German Financial Services SpeedRead: 12 August 2024 edition

Welcome to the latest edition of the Germany specific Financial Services SpeedRead, a collection of bite-sized updates designed to help you keep on top of key regulatory developments in financial services over the preceding fortnight. Please get in touch if you want to explore any of the topics covered in this fortnight's edition of Financial Services SpeedRead in more detail.

Financial Markets

1.  ESMA: Public Statement: Transition to the new regime for post-trade transparency of OTC-transactions

On 22 July 2024, ESMA published a statement on the transition to the new regime for post-trade transparency of OTC-transactions, as previously introduced by the MiFIR review.

The statement aims to provide practical guidance to market participants. In particular, ESMA outlines its two-step approach, which has been agreed with by NCAs, for the implementation of the orderly transition to the Designated Publishing Entity (DPE) regime. This involves ESMA beginning to publish the DPE register on 29 September 2024 and the new DPE regime for post-trade transparency becoming fully operational on 3 February 2025.

Investment firms that intend to become DPEs are encouraged to register with their NCA and to provide the classes of financial instruments for which they wish to take up this function, as well as other identifying information requested by the NCAs.

2.  ESMA: Report: Suspicious Transaction and Order Reports 

On 17 July 2024, ESMA published its report on Suspicious Transaction and Order Reports (STORs). 

The report aims at providing the market with a clear overview over the use of STORs in different jurisdictions across the EU and how this has evolved over time. ESMA concluded the following:

• the figures are rather consistent and no major changes have been detected compared to previous years; and
• the number of notifications received from NCAs is stable and other indicators, such as the type of reporting entities, the type of instrument and the types of violation which the notifications cover, point towards very similar results.

3.  ESMA: Consultation Paper: Technical Standards specifying the criteria for establishing and assessing the effectiveness of investment firms’ order execution policies

On 16 July 2024, ESMA published a consultation paper on order execution policies, in line with its mandate under the Directive amending MiFID II (Updated MIFID), which was finalised along with Regulation amending MiFIR (Updated MiFIR) in March 2024 (see our briefing here). Updated MiFIR and Updated MiFID entered into force on 29 March 2024, with a deadline of 29 September 2025 for Member States to have published measures to transpose Updated MiFID.

The measures proposed by ESMA will result in amendments needing to be made to sections of existing policies, including specific instructions, monitoring and review of policy.

ESMA is suggesting that firms should pre-select the venues eligible for client order execution per class of financial instruments and per category of client. ESMA is also suggesting that firms should obtain the best result for their clients when executing client order based on own account deals. ESMA has also explicitly stated that some requirements under the best execution regime (e.g. monitoring and reviewing) can be carried out by third parties. 

The deadline for comments is 16 October 2024. ESMA expects to prepare the final report containing draft technical standards to be submitted to the EU Commission for endorsement by 29 December 2024.

For more information, please see our briefing here.

Banking and Prudential

4.  BaFin: Supervisory notice on new surcharge classes for determining the own funds requirement in SREP 2024

On 31 July 2024, BaFin published a supervisory notice defining the new surcharge classes within the Supervisory Review and Evaluation Process 2024 (SREP 2024)for determining the own funds requirement.

In contrast to the old surcharge matrix, only twelve fields will be included in future and the differentiation between risk analysis grades 1 and 2 will no longer influence the surcharge amount.

5. EU Commission: Legislation: Amending the CRR to postpone application date of the own funds requirements for market risk

On 24 July 2024, the EU Commission adopted a Delegated Regulation which postpones by one year, until 1 January 2026, the date of application of the Fundamental Review of the Trading Book standards in the EU for banks’ calculation of own funds requirements for market risk.

The Delegated Regulation will enter into force on the day after its publication in the Official Journal of the EU. It applies from 1 January 2025.

6. BaFin: amended guidance notice on external bail-in implementation

On 4 July 2024, BaFin published its amended version of the guidance notice on external bail-in implementation. It implements the guidelines of the European Banking Authority on the "Publication of the write-down and conversion and bail-in implementation mechanism" (EBA/GL/2023/01). The new version also includes a standardised concept for the write-down and conversion of percentage and unit-listed structured debt instruments.

The addressees are all companies within the meaning of Article 2 of the Single Resolution Mechanism Regulation (Regulation (EU) No. 806/2014) and companies within the meaning of Section 1 (1) Nos. 1 to 3 of the German Recovery and Resolution Act (Sanierungs- und Abwicklungsgesetz, SAG) with their registered office in Germany for which the resolution strategy provides for a bail-in. Also included are institutions within the authority of the Single Resolution Board as the resolution authority.

Fund Management

7. BaFin: Guidance notice on the suitability of executive directors in accordance with the German Capital Investment Code

On 19 July 2024, BaFin published the guidance notice on the suitability of executive directors in accordance with the German Capital Investment Code (Kapitalanlagegesetzbuch, KAGB) as well as corresponding forms and templates. The guidance notice addresses fund management companies supervised by BaFin under KAGB. Furthermore, with the coming into force of this guidance notice, the statements made in the guidance notice regarding executive directors with the KWG, ZAG and KAGB in relation to the KAGB are no longer applicable.

The information sheet sets out the professional and personal requirements for individuals appointed as managers in accordance with the KAGB. It provides an overview of the associated notification obligations, including the documents to be submitted. A number of forms are provided to facilitate the notification process.

Please be advised that the guidance notice is to be used solely for audit purposes from 1 August 2024 onwards.

Senior Managers and Governance

8. European Central Bank: Consultation: Draft guide on governance and risk culture

On 24 July 2024, the European Central Bank (ECB) published a public consultation on the draft guide on governance and risk culture. 

The guide, which seeks to replace the 2016 Single Supervisory Mechanism statement on governance and risk appetite, aims to provide banks with a roadmap to a more effective internal governance and risk culture.

The proposed measures include:

• clarifying supervisors' expectations regarding how management bodies and committees should be composed and function;
• providing the roles and responsibilities of the internal control functions; and
• emphasising the importance of risk culture and outlining expectations regarding the risk appetite frameworks of banks.

The consultation ends on 16 October 2024.

Financial Crime

9. BaFin: Circular on high-risk third countries for Anti Money Laundering purposes

On 29 July 2024, BaFin published the circular 08/2024 (GW) regarding third countries with strategic deficiencies in their systems for preventing money laundering and terrorist financing that pose significant risks to the international financial system (high-risk countries).

In the circular, BaFin addresses the content of the current EU and FATF country lists due to deficits in the fight against money laundering, terrorist financing and the financing of proliferation as well as the legal consequences and measures of BaFin with regard to the countries with increased risk named in the lists. In particular, the FATF declaration "High-Risk Jurisdictions subject to a Call for Action" on the Democratic People's Republic of Korea (North Korea), Iran and Myanmar and the FATF report on countries under observation "Jurisdictions under Increased Monitoring" of 28 June 2024 should be mentioned.

10. BaFin: Information on loan fronting and associated money laundering risk

On 19 July 2024, BaFin published detailed information on loan fronting and the associated money laundering risk. BaFin identified loan fronting as a business model with particular money laundering risk.

In addition to outlining the various types of the business model loan fronting, BaFin emphasises the importance of assessing money laundering risk on a case-by-case basis, taking into account the specific structure of each loan fronting model. Consequently, obliged parties who engage in loan fronting should both during the new product process in accordance with MaRisk AT 8.1 in conjunction with Section 6 (2) No. 4 GwG and in their risk analysis in accordance with Section 5 GwG, intensively analyse the respective structure of the transaction and the resulting specific risks, implement appropriate security measures and document these accordingly.

Furthermore, BaFin provides guidance on specific risk types, including potential risks from an unknown source of funds, from the payment of debt service, and from the individuals involved.

11. BaFin: Consultation - Draft of an amended version of the Interpretation and Application Guidance on the German Anti Money Laundering Act

On 9 July 2024, BaFin published a draft for an amended version of the Interpretation and Application Guidance on the German Anti Money Laundering Act (Auslegungs- und Anwendungshinweise zum Geldwäschegesetz, AuA GwG) in accordance with Section 51 (8) GwG.

The consultation draft contains wording that relates to the drafts currently in the legislative process to amend the GwG (Financial Market Digitisation Act and Financial Crime Prevention Act). The final content will depend on the further course of the procedure. In addition to various clarifications, adjustments have also been made, for example to the update deadlines within the meaning of Section 10 (1) No. 5 GwG. Further, BaFin already addresses changes resulting from the new EU AML legislative package, particularly the new Anti Money Laundering Regulation.

Moreover, BaFin furnished particular guidance for certain obliged parties under GwG, including, for instance, institutions engaged in factoring operations.

The consultation period ends on 9 August 2024. The target date for application is 1 January 2025.

Retail Services

No new entries.

Digital Finance and Fintech

12. BaFin: Supervisory notice on implementation guidance on DORA

On 8 July 2024, BaFin published a supervisory notice on implementation guidance on the Digital Operational Resilience Act (Regulation (EU) No. 2022/2254 – DORA). The notice contains guidance on IT risk management and IT third-party risk management as well as an overview of the minimum contractual requirements under DORA that supervised entities must include in their contractual documentation with ICT third-party service providers. From the perspective of BaFin the supervisory notice should assist addressees in implementing the requirements of DORA for ICT risk management and ICT third-party risk management.

It should be emphasised that the DORA requirements essentially correspond to the supervisory requirements for IT (BAIT, VAIT, KAIT and ZAIT), which is why BaFin states in the supervisory notice that it intends to repeal them.

Payments

13. EU Commission: Q&As: Clarification of requirements of the Instant Payments Regulation

On 23 July 2024, the EU Commission published a set of Q&As to provide clarification on the requirements of the Instant Payments Regulation (IPR) and its implementation.

The EU Commission aims to facilitate the timely and consistent implementation of the IPR which sets out obligations for payment service providers and that must be complied with from 9 January 2025. 

The Q&A document collates the clarifications provided during two online workshops held by the Commission Directorate-General for Financial Stability, Financial Services and Capital Markets Union in April and May 2024.

ESG

14. BaFin: Supervisory notice that ESMA Guidelines on funds’ names using ESG or sustainability-related terms are now taken into account in its administrative practice

On 25 July 2024, BaFin published a supervisory notice that ESMA Guidelines on funds’ names using ESG or sustainability-related terms ("Guidelines", ESMA34-472-440) are now taken into account in its administrative practice. It should be emphasised that the Guidelines will entirely replace previous corresponding BaFin administrative practice on sustainable investment funds.

In its supervisory notice, BaFin also states that, in contrast to its previous administrative practice, according to which investment funds marketed as explicitly sustainable were also subject to an assessment of the fund's investment conditions, from now on only the existence of sustainability-related terms in the fund's name will trigger such an assessment of the investment conditions.

Further, BaFin does not as a rule consider the adjustment of the investment conditions when converting existing funds with a sustainability focus to the requirements of the Guideline to be either a change to the investment principles or a change to material investor rights that is detrimental to investors.

The publication of the Guidelines in all official languages of the EU member states on the ESMA's website is to be expected in August 2024. Two months after the publication BaFin must explain to ESMA whether it intends to apply the Guidelines. Three months after the publication the Guidelines will apply to all new EU-Funds that use corresponding sustainability-related terms in their names. Nine months after publication the Guidelines will also apply for such funds issued before the publication of the Guidelines.

15. ESAs: Q&A: Consolidated Q&A on SFDR

On 25 July 2024, the ESAs published an updated version of the consolidated Q&As on Sustainable Finance Disclosure Regulation.

The Consolidated Q&A has been updated to include responses to various questions, including how values in currencies other than EUR should be converted to EUR and if a sustainable investment pursuant to Article 2(17) SFDR can also be made by investing in another financial product, e.g. a UCITS fund.

16. ESMA: Opinion: Sustainable investments: Facilitating the investor journey: A holistic vision for the long term

On 24 July 2024, ESMA published an opinion on the EU Sustainable Finance Framework, setting out possible long-term improvements.

ESMA acknowledges that while the EU Sustainable Finance Framework is well developed and includes safeguards against greenwashing, it considers that the Framework could further evolve to facilitate investors’ access to sustainable investments and support the effective functioning of the Sustainable Investment Value Chain.

The Opinion outlines several key recommendations for the EU Commission's consideration, including:

• EU Taxonomy: The EU taxonomy should become the sole, common reference point for the assessment of sustainability and should be embedded in all Sustainable Finance legislation. The EU Taxonomy should also be completed for all activities that can substantially contribute to environmental sustainability and a social taxonomy developed;
• Transition investments: A definition of transition investments should be incorporated into the Framework to provide legal clarity and support the creation of transition-related products;
• Financial Products: All financial products should disclose some minimum basic sustainability information, covering environmental and social characteristics;
• Product Categorisation: A product categorisation system should be introduced catering to sustainability and transition, based on a set of clear eligibility criteria and binding transparency obligations;
• ESG data products: ESG data products should be brought into the regulatory perimeter, the consistency of ESG metrics continue to be improved, reliability of estimates ensured; and
• Testing: Consumer and industry testing should be carried out before implementing policy solutions to ensure their feasibility and appropriateness for retail investors.

Other

17. ECB: Press release: Conclusion of cyber resilience stress test

On 26 July 2024, the ECB published a press release stating that it had concluded its cyber resilience stress test.

The test considered how banks would respond to, and recover from, a severe but plausible cybersecurity incident. Overall, the test showed that banks have response and recovery frameworks in place but there is room for improvement.

The results of the exercise will feed into the 2024 Supervisory Review and Evaluation Process, which assess banks' individual risk profiles.

18. ESAs: Final Report: Draft Regulatory Technical Standards specifying the elements which a financial entity needs to determine and assess when subcontracting ICT services supporting critical or important functions

On 26 July 2024, the ESAs published their final report on draft Regulatory Technical Standards (RTS) specifying how to determine and assess the conditions for subcontracting information and communication technology services that support critical or important functions under DORA.

These standards aim to enhance the digital resilience of the EU financial sector by strengthening the financial entities’ ICT risk management over the use of subcontracting.

The ESAs will submit the Final Report to the EU Commission for adoption.

19. EBA: Final Report: EBA extends the existing Joint Committee Guidelines on complaints handling to credit servicers

On 24 July 2024, the EBA published its final report on EBA Guidelines amending the Joint Committee Guidelines on complaints handling for the securities and banking sectors.

The new guidelines extend the existing Joint Committee Guidelines to cover credit servicers, with the aim of establishing and maintaining effective and transparent procedures for complaints handling with regard to borrowers under the Directive on credit servicers and credit purchasers ((EU) 2021/2167).

These Guidelines will be translated into the official EU languages and published on the EBA website. The deadline for competent authorities to report their compliance with these Guidelines is two months after the publication of the translations. The guidelines will apply three months after the entry into force of the Payment Services Regulation.

20. Second Act on the Review of the Capital Investor Model Case Proceedings Act published in the German Federal Law Gazette

On 19 July 2024, the Second Act on the Review of the Capital Investor Model Case Proceedings Act (Zweites Gesetz zur Reform des Kapitalanleger-Musterverfahrensgesetzes) was published in the German Federal Law Gazette.

A second reform proved to be necessary because the desired objectives of the Capital Investor Model Case Proceedings Act (Kapitalanleger-Musterverfahrensgesetz, KapMuG) were not achieved as intended and the temporary law would have expired on 31 August 2024. The new KapMuG is not limited in time, the personal scope is broadened and includes claims against custodians of crypto assets, auditors and rating agencies. Further the proceedings are digitalised by keeping files electronically.

21. ESAs: News: One pager: Establishing the EU-SCICF

On 17 July 2024, the ESA published an a "one pager" stating that it will establish the EU Systemic Cyber Incident Coordination Framework (EU-SCICF), in the context of DORA, which will facilitate a financial sector response to cyber incidents which pose significant risk to financial stability.

Under EU-SCICF, participating members will be alerted and will share information on potential systemic cyber incidents of threats. The EU-SCICF will serve as a forum for relevant authorities to communicate and coordinate on any needed action and on the use of tools to counter the crisis from a macroprudential perspective.

22. EBA: Report: Review on the application of gender neutral remuneration policies

On Tuesday 16 July, the EBA published a report on the review of the application of gender neutral remuneration policies by institutions and investment firms. 

The report found that most institutions and a majority of investment firms have adopted remuneration policies that are explicitly gender-neutral. However, some entities had not yet enforced an explicitly gender-neutral remuneration policy. Further, the EBA observed that some entities did not conduct annual policy reviews, did not monitor whether the remuneration policy was applied in a gender-neutral way, did not calculate the gender pay gap or did not make such information publicly available.

The EBA concluded that, although many institutions and investment firms have faced little challenge when implementing gender-neutral remuneration policies, the level of transparency on gender-neutral remuneration and diversity metrics could be improved.

23. ESAs: Press Release: ESAs published second batch of policy products under DORA

On Wednesday 17 July,  the ESAs published the second (and final) batch of policy products under DORA. The package includes:

• RTS and implementing technical standards on the content, format, templates and timelines for reporting major ICT-related incidents and significant cyber threats;
• RTS on the harmonisation of conditions enabling the conduct of the oversight activities;
• RTS specifying the criteria for determining the composition of the joint examination team;
• RTS on threat-led penetration testing;.
• Guidelines on the estimation of aggregated costs/losses caused by major ICT-related incidents; and
• Guidelines on oversight cooperation.

For more information on the policy products, please see our briefing here.