German Federal Ministry of Finance publishes draft legislation for reinforcement of investor protection


In the past, many investors lost substantial amounts of money with investment products which currently do not or at least not entirely fall within the scope of the German Federal Financial Supervisory Authority ("Bundesanstalt für Finanzdienstleistungsaufsicht" (BaFin)). These investors had serious problems in making an adequate assessment of the involved risks and potential profitability of the respective investment products. Consequently, many investors lost confidence in these products.

For this reason the Federal Ministry of Finance considered it necessary to extend BaFin's powers. In order to address the aforementioned issues, the draft legislation grants BaFin authority to give regulated companies binding instructions which are appropriate and necessary to prevent or remove serious or repeated infringements of rules safeguarding collective consumer interests. Furthermore, BaFin shall have the power to prohibit or restrain the marketing, distribution and sale of those financial instruments or structured deposits which raise serious doubts in view of investor protection or integrity or stability of financial markets. Moreover, the draft legislation intends to allow and impose a duty on BaFin to check the consistency of prospectuses for investment products especially with regard to the sustainability of the respective issuer's business model.

As indicated, another aim of the draft legislation is to improve transparency of investment products. Therefore, in future the VermAnlG shall be applicable to public offers of unsecured junior debts, shareholder loans and assets granting a claim for redemption and interest (without qualifying as deposits underthe German Banking Act ("Kreditwesengesetz")). Further, pursuant to the draft legislation, investment products shall have a minimum term of 24 months. Furthermore, prospectus requirements shall be extended so that prospectuses for investment products would have to be renewed every 12 months and would have to be kept up to date at all times. Finally, the draft legislation envisages that issuers of investment products would be obliged, even after the public offering, to reveal to BaFin and the media non-public facts which might be able to substantially restrain their ability to service investor's repayment claims.

You can read the (German) draft legislation here.