© istockphoto.com/FrankRamspott
Erscheinung:04.11.2019 | Topic Consumer protection “There can never be an all-inclusive package offering consumers complete protection”
More transparency in the gray capital market, and investors who still have to make their own decisions – Elisabeth Roegele on the new consumer protection package
Empower consumers, but not relieve them of responsibility – with these few words, Elisabeth Roegele summarises the package of measures agreed upon in August by the German ministries headed by Olaf Scholz and Christine Lambrecht, i.e. the Federal Ministry of Finance and the Federal Ministry of Justice and Consumer Protection. Ms Roegele, head of securities supervision at BaFin, is sure: there will be a marked improvement in safety in the gray capital market. However, in an interview with the BaFinJournal, Roegele warns investors that business models could still develop in ways that the issuer did not plan or predict.
At a glance:Nine steps to greater consumer protection
The Federal Government's consumer protection package comprises nine measures. Measures 1 and 6 are already fully implemented, measure 9 partially. Draft bills are being drawn up for the others. What do these measures contain?
- Incomplete prospectuses will be prohibited from now on. Background: Investors cannot really assess forecasts made by issuers if they do not have details such as interest payments, purchase price or repurchase price. The legislation remedying this entered into force in mid-July.
- Capital investments (Vermögensanlagen) in the form of blind pools may no longer be publicly offered to retail investors. Alternative for providers and investors: closed-end funds.
- In future, only brokers that are subject to supervision, and thus required, for example, to fulfil certain rules of conduct and transparency requirements, will be able to market capital investments. Direct selling, which is inherently subject to conflicts of interest, is thus no longer permitted.
- Examining the accounts of issuers of capital investments is to be made easier. Investors could then more easily find out if their money is being used for the stated purposes.
- In future, issuers of direct investments must instruct a qualified independent third party – such as a lawyer or an auditor – to audit how the funds received are being used. Issuers must publish the findings of this audit on the use of funds.
- BaFin will consistently continue to make use of its product intervention powers for capital investments. Since 2015 it has been able to restrict or even prohibit the marketing, distribution and sale of certain financial products – for example, if these products raise significant investor protection concerns. BaFin has already used these powers. In many cases, however, it is sufficient to simply point out that it has this tool at its disposal.
- Up to now, managers of small closed-end retail funds have only had to register with BaFin, and are subject to less stringent requirements – investors are not always aware of this. This will no longer be the case: in the future, all closed-end retail fund managers will be required to seek authorisation – and will thus also become subject to supervision by BaFin. But it should be noted that anyone who is already registered as a manager of an existing closed-end retail fund will be able to benefit from grandfathering provisions.
- Supervision of independent financial investment intermediaries will be gradually transferred to BaFin. Up to now they have been supervised by the trade offices (Gewerbeämter) or chambers of industry and commerce, depending on the Federal State. Bringing supervisory activities together under one roof at BaFin is aimed at ensuring consistent and high-quality financial supervision.
- BaFin will intensify its existing work in the field of consumer education and in providing information about capital investments.
Ms Roegele, the Federal Ministry of Finance and the Federal Ministry of Justice and Consumer Protection recently got their big consumer protection package off the ground. Is this the long hoped-for, all-inclusive package offering consumer complete protection?
Roegele: No. It is not meant to be a worry-free, all-in-one package; something like that can and will never exist. But this package significantly improves investor protection. The package provides for greater transparency around capital investments and investors will be able to make more autonomous decisions about how to invest their money in the capital market. But that also means that investors need to inform themselves and make their own decisions.
Will the gray capital market basically be regulated now then?
The gray capital market will become more transparent for investors. There will be a marked improvement in protection but business models that retail investors have invested in could still develop in ways that the issuer did not plan or predict. But there is also one thing we must not forget: we can curtail criminal activity through regulation, but we cannot completely rule it out.
What do you expect to be the result of supervised brokers being the only ones allowed to market capital investments in the future?
Much better protection for investors. The fact that providers will no longer be allowed to market their capital investments directly to retail investors is a big step in the right direction. Financial services institutions and financial investment intermediaries are subject to ongoing supervision. They have to comply with a whole range of transparency obligations and rules of conduct. And they have the expertise needed to advise investors.
It will no longer be permitted to offer retail investors blind pools. Is consumer protection turning into patronisation here?
No, this is not about patronising consumers. In particular when we look at capital investments, we see a lot of blind pools. But a retail investor should know what they are investing in. That's the only way they can take all aspects into account.
The goal of the whole consumer protection package is to enable investors to make informed decisions. This is a very important point – and is the opposite of patronising. The Federal Government wants to empower consumers, but not relieve them of responsibility. This is the only viable approach. Anyone who does not want to concern themselves with an investment product and prefers to leave this to an asset manager still has the option of investing in funds.
It is intended that BaFin will soon be able to request information and documentation from issuers of capital investments before examining their accounts. Will that lead to a wave of account examinations?
Absolutely not. We do not carry out account examinations out of the blue and we will not do so in the future either. We will still need to have specific evidence to do this. The point is that because we will now be able to request information beforehand, we will be better able to assess whether our suspicions are supported by solid evidence.
How will it benefit consumers that issuers of direct investments in tangible assets will soon have to instruct an independent third party to review how money received from investors is being used?
First, I would like to underscore again that the use of funds will only be monitored for direct investments in tangible assets, and not for all types of investment.
It will make it easier for investors to know whether their money is really being used for the stated purposes. If an independent third party is keeping an eye on that, this is definitely a plus for consumer protection.
Speaking of product intervention, the Federal Ministry of Finance and the Federal Ministry of Justice and Consumer Protection want BaFin to consistently make use of its product intervention powers. Have the supervisors too rarely made use of this powerful tool up to now?
No, that is not the issue. BaFin has used those powers several times already. Just recently we made sure, for example, that the restrictions on marketing, distributing and selling financial contracts for differences (CFDs) to retail investors in Germany remained in place (see BaFinJournal August 2019 – only available in German).
The Federal Ministry of Finance and Federal Ministry of Justice and Consumer Protection simply want to again make it clear how important product intervention is as a tool. Product intervention can only ever be the last resort. But sometimes it is even enough to simply point out that we have this tool at our disposal.
There is another important point. In my view, it has again been made clear that there are two instruments that go hand in hand. There is the approval of prospectuses, which we grant in accordance with our legal mandate – so we assess their consistency, completeness and comprehensibility. And there is product intervention, which can be extensive.
Even if a provider's prospectus meets all of the legal requirements and we have to approve it, that does not stop us from subsequently prohibiting sale of the product. If we have significant concerns about investor protection, we can intervene. That sounds like a contradiction, but it’s not.
What can BaFin do better than trade offices or chambers of industry and commerce when it comes to supervising independent financial investment intermediaries?
We have a lot of experience in supervising compliance with rules of conduct, i.e. ensuring that the requirements for investment advice and brokerage are met. And we can make sure that supervision is consistent, i.e. that independent financial investment intermediaries are supervised according to similar standards as banks.
Bringing supervisory activities together under one roof also has the advantage that we can make sure that the ideas formulated by the European legislator in MiFID II, for example, are implemented across the board. Interpreting and applying European law is part of our daily work.
BaFin is to step up its work in the field of consumer education. What do you think about that?
We are already very active when it comes to informing consumers – including in the areas mentioned in the consumer protection package. So we are happy that the Federal Government also recognises this and that we can continue to expand our efforts here even further.
Ms Roegele, thank you for speaking to us!
Please note
This article reflects the situation at the time of publication and will not be updated subsequently. Please take note of the Standard Terms and Conditions of Use.
