Financial regulation
Regulatory bodies
Which bodies regulate the supply of fintech products and services?
The Federal Financial Supervisory Authority (BaFin) is responsible for regulating fintech products and services in Germany if they fall within the scope of regulated activities or products. A fintech company may be subject to reduced requirements, provided it limits its activities to largely:
- distribution of open-end or closed-end funds registered for public distribution in Germany; or
- distribution of participation rights, subordinated loans or profit shares.
In these cases, the local trade office will be the competent supervisory authority.
Regulated business
What activities trigger a license requirement in your jurisdiction?
Pursuant to § 32(1), sentence 1 of the German Banking Act (KWG), anyone wishing to conduct banking activities or provide financial services in Germany commercially or to an extent that requires a commercially organized business enterprise requires a written license from BaFin. What constitutes banking or financial services appears from Section 1(1) and (1a) KWG and includes, among other things,
- acceptance of money from the public (deposit business);
- provision of money loans (lending business);
- brokerage of business involving the purchase and sale of financial instruments (investment brokerage);
- give customers or their representatives personal recommendations in connection with transactions related to certain financial instruments where the recommendation is based on an assessment of the investor’s personal circumstances or appears suitable for the investor and is not exclusively given via information distribution channels or for the general public (investment advice);
- purchase and sale of financial instruments on behalf of and for the account of others (contract brokerage);
- management of individual portfolios of financial instruments for others on a discretionary basis (portfolio management);
- trading in foreign notes and coins (trade in foreign currency);
- ongoing purchase of receivables on the basis of standard agreements, with or without recourse (factoring);
- conclusion of financial lease agreements as lessor and management of property leasing for special purposes (financial leasing); and
- purchase and sale of financial instruments separate from the management of a collective investment scheme for a community of investors, who are natural persons, on a discretionary basis with regard to the choice of financial instruments (capital management).
Since the beginning of 2020, crypto depository business has been added to the list of licensed activities. Crypto custody business is defined as the custody, administration and storage of crypto-assets or private cryptographic keys used to hold, store and transfer crypto-assets for others (crypto-asset custody services).
In general, a license is required for all investment services and activities listed in Part A of Annex I to Directive 2014/65/EU on markets for financial instruments or Annex I to Directive 2013/36/EU on access to credit institutions and supervision of credit institutions and securities company. The offer of payment services is licensed based on the provisions of the German Payment Services Supervision Act (ZAG).
Trading with claims arising from fully drawn up loan agreements does not trigger a license requirement, provided that the requirement does not change. However, changes that require a new credit decision (e.g. extension) may constitute licensed lending activities.
Consumer loans
Are consumer loans regulated in your jurisdiction?
The contractual basis for consumer loan contracts is found in the German Civil Law Act. The civil law provisions contain an elaborate protection regime and require the borrower to comply with, among other things, certain information obligations and termination rights for borrowers. In particular, the license requirement is triggered if the repayment obligation is in cash. Where the repayment obligation takes the form of financial instruments or other goods or rights, other license requirements may apply (e.g. investment services).
Secondary market loan trading
Are there restrictions on trading in loans in the secondary market in your jurisdiction?
Generally speaking, trading with fully drawn loans does not trigger a license requirement in Germany. Restrictions on the trading of loans may apply according to the terms of the respective contract or as a result of data protection rules.
Collective investment schemes
Describe the regulatory regime for collective investment schemes and whether fintech companies offering alternative financing products or services will fall within its scope.
The German Capital Investment Code (KAGB) provides the licensing and supervisory regime for investment management companies and investment funds in Germany. In addition, the marketing of investment funds to investors in Germany is also regulated under the KAGB. The KAGB takes a holistic approach and provides the legal regime for all collective investment schemes (e.g. alternative investment funds and undertakings for collective investment in transferable securities). The aim of KAGB is to ensure adequate supervision of collective investments, including administration, marketing and compliance with the investment rules. But crowdfunding platforms and peer-to-peer (P2P) lending platforms are generally not regarded as collective investment schemes by BaFin. BaFin focuses on the lending aspect and indicates in several guidance notes that, depending on the actual nature of the services offered, licensed lending activities may be carried out. Furthermore, the mediation of loans requires a license under the German Industrial Code (GewO), and therefore the operation of a P2P lending platform may trigger the requirement for a loan broker’s license.
Alternative investment funds
Are alternative investment fund managers regulated?
Managers of alternative investment funds located in Germany are regulated under the KAGB. The same also applies to a certain extent to German branches of non-German managers of alternative investment funds. Alternative investment funds can only be marketed in Germany when they are registered or sent for distribution to investors in Germany. Germany has implemented the Alternative Investment Fund Managers Directive 2011/61/EU.
Depending on the nature of their actual activities, fintech companies may fall outside the scope of the KAGB if their activities do not constitute an investment fund. An investment fund is, according to § 1(1), point 1 of the KAGB, any collective investment scheme that raises capital from a number of investors, with the aim of investing in accordance with a defined investment policy for the benefit of these investors. and which does not constitute an enterprise that operates outside the financial sector. Such a number of investors will be deemed to exist if the fund rules or the articles of association of the collective investment fund do not limit the number of potential investors to a single investor.
Peer-to-peer and marketplace lending
Describe any specific regulation of peer-to-peer or marketplace lending in your jurisdiction.
Lenders and borrowers
BaFin has published guidance on the question of when the participants in a P2P marketplace typically conduct lending or deposit activities on a scale that triggers a license requirement. In accordance with this guidance, BaFin assesses potential license requirements on a case-by-case basis, and takes into account the activities of each individual investor. It is particularly important that investors do not invest on a commercial scale or in a way that requires a commercially organized business, because otherwise a banking license requirement is triggered. BaFin proposes that a commercially organized business enterprise is required if more than €500,000 is invested or more than 100 loans are granted. An investor invests on a commercial scale if he or she makes the investments for a certain period of time and with the aim of making money. In addition, public lending models are under certain circumstances subject to the Capital Investments Act, so that several investor protection rules apply, for example the requirement to prepare a sales prospectus, which must be approved by BaFin. However, exceptions may apply.
Peer-to-peer or platform operators
Whether the operation of a crowdlending platform requires a license (and what type of license) depends on the actual services offered. In general, it depends on the way the contract is designed on the platform. In cases where the operator of the platform only provides the infrastructure, the licensed activities are more likely to be carried out by the users of the platform. If, on the other hand, the operator of the platform enters into each transaction and assumes its own credit risk, it is likely that the licensed activity will be carried out by the platform operator. However, pure brokering of loans will generally not be considered banking, financial or payment services, so “only” an authorization under the GewO may be required.
Crowdfunding
Describe any specific regulation of crowdfunding in your jurisdiction.
There are several different types of crowdfunding platforms available in Germany. In a guidance note, BaFin sets out four main models for crowdfunding:
- donation-based and reward-based crowdfunding, which is also referred to as crowdfunding;
- loan-based crowdfunding (crowd lending); and
- audience investment.
In the latter two types, the aim is to generate a financial return. BaFin does not apply specific regulatory regimes for different business models per se. BaFin instead focuses on the nature of the activities carried out by the users and operators of the crowdfunding platforms and decides on a case-by-case basis whether licensed activities are carried out and by whom.
Invoice trade
Describe any specific regulation of invoice trading in your jurisdiction.
Invoice trading is generally not a regulated activity. But if the actual activities constitute a financial service (e.g. factoring, which means ongoing purchase of receivables on the basis of standard agreements, with or without recourse) this activity is regulated and requires a license for financial services.
Payment services
Are payment services regulated in your jurisdiction?
Germany has implemented the Payment Services Directive, and anyone wishing to operate payment services as a payment institution commercially or on a scale that requires commercially organized business operation needs written permission from BaFin. What constitutes payment services is laid down in the ZAG and includes the same activities as described in the payment services directive.
Open bank
Are there any laws or regulations introduced to promote competition that require financial institutions to make customer or product data available to third parties?
No, we are not aware of such laws or regulations.
Insurance products
Do fintech companies that sell or market insurance products in your jurisdiction need to be regulated?
Fintech companies that sell or market insurance products in Germany are likely to be regulated by BaFin if they conduct insurance business in Germany and by the local Chamber of Industry and Commerce if they act as insurance brokers in Germany.
Credit references
Are there any restrictions on providing credit references or credit information services in your jurisdiction?
If a credit information service qualifies as a credit rating agency, the rules in the EU’s credit rating agency regulation apply.
