Germany’s Federal Financial Supervisory Authority (BaFin) has recently updated its guidance notice (Merkblatt) on the regulatory classification of financial leasing (Finanzierungsleasing). In its new version, the guidance notice is now better structured and worded more clearly with regard to some aspects. Some questions still need clarification.
1. Background: Authorisation requirement for financial leasing
The background of the guidance notice is the classification of financial leasing as a financial service in Section 1 (1a), sentence 2 no. 10 of the German Banking Act (Kreditwesengesetz – KWG). As a result, among other things, pursuant to Section 32 (1) sentence 1 KWG, a written BaFin authorisation is required for anyone who offers financial leasing on a commercial basis or to an extent that requires a commercially organised business operation. However, the term financial leasing is not legally defined. In civil law, its definition is subject to debate which leads to difficulties in distinguishing it from other types of contracts such as rental agreements. This continues in regulatory law. BaFin’s guidance notice is intended to provide clarity here, which it achieves only partially.
2. Main content of the guidance notice
a) Clarification: Financing function as decisive criterion
In the updated version of the guidance notice, BaFin now clearly emphasises that the regulatory classification of a contract as financial leasing is independent of its assessment under civil law. The effectiveness of contract clauses in civil law is irrelevant in this respect. It is therefore possible that civil law and regulatory law assessments of a contract differ. For example, a civil court could consider clauses typical of (financial) leasing in a contract to be invalid and classify such contract as a rental agreement, whereas the offer of a contract with such content would already trigger a duty to obtain a BaFin authorisation pursuant to section 32 (1) sentence 1 KWG.
The BaFin emphasises that the decisive criterion for distinguishing financial leasing under regulatory law from other contracts that do not require an authorisation is their financing function. It is important that a financial lease is comparable to a loan in banking terms. According to BaFin, there is a financing function if the lessee bears the investment risk regarding the leased item. This, in turn, is the case if the risk regarding damage to the leased asset (Sachgefahr) and having to make payments (Preisgefahr) is transferred from lessor to lessee and the lessor – as typical in leasing arrangements – excludes any warranty while assigning its warranty claims against third parties to the lessee. In addition, the lessor has to intend to fully amortise its costs through a one-time transfer of use and the subsequent remarketing of the leased asset at the end of the contract.
Two aspects of this are new: Firstly, the guidance notice now emphasises the financing function of financial leasing as a differentiation criterion more strongly than before. Secondly, BaFin clarifies that the requirement of intended amortisation refers only to the lessor’s costs and thus not also to its profit margin.
According to BaFin, the typical triangular arrangement of seller, lessor and lessee is not a mandatory requirement for the classification of a contract as a financial lease from a regulatory perspective. As a result, to distinguish between financial leases and other contracts the underlying question is whether the lessor is aiming for a contract structure under which the position of the lessee is comparable to that of a borrower.
b) Correction of BaFin on manufacturer leasing
In the updated guidance notice, BaFin corrected its classification of so-called manufacturer leasing. This is (direct) leasing of the leased asset by the manufacturer to the lessee without the involvement of a legally independent leasing company. In the former version of the guidance notice, BaFin had stated that this form of leasing did not constitute a financial lease as the manufacturer’s focus was not on financing but on selling its own product.
In the updated guidance notice, BaFin now emphasises that manufacturer leasing is not always exempted from the obligation to obtain a BaFin authorisation for financial leasing. Rather, only if the investment risk is not shifted from lessor to lessee, for example because there is no triangular constellation between the parties, it does not constitute financial leasing.
c) Guidance on money remittance
The BaFin’s clarifications on money remittance pursuant to section 1 (1) sentence 2 no. 6 of the German Payment Services Oversight Act (Zahlungsdiensteaufsichtsgesetz – ZAG) are helpful in practice. If a lessor passes on payments from the lessee to a third party which are based on a contract between this third party and the lessee, this regularly constitutes money remittance. Under the ZAG, a license is required for such service. This can be the case, for example, with full-service leasing contracts in which other services are provided in addition to the transfer of use of the leased asset. Many car subscription services are also structured similarly.
On the other hand, it does not constitute money remittance if a lessor makes payments to a third party and thereby fulfils its own obligation under a contract with the third party.
d) Open points and ambiguities
Unfortunately, the guidance notice is not always free of contradictions. For example, in its explanations of the prerequisites for financial leases, BaFin emphasises that the duration of the contract and the relationship of such duration to the usual depreciation period of the leased asset is irrelevant for regulatory law. However, when differentiating between financial leasing and operating leasing further down in the guidance notice, it then points to precisely this criterion, among others. Whether the duration of the contract is relevant for the differentiation thus remains unclear. This is particularly unfortunate for the providers of car leases, insofar as the classification of the contract as a financial lease on the basis of their contract design is not clear. In individual cases, consultation with BaFin may be advisable.