is about protection. Protection that enables investors to act responsibly and strengthens personal autonomy. Particularly retail investors need to know in advance which projects they are investing their money in. But they can’t do that if they’re left in the dark.

There’s the old proverb that you should never buy a pig in a poke. That’s precisely what’s been happening here on a widespread scale. There was an enormous imbalance in knowledge between offerors and investors and the only way to resolve this was by banning blind pools. Here the theme of transparency recurs again: the lawmakers are not prohibiting investors from investing in projects normally funded through blind pools but are enabling them to form their own impression of these projects. In this way they can better decide whether it makes sense for them to invest in such a product. In other words, investors are being given the means to make responsible decisions.

There’s bound to be investors who don’t wish to concern themselves with a capital investment to such a degree. Or who say it’s all too complicated for them to understand. If that is the case, they should steer well clear of such products. People should only take risks if they know what they are letting themselves in for and can bear the risks.

Let’s talk about direct selling: what do investors stand to gain from the fact that, in future, only investment services enterprises and financial investment intermediaries will be allowed to distribute capital investments?

They can expect better protection, and here’s why: anyone distributing their own capital investments will have their own economic interests at heart first and foremost. And these might conflict with those of the investors. Investment services enterprises and financial investment intermediaries do not distribute their own investment products but offer an array of products from different providers.

And that’s not all: investment services enterprises are supervised by BaFin and have the necessary expert knowledge to advise investors and to customise their advice to the investors’ needs. What’s more: they have to meet transparency requirements and comply with rules of conduct designed to protect investors. Financial investment intermediaries are also subject to supervision, in their case by the Trade Supervisory Offices (Gewerbeaufsichtsamt) or the chambers of industry and commerce.

But once again: the Act to Strengthen Investor Protection makes the grey capital market safer but it cannot provide complete protection in all situations. That would be simply impossible.

Some issuers will soon be obliged to appoint an independent third party to control how investors’ money is being used. What changes do you expect from this?

I expect a further tangible increase in investor protection. The fact that, in future, an independent third party will be entrusted with monitoring the application of investments in, for example, direct investments in tangible assets will lead again to more transparency. Up until now, all investors could do was rely on their money being properly invested. Now they will be able to better trace whether the money really is being used for the intended purpose.

One final question: the new legislation interlinks the processes of prospectus scrutiny and product intervention for capital investments. What is going to change here?

Let me briefly explain the situation as it is at the moment: on the one hand, prospectuses for capital investments are subject to an approval process by BaFin. We scrutinise prospectuses in accordance with statutory requirements. Specifically we examine whether they are consistent, complete and comprehensible. No more, but no less than that. On the other hand, there’s the tool of product intervention. We can, for example, prohibit a product or restrict its distribution if there are considerable grounds for investor protection concerns. For example, we took measures to impose a restriction on the marketing, distribution and sale of contracts for difference (CFDs) in Germany to retail investors.

Up until now, these two processes were handled separately. If a prospectus met the legal requirements, in other words was consistent, complete and comprehensible, BaFin had to approve it. End of matter. It was completely irrelevant whether BaFin was at the same examining a possible need to, for example, prohibit the product due to considerable investor protection concerns.

We’ll no longer be faced with such situations. We’ll continue to scrutinise whether the capital investment prospectuses are consistent, complete and comprehensible. But in future the prospectus approval procedure will be suspended as soon as BaFin has grounds for investor protection concerns. And we will in principle continue to suspend the process until we’ve finally concluded whether there is a need to adopt product intervention measures. If BaFin prohibits an investment product, we will of course stop the prospectus approval process.

However, these provisions do not apply to prospectuses under the EU Prospectus Regulation. The reason is that this is a directly applicable European regulation, which means that national legislators do not have any legislative powers in this area.

I welcome these new tools for capital investments: they contribute towards making our supervisory practice more effective and our actions more comprehensible.

Thank you for the interview, Dr Pötzsch.