Our present banking system has only little in common with its historical predecessors. Money is no longer backed by precious metals. Thanks to the fractional-reserve system, credits can be created out of nothing. And both international networking and new financial products that keep coming up have led to a continuously growing complexity of the financial system. While, on the one hand, this system has brought about a large increase in wealth throughout the world, its complexity, on the other hand, has made it vulnerable to shocks and crises. To reduce these risks, German legislation requires banks to obtain a German banking license from state supervisory authorities before starting operations.
In Germany, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht; "BaFin") is responsible for banking license applications. Not only traditional credit institutions are subject to supervision by BaFin. In fact, the authority also supervises financial services and payment services that are not included in the definition of standard banking transactions.
BaFin is, hence, the overall supervisory authority for all sectors of an increasingly diversified finance industry. The deposit business, for instance, one of the traditional banking services, is subject to BaFin supervision in just the same way as investment advice, which is a financial service, or transfers of cash funds or cash equivalents, which belong to the payment services sector.
As the risk to financial stability and consumer protection varies depending on the specific type of activity that is subject to supervision, the BaFin banking license requirements also differ accordingly. The following will be imperative in any event
- reliability of the management;
- a sound business plan; and
- compliance with all anti-money laundering regulations and activity-specific compliance rules.
However, even regarding these factors, there exist some qualitative differences. While the executive manager of a bank, for instance, must prove verifiable management experience in a comparable institution, the managing director of a smaller payment services provider only needs appropriate theoretical and practical knowledge in the specific field of the company's intended activity.
When the statutory requirements for the issuance of a German banking license are met, the applicant has a legally enforceable right to be issued the license. In this context, it will be up to the BaFin to decide whether the details provided are sufficient for issuing a license under supervisory law. Especially where complex or innovative business models are concerned, many queries or clarifications may be necessary. As a consequence, a great deal of care and accuracy should be applied to drafting the license application to avoid a lengthy procedure and ensure that the sought-after license is received as quickly as possible. Experience has shown that, to ensure this, it is advisable to seek advice from specialist attorneys.
Applicants that successfully complete the license procedure may lastly commence their planned activity. In such case, the license holder not only has the option to engage in business in Germany. In fact, thanks to the so-called European Passport, the license holder can take advantage of the European free movement of services. Upon notification to BaFin, the license holder can offer its services without restriction throughout the European Union. Thus, the banking license obtained in Germany opens up the EU market of more than 500 million consumers.
In contrast, any company commencing an activity that requires a license without holding the necessary banking license takes a great risk. Such company will be threatened with fines and even prosecution by the public prosecutor. Even if the infringement is due to negligence, prison sentences of up to three years can be imposed. In addition, the company's business may be restricted or even prohibited by formal decision of the BaFin.
And finally, the company runs risks under civil law. Customers might claim compensation for losses caused by a non-licensed provider. And even competitors may put them on notice of infringement of competition law. The case of an intermediary provider of delivery services, who put a competitor on notice of infringement of competition law for accepting payments from customers, has gained some notoriety in Germany. Up to that moment, the competitor was not even aware that its activity required a German license.
This example shows that, prior to starting financial activities, you should seek advice from a competent legal expert. This is the only way you can ensure that all legal aspects are taken into account and minimize the risks described above. Because: Once a company has been engaged in business without holding the required license, it will have great difficulty proving the reliability required for obtaining it later on. This could place unnecessary obstacles in the way of your company's business idea.
Our experts will be pleased to provide active advice and support. We check whether you need a license for your business model and guide you through the approval procedure. In this way, you ensure that your company is built on a solid foundation in compliance with supervisory law so that you can fully concentrate on the development of your business. Your contacts are
- Attorney Dr. Annette Wagemann (Certified Specialist for Banking and Capital Markets Law, head of department),
- Attorney Sebastian Förste, and
- Attorney Benjamin Kirschbaum.
Please contact us by e-mail (firstname.lastname@example.org) or by phone (+49 (0)69 76 75 77 80).