German Banking Law & Capital Markets Law

For our clients, our specialist attorneys for German banking and capital markets law review whether the business model they operate falls under banking supervision. The primary legal basis for banking supervision is the German Banking Act (Kreditwesengesetz, KWG). The task of banking supervision is to monitor the activities of credit and financial services institutions as part of the state supervision of the financial market. In this context, banking supervision comprises, on one hand, the permission to conduct business during the "start-up" of a credit and financial services institution and, on the other hand, the monitoring of ongoing business activities as "ongoing supervision."

Advice on all concerns relating to the BaFin and the Federal Bank of Germany

The German Federal Financial Supervisory Authority (BaFin) and the Federal Bank of Germany share banking supervision tasks. The BaFin monitors banks and financial services institutions for compliance with the rules and requirements of the German Banking Act. As part of its ongoing supervisory activities, the Federal Bank of Germany evaluates, among other things, reports and notifications to be submitted by institutions on a regular basis and examines whether the institutions' equity base and risk management procedures are appropriate.

The establishment of new credit institutions and financial services institutions in Germany is subject to a statutory authorization requirement.

At what point is an establishment considered a credit institution?

A credit institution is an enterprise which carries out banking transactions on a commercial basis or to such an extent that it requires a commercially organized business operation. Banking transactions, according § 1 (1) of the German Banking Act (KWG), are conclusively listed as a total of 11 types of transactions; transactions not listed here do not constitute banking transactions. Banking transactions are, in particular:

• processing of payment transactions
• acceptance of interest bearing deposits
• supply of credit and loans.

What are financial services?

Financial services institutions provide the following financial services listed exhaustively in § 1 (1a) of the German Banking Act (KWG):

• investment brokerage
• investment consulting
• operation of a multilateral trading facility
• placement business
• acquisition brokerage of financial instruments in the name of a third party for a third party account
• financial portfolio management
• acquisition and sale of financial instruments for one's own account as a service for others (proprietary trading)
• mediation of deposits in countries outside the European Economic Area (third-country deposit mediation)
• crypto custody business
• exchange transactions
• purchase of receivables with or without recourse (factoring)
• conclusion of finance lease agreements as lessor
• acquisition and disposal of financial instruments on behalf of a community of investors (investment management).

Banking transactions require a BaFin licence

Anyone wishing to conduct banking transactions or provide financial services in Germany requires a license from the BaFin as the competent authority. The requirements for this include, among other things, compliance with the minimum capital requirements, the qualifications and reliability of the management and shareholders, sound institution management and the viability of the business plan as well as proper organization including suitable risk controlling and management systems (MaRisk).

The intensity of the ongoing supervision depends on the nature and scale of the business operation. The focus of monitoring is on equity and liquidity requirements and the existing risk control mechanisms.

Our banking supervision services

• extensive communication with the German Federal Supervisory Authority (BaFin)
• advice and support for special audits
• representation in legal disputes with BaFin
• consulting related to the business model
• realization of permit procedures
• consulting on and control of reporting obligations
• takeover of the reporting system as an external body
• compliance and assumption of the compliance function
• money laundering advice and assumption of the function of money laundering officer
• data protection
• advice on account retrieval procedures

WINHELLER is one of the leading German law firms in the field of bitcoin and other cryptographic currencies. We advise domestic and foreign companies whose business models are based on bitcoin as well as investors and credit institutions that see new business opportunities in cryptographic currencies. From the coordination of banking supervisory law with the BaFin to contract drafting and corporate law consulting services to the tax assessment of bitcoin transactions: We are happy to assist you if you have legal or tax questions concerning bitcoin and digital currencies.

Our services relating to blockchain and digital currencies

• regulatory advice on your business model
• coordination of the exemption from procuring permission for your business model from the BaFin
• realization of permit procedures
• consulting on and control of reporting obligations
• takeover of the reporting system as an external body
• compliance and assumption of the compliance function
• money laundering advice and assumption of the function of money laundering officer, contact point to the FIU
• data protection
• advice on account retrieval procedures

Anyone wishing to offer investments to the public in Germany must first publish an investment product sales prospectus and an investment information sheet. Both must be approved by the BaFin.

However, if the brokerage of an investment is carried out within the framework of crowdfunding or crowdinvesting pursuant to § 2a of the German Capital Investment Act (Vermögensanlagengesetz, VermAnlG) via Internet service platforms, the providers may be exempt from the obligation to prepare and publish a sales prospectus. In this case, however, it is necessary to prepare an investment information sheet and to have the publication approved by the BaFin.

Crowdfunding refers to a form of financing in which a large number of sponsors finance a specific project. The investors receive a fixed interest rate for the investment or participate in future profits of the financed project through a performance-based interest rate. The collection of funds through Internet service platforms is the standard procedure.

Our crowdfunding services

• regulatory review of your project and coordination with the BaFin
• consulting on the conception of the Internet service platform
• conception of the investment conditions
• conception of the investment information sheet 
• monitoring of the approval procedure for the investment information sheet

Crowdlending is an approach in which a large number of people extend credit. The borrowers then repay the loan with interest within the agreed term. Crowdlending is also called "lending-based crowdfunding." A P2P (peer-to-peer) loan is when the loan is assigned by self-employed individuals and businesses.

The regulatory provisions to be observed in crowdlending are based on the specific design in each individual case. In view of the differences among the individual crowdfunding platforms, binding statements on the obligation to obtain permission can only be made after a review of the respective business model. For example, the operation of a crowdlending platform may be subject to obligations to seek permission under the German Banking Act (Kreditwesengesetz, KWG), or the Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz, ZAG) may be affected. There may also be other obligations to be observed, for example, on the basis of the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG).

The provider of investments may also be subject to the prospectus requirement under the German Capital Investment Act (Vermögensanlagengesetz, VermAnlG) or the Securities Prospectus Act (Wertpapierprospektgesetz, WpPG). This also depends on how the investment to be offered and the modalities of the offer will be structured in the individual case.

Our crowdlending services

• regulatory review of your project and coordination with the BaFin
• consulting on the conception of the Internet service platform
• conception of the investment conditions

The BaFin monitors the compliance of payment institutions, payment service providers and electronic money institutions (often referred to as payment service providers or PSPs) with the rules and requirements of the Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz, ZAG) during the "start up" and as "ongoing supervision."

Payment services include

1. a deposit or withdrawal transaction,
2. payment transactions in the form of direct debits, credit transfers and payment card transactions without the granting of credit,
3. payment transactions with the granting of credit,
4. acquisition activities,
5. money transfer activities,
6. payment initiation services, and
7. account Information services.

The founding of payment institutions and e-money institutions in Germany is subject to a statutory authorization requirement. This means that anyone seeking to engage in payment services or the e-money business requires authorization from the BaFin as the competent authority. The requirements for this include compliance with the minimum capital requirements, the qualifications and reliability of the management and shareholders, sound institution management and the viability of the business plan as well as proper organization, including appropriate risk control and management systems.

The intensity of the ongoing supervision depends on the nature and scale of the business operation. The focus of monitoring is on equity and liquidity requirements and the existing risk control mechanisms.

Our services for electronic money institutions

• regulatory advice on your business model
• coordination of the exemption from procuring permission for your business model from the BaFin
• realization of licensing procedures
• consulting on and control of reporting obligations
• takeover of the reporting system as an external body
• compliance and assumption of the compliance function
• money laundering advice and assumption of the function of money laundering officer
• data protection
• advice on account retrieval procedures

In Germany, the BaFin supervises capital management companies (Kapitalverwaltungsgesellschaften, KVG) and the investment funds offered by these companies in accordance with the German Investment Code (Kapitalanlagegesetzbuch,KAGB). Investment funds are, for example, UCITS, real estate investment funds, mixed investment funds, other investment funds, special AIFs with fixed investment conditions or hedge funds.

Capital management companies have two options for managing investment assets in Germany:

• as a capital management company with a registered office and head office in Germany
• as an EU management company through a branch or by way of cross-border services (EU passport)

BaFin authorization required

Anyone seeking to manage investment assets as a capital management company with a registered office and head office in Germany requires written permission from the BaFin or must register with BaFin. The management of an investment fund is referred to when at least portfolio management or risk management is provided. Under certain circumstances, it is sufficient for AIF capital management companies to simply register with the BaFin. AIF capital management companies have their registered office and head office in Germany and manage alternative investment funds (AIF).

Anyone seeking to distribute stocks or shares in investment funds in Germany must first complete a sales notification procedure with the BaFin. The type and scope of the documents to be provided for this purpose depend on where the (capital) management company has its registered office and where the investment fund is located or where its registered office is located.

Our services for capital management companies

• execution of licensing procedures or registration procedures for a UCITS capital management company or an AIF capital management company
• back-office services for the capital management company
  • consulting on and control of reporting obligations
  • takeover of the reporting system as an external body
  • compliance and assumption of the compliance function
  • money laundering compliance and assumption of the function of money laundering officer
  • data protection
  • communication with the BaFin
  • advice and support for special audits
  • representation in legal disputes with BaFin
• conception of the investment conditions, drafting of articles of association or of the shareholder of the investment fund 
• design of the prospectus and the essential investor information
• monitoring of the distribution notification procedures

In order to maintain the integrity and stability of the financial system, in particular to combat money laundering, credit institutions are required under § 24c of the German Banking Act (Kreditwesengesetz, KWG) to maintain an automated retrieval system for account master data. With this retrieval system, the BaFin can access customer data at any time. The credit institutions themselves as well as affected customers do not learn anything about an account retrieval. Our team advises banks and financial service providers on all aspects of account supervision.

Through the German act to implement the 5th EU money laundering directive (Federal Law Gesetz (BGBl) I of December 19, 2019, p. 2602), crypto custody business shall be incorporated as a new financial service in the German Banking Act (Kreditwesengesetz, KWG). Companies seeking to provide these services will require a permit from the BaFin since the act came into force on January 1, 2020.

Our crypto custody services

• regulatory advice on your crypto custody business model
• realization of licensing procedures  
• consulting on and control of reporting obligations
• takeover of the reporting system as an external body
• compliance and assumption of the compliance function
• money laundering advice and assumption of the function of money laundering officer
• data protection
• advice on account retrieval procedures

The securities supervision of the BaFin is intended to ensure the transparency and integrity of the financial market as well as investor protection. The legal basis for securities supervision includes

• the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG),
• the German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz, WpÜG),
• the German Securities Prospectus Act (Wertpapierprospektgesetz, WpPG), and
• the German Securities Sales Prospectus Act (Wertpapier-Verkaufsprospektgesetz, VerkProspG).

Our services in the field of securities supervision

• communication with the BaFin
• realization of licensing procedures
• conception of the issue prospectus
• support during approval and licensing procedures
• advice and support in the implementation of internal control systems
• advice on statutory disclosure requirements such as ad hoc publicity and the disclosure of directors' dealings
• advice and control regarding the good conduct duties according to the German Securities Trading Act
• product governance
• compliance and assumption of the compliance function
• money laundering compliance and assumption of the function of money laundering officer
• data protection

Securities service providers or credit institutions authorized in one state of the European Economic Area are also entitled to conduct their business in other member states. This is enabled through the European passport.

The cross-border activity may be carried out either through a branch or through the freedom to provide services. If a securities service company or a credit institution intends to operate on a cross-border basis within the framework of the establishment and provision of services, it must notify its domestic regulatory authority (notification).

However, investments, foreign currency and units of account are not covered by the European passport under the MiFID II Directive and are subject to the rules applicable in the host country.

A management company with its registered office in a member state of the EU or the EEA seeking to manage investment assets in Germany through a branch or by way of cross-border service provision can also make use of the EU passport. The requirements depend on whether the EU management company wishes to manage a UCITS or special AIFs in Germany.

Our services regarding the EU passport

• regulatory review of your project and coordination with the BaFin
• realization of the notification procedure
• legal advice on the activities of branches in Germany
• back-office services for the branch office in Germany
• takeover of the reporting system as an external body
• compliance and assumption of the compliance function
• money laundering compliance and assumption of the function of money laundering officer
• data protection
• advice on account retrieval procedures