In Dr Jörg Kukies’s view, BaFin is on the right path. Speaking about the modernisation project in a press conference on 13 October, during which Dr Kukies and BaFin President Mark Branson presented the progress made to date, State Secretary Kukies reported that important milestones had already been reached in the project, which was launched six months ago and is being implemented by BaFin together with the Federal Ministry of Finance (Bundesfinanzministerium – BMF) (see info box). Large parts of the programme have already been realised, and around one third is close to implementation. The project will be completed in December.

“Things are moving along quickly,” said Branson, who has been President of BaFin since August. He was impressed right from the start by how much had already been achieved and how much energy is being put into the project. And, crucially from Branson’s perspective: the project is heading in the right direction. Kukies also noted that BaFin has already received recognition for the modernisation project. At the 20th eGovernment competition, hosted by BearingPoint and Cisco, the project team came first in the category “Best agile transformation project 2021“.

Modernisation process set to continue

For Branson and Kukies, the modernisation project is only the beginning of BaFin’s long-term development. According to Branson, “BaFin is certainly more modern that it was half a year ago. But we will need years to reach the level we are aiming for.” Both Branson and Kukies view BaFin’s modernisation as a challenging long-distance race. “We were both long-distance runners, we know what we are talking about,” said Branson. Regarding the further course of the modernisation process, Kukies announced that the BMF would no longer be involved from December: “It is important to us that we leave the further stages of our shared long-distance race to BaFin,” said Kukies – also in respect of BaFin’s operational independence from the BMF. This point is very important to Branson: “There must be total independence in operational supervision.”

BaFin’s President is aware of the high expectations placed on his authority which, he explained, is expected to make decisions of the very best quality, set clear, ambitious targets and to apply modern, digital working methods. Branson is confident that BaFin’s employees are motivated to continue along the path set out.

Holistic, integrated and forward-looking supervision

For Branson, BaFin’s modernisation is also a question of culture. He believes that, as a modern supervisory authority, BaFin’s thinking has to be holistic, integrated and forward-looking. “We need to be fast, flexible, open and extremely clear in our communication,” he said. For Branson, it is essential that “we are bold and prepared to take risks from time to time.” BaFin must make decisions even when responsibilities are not 100% clear and even before every last detail can be clarified, he continued. “The risk of not having all of the information needed for a decision is not as great as the risk of not acting, or of acting too late.”

Focus Units and Task Force to ensure intensified control

The Focus Units and Task Force, which Kukies and Branson hope will boost BaFin’s supervisory impact, are examples of milestones already reached as part of the modernisation project. Both units were launched in the middle of August and, according to Kukies, they are working as planned. They are coordinated by the Coordination of Focus Units and Task Force Office (Koordination Fokusaufsicht und Taskforce – KFT). The KFT reports directly to BaFin’s President. The Focus Units supervise financial services institutions with complex or innovative business models. BaFin intends to take a more holistic and in-depth approach in this area in order to identify and counteract critical risks. The new processes required for this purpose have been set up and tested in the past few months. The Focus Units are already supervising 17 banks, insurers, securities firms and payment services providers.

With its dedicated Task Force, BaFin can now respond to suspected violations by carrying out investigative audits with its own employees, even at short notice. This gives BaFin a kind of rapid response team, which is ready to be deployed immediately in urgent matters. A group of finance specialists form the core of this Task Force. For this team, BaFin is recruiting highly qualified auditors and financial forensic investigators. Depending on the case at hand, the Task Force can also co-opt experts from BaFin’s various sectors.

BaFin to intensify the enforcement of companies' financial reporting

Kukies and Branson consider the reorganisation of financial reporting enforcement to be a key step in the reform process. Under the Act to Strengthen Financial Market Integrity (Finanzmarktintegritätsstärkungsgesetz – FISG), from 2022 onwards financial reporting enforcement will be organised as a one-tier process, i.e. in future, BaFin alone will be responsible for both ad hoc and sampling audits. BaFin's rights to examine the financial statements of companies listed in Germany will thus be significantly strengthened. BaFin has created a tailor-made market monitoring system to identify companies at risk. This prototype is continuously being enhanced.

At the same time, BaFin is taking a more proactive approach in its auditing activities, for example by increasing on-site inspections and conducting financial forensic investigations. In September of this year, a newly established Directorate assumed responsibility for financial reporting enforcement at BaFin. At the beginning of 2022, the experts from the Financial Reporting Enforcement Panel (FREP) are to join BaFin. Additional auditors and accounting specialists will also be recruited. In total, around 60 employees will work in BaFin's financial reporting enforcement directorate.

Contact point for whistleblowers and Market Contact Group to provide fresh impetus

In August, BaFin reorganised its contact point for whistleblowers. A risk-based approach and comprehensive monitoring allow BaFin to gather and analyse valuable information in order to mount a targeted response. On the basis of the BaFin Whistleblower Regulation issued by the BMF on 26 July 2021, the contact point for whistleblowers already acts in accordance with the standards of the EU Whistleblower Directive.

The newly created Market Contact Group (MCG), which forms part of the contact point for whistleblowers, receives information from the financial sector.

Mystery shopping and new dedicated officer to strengthen investor and consumer protection

Starting next year, BaFin will also make undercover test purchases, also known as mystery shopping, thus adding another tool to strengthen consumer protection supervision (see info box). The plan is to carry out several test purchases per year. Trained test buyers will act as consumers, receiving advice from financial institutions or acquiring products for test purposes. BaFin will use this as a way to verify whether the service providers meet their legal obligations towards consumers and investors. Initial pilots have already been conducted.

The appointment, in July of this year, of a dedicated Investor and Consumer Protection Officer has further strengthened BaFin's collective consumer and investor protection mandate (see expert article on the BaFin website dated 21 October 2021).

BaFin President given greater powers

The modernisation has also resulted in a significant strengthening of the office of the BaFin President. BaFin President Branson is responsible for the budget, determines the allocation of personnel and financial resources and lays down the organisational structure. BaFin adjusted its Statutes accordingly as at 1 July this year (see expert article on the BaFin website dated 4 August 2021). This has accelerated decision-making processes at the executive level. In addition, BaFin is planning to introduce a new strategic management system with clear targets by the end of the year.

Data Intelligence Unit and IT supervision: BaFin uses state-of-the-art technology

In Branson’s view, the new Data Intelligence Unit (DIU) will boost BaFin’s modernisation process. The central analytics unit started its work in August. The DIU is the backbone of data-driven and IT-based supervision. A prototype of a new central tool – the supervisor cockpit – has already been developed. Version 1.0 is expected to go live at the end of the year, followed by regular upgrades. This IT solution will make use of the latest technologies to give BaFin's supervisors all the information they need at a glance in a tool that is user-friendly and intuitive to operate.

In August of this year, BaFin also strengthened its IT supervision: a new directorate now oversees crypto custody business, e-money institutions and payment institutions. The main focus is on preventing cyber crises and monitoring networked IT companies providing outsourced services. Other IT experts will provide additional support to these areas of supervision in future. Alongside this, BaFin is expanding its training opportunities with the aim of increasing digital know-how and covering supervisory issues relevant to technology, such as cloud computing, cyber security in the financial sector, and distributed ledger technology and blockchain.

New positions

In total, about 150 new positions have been created so that the new tasks, responsibilities and powers can be implemented. About 80 per cent of these vacancies have already been filled or the selection process is underway. An equal mix of committed, experienced supervisors and external candidates with new professional skills will combine the expertise of BaFin with fresh insights and new ideas from the market.
The event was moderated by Annkathrin Frind from BaFin’s Press Office.