With the ambitious goal of strengthening the performance of the German capital market and increasing the attractiveness of Germany as a financial location in the European financial center, the draft bill for a law on the financing of future-proof investments (“Draft Bill”) was published by the Federal Ministry of Finance and the Federal Ministry of Justice on April 12, 2023. The Draft Bill contained a large number of proposed amendments under company, financial market and tax law. This was followed on August 17, 2023 by the publication by the German government of a draft bill for a law on the financing of future-proof investments (Future Financing Act – “ZuFinG-E” and “Government Draft“). This draft translates the government’s intention to promote future-oriented investments into more concrete legal form and will go through the legislative process of the German Parliament.
In the following overview, we outline the main changes resulting from this for the financial supervisory law.
MAIN CONTENTS I. Electronic and English-language communication with public authorities
For international market participants, the German financial market should be more easily accessible in the future, which is why the German Financial Supervisory Authority (“BaFin”) should be enabled to communicate with market participants in English as the international working language, over and above the existing legal leeway:
Applications can be submitted in English in the future by supplementing the Financial Services Supervision Act (“FinDAG”). Administrative specifications and forms relevant for international market participants are to be made available in English more quickly and more comprehensively (Section 4j FinDAG-E).
In addition, it should be possible in the future, for example through an amendment to the Ownership Control Ordinance (Inhaberkontrollverordnung – “InhKontrollV”), for interested acquirers and owners of significant shareholdings to communicate with BaFin in ownership control proceedings in English.
In addition to English-language communication, written form requirements in supervisory law are to be replaced by digital communication options. For example, the Payment Services Supervision Act (Gesetz über die Beaufsichtigung von Zahlungsdiensten – “ZAG“) is to be amended to create the basis for companies subject to licensing and registration requirements to communicate with BaFin electronically in the context of licensing and registration (Section 4a ZAG-E). In the past, communication between BaFin and the institutions could already take place in part via a portal set up by BaFin, without there being any statutory regulation for ZAG institutions in this regard.
Furthermore, electronic and English-language communication with authorities is to be comprehensively supplemented by parallel regulations in further supervisory laws. In practice, the option of English communication and the waiver of the numerous written form requirements under supervisory law promise considerable advantages in the context of the usually already extensive requirements for communication with BaFin. The proposed amendments from the Draft Bill have been incorporated into the Government Draft without any significant adjustments.
II. Introduction of the electronic share
Already laid down in the coalition agreement and legally elaborated in the Government Draft, the scope of the Electronic Securities Act (Gesetz über elektronische Wertpapiere – “eWpG“) is to be extended to electronic shares. To date, only bearer bonds and investment fund share certificates could be issued electronically under the eWpG. The proposed amendments to the eWpG and the German Stock Corporation Act (Aktiengesetz – “AktG“) are intended to make this possible for electronic shares as well in the future. With regard to the electronic central register share, Germany is thus catching up with other countries where electronic share custody has long been standard. The introduction represents a novelty in German stock corporation law and will make a decisive contribution to opening up the financial market for companies and investors.
III. Adjustment of the liability rules for Crowd Funding Projects
Easing of liability for crowdfunding projects: In the future, crowdfunding for project promoters and crowdfunding service providers is expected to become more attractive due to the limitation of liability rules. The existing liability rules for Key Investment Information Sheets (“KIIS“) in the case of swarm financing projects are to be aligned with the liability rules for investments such as securities and asset investments. At the same time, this also enables the improvement of the enforcement of compensation claims for the investor:
A revision of the liability rules set out in Sections 32c, 32d and 32e (1) of the German Securities Trading Act (Wertpapierhandelsgesetz – “WpHG“) is initially intended to eliminate the direct liability of members of the management and supervisory bodies of project sponsors and providers of crowdfunding services.
Whereas in the Draft Bill the fault of the project sponsor or the crowdfunding service provider was still rebuttably presumed, as is customary in German supervisory law, according to the Government Draft liability will only be considered in the future if negligence can be proven.
Furthermore, liability due to incorrect or missing information in a KIIS or due to missing declarations to be made shall be limited to the refund of the investment made by the investor.
The draft thus creates, at least to a large extent, the required uniformity of the supervisory liability standard.
IV. Introduction of specifications for crypto custody
In view of current events on the crypto market, this is a very relevant topic for the financial industry: The newly adopted Regulation (EU) 2023/1114 on Markets in Crypto-Assets (“MiCAR“) also includes regulations for the protection of client assets in the event of the insolvency of crypto custodians. The Future Financing Act is intended to keep crypto assets in custody out of the reach of the crypto custodian’s general creditors even before MiCAR takes effect or its transition period ends. The failures of crypto exchanges show how practically relevant and important a corresponding regulation is in order to create security for companies and investors.
1. Introduction of an asset segregation requirement
The ZuFinG-E obliges crypto custodians to take precautions to separate their own crypto assets from crypto assets in custody and to no longer dispose of them without explicit consent. To implement the asset segregation requirement, the Draft Bill provides for an amendment to the German Banking Act (Kreditwesengesetz – “KWG“).
Crypto custodians must keep crypto assets and customers’ private cryptographic keys separate from their own and other customers’ assets. Bundled custody as in the case of the omnibus solution should remain possible, but it must be ensured that the individual shares can be determined and assigned to the respective customer at any time.
If the crypto custodian violates these obligations, it commits an administrative offense that can be punished with a fine of up to EUR 500,000.00.
2. Regulation of the allocation of crypto assets held in custody and the right of customers to segregate such assets
The clear separation provisions are complemented by the strengthening of customer rights in the event of the custodian’s insolvency. The crypto assets in custody, including the private cryptographic keys, must remain inaccessible to the crypto custodian’s general creditors, which is once again clarified by a supplementary provision. This will enable the customers to oppose an access under enforcement law with the third-party action (Section 771 ZPO). In addition, they will then be entitled to a right of segregation (Section 47 InsO) in insolvency proceedings regarding the assets of the crypto custodian. The starting point is the statutory provision in a new Section 46i (1) KWG, according to which a customer’s crypto asset held in custody is deemed to belong to the customer. However, this fiction is to cease to apply if the customer has previously given his consent to the disposal of the assets for the account of the institution or third parties. The exact requirements for consent remain to be seen.
With regard to the right to segregation, the Government Draft specifies that the customer bears the costs of segregation if he does not consent to the transfer to a crypto custodian determined by the insolvency administrator. However, this is to be waived as an exception if the conditions of this crypto custodian are unreasonable. The conditions shall be deemed unreasonable, for example, if the custody fees charged are disproportionately high or if the customer is offered less security for the crypto assets held in custody.
V. Introduction of regulations for the DLT Pilot Regime
In line with the objective of the Draft Bill to make the German financial market more accessible for start-ups, growth companies and small and medium-sized enterprises through digitalization and internationalization, the Government Draft includes accompanying regulations to the so-called DLT pilot regime already in place.
The DLT pilot scheme, under which a temporary test environment (regulatory sandbox) is made possible for market infrastructures based on distributed ledger technology (“DLT“), has already come into effect. Market participants can gain initial experience in trading tokenized financial instruments. It applies to all market participants that enable decentralized trading as well as decentralized settlement.
As the DLT pilot regime contains requirements and exemptions for DLT-based market infrastructures, an adjustment of the national regulatory requirements will be necessary:
The ZuFinG-E therefore provides, among other things, for the inclusion of new provisions in the KWG and the Securities Institutions Act (Wertpapierinstitutsgesetz – “WpIG“), according to which the activities permitted under the DLT pilot regime do not trigger any additional licensing requirement under the KWG or WpIG.
In addition, BaFin is to be the competent authority within the meaning of DLT pilot regime and, in deviation from the previous principle of German-language communication with authorities, is to determine that documents may also be prepared and submitted in English (Sections 53r, 53u (1), 78a, 78c (1) KWG-E).
In addition, applications relating to the DLT pilot regime are to be permitted to be transmitted purely electronically (Sections 53u (2), 78c (2) KWG-E). According to the Government Draft, the transmission channel and the data format are to be determined by BaFin.
VI. New regulations in payment services law 1. Exception from Terms & Conditions Control for contracts between financial entrepreneurs
For T&Cs between banks and other financial service providers, an area exemption from T&C control is to be introduced for contracts on transactions requiring a license under the KWG, the WpIG and ZAG (Section 310 (1a) BGB-E). In contrast to the Draft Bill, however, the Government Draft no longer requires that the actors have a permit under these laws and are supervised. Instead, it should suffice to prove that the contracting entrepreneurs are permitted to carry out this type of business in general or the specific business lawfully.
The purpose of the area exception is to enable contracts under German law to be structured in a legally secure manner in accordance with the internationally applicable standards. Up to now, there has been considerable legal uncertainty as to the extent to which the standard contractual clauses that are customary in practice and are also drafted with regard to regulatory provisions also comply with the requirements of T&C law, if there is no case law on this yet.
2. BaFin comparison website for payment account fees
In order to ensure that a comparison website for payment account fees is permanently available to consumers in compliance with European law, a comparison website operated by BaFin is also to be established (Section 16 (1) of the Draft Payment Accounts Act – “ZKG-E”).
A legal obligation for payment service providers to report data on comparison criteria to BaFin is also to be introduced in order to be able to efficiently and effectively cover the essential part of the German market in payment account comparison (Section 17 (2) ZKG-E).
The Government Draft will go through the legislative process in the near future, and its conclusion is planned for the fall or winter of this year. While the majority of the regulations are expected to enter into force the day after the Future Financing Act is promulgated in the Federal Law Gazette, this is scheduled for January 1, 2024 for some other regulations. We look forward to continuing to keep you informed of developments in the planned Future Financing Act!