BaFin License Requirement for Non-EU Firms for Banking and Financial Services in Germany
Updated: Jan 25
Germany is the world's fourth largest economy with more than 80 million inhabitants and one of the most vibrant markets for banking and investment services worldwide. On other hand, supervisory law is an important entrance barrier, preventing foreign companies from offering their services freely to the German market. Foreign companies, including credit institutions and investment firms, that are not situated within the European Union (EU) respectively the European Economic Area (EEA) and thus cannot rely on the European passport regime, will generally need to apply for a BaFin authorization (BaFin license), or, in the case of a CRR credit institution, apply for a European Central Bank (ECB) authorization. Once an authorization has been granted, banking and investment services can be offered in Germany and via the passport regime also in other countries of the EU/EEA.
Kronsteyn provides you with legal support on your journey to the German banking and investment services market, including in particular the legal conception and verification of your business model, preparing and conducting the authorization procedure with the German supervisory authorities BaFin and Deutsche Bundesbank, drafting key compliance documents such as a handbook and necessary policies, and drafting customer documents such as German/EU/EEA terms and conditions and other legal documents.
Contents
1. Services That Require Authorization
German supervisory law is dominated by EU law. Thus, German authorization regime is largely based on the Capital Requirements Directive (Directive 2013/36/EU, CRD) and the Markets in Financial Instruments Directive (Directive 2014/65/EU, MiFID) and is in parts implemented in the German Banking Act (Kreditwesengesetz, KWG) and the German Securities Institutions Act (Wertpapierinstitutsgesetz, WpIG). However, there are many aspects of German supervisory law that go beyond the EU minimum standard. An important point is that the list of regulated serves is wider than EU law expects. This is because, on the one hand, some services under German law are not part of CRD/MiFID authorization requirement such as foreign cash services and, on the other hand, the German term "financial instruments" that sets the scope of several investment services is broader, e. g. crypto currencies are also part of it. There are also exemptions for providing banking services in Germany that might be applicable even though their scope is limited.
a. Banking Services Requiring German Authorization
The following banking services require authorization:
Deposit services which are defined as accepting third-party funds as deposits or other unconditionally repayable funds from the public, unless the repayment claim is securitised in bearer or registered bonds, without regard to whether interest is paid;
Covered bond services which are defined as covered bond transactions according to Section 1(1) sentence 2 of the German Covered Bond Act (Pfandbriefgesetz, PfandBG);
Lending services which are defined as granting money loans and acceptance credits;
Discount services which are defined as purchasing bills of exchange and cheques;
Custody services which are defined as safekeeping and administration of securities for others;
Central securities depository services which are defined as operating a securities settlement system referred to in point (3) of Section A of the Annex of Central Securities Depositories Regulation (Regulation (EU) No 909/2014, CSDR) and provides at least one other core service listed in Section A of the Annex;
Loan repurchase services which are defined as entering into the obligation to repurchase previously sold loan receivables before maturity;
Guarantee services which are defined as assuming sureties, guarantees and other warranties for others;
Cheque and bill of exchange collection and travelers' cheques services which are defined as performing cashless cheque collection, bill of exchange collection, and the issue of travelers' cheques;
Underwriting services which are defined as assuming financial instruments for own risk for placement or assuming equivalent guarantees;
Central counterparty services which are defined interposing oneself between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer.
b. Investment Services Requiring German Authorization
The following investment services require authorization:
Financial commission services which are defined as acquiring and selling financial instruments in one's own name for the account of third parties;
Investment brokering services which are defined as brokering transactions on the acquisition and sale of financial instruments;
Investment advice services which are defined as making personal recommendations to clients or their representatives relating to transactions in specific financial instruments, provided that the recommendation is based on an examination of the investor's personal circumstances or is presented as suitable for the investor and is not disclosed exclusively through information dissemination channels or to the public;
Placement services which are defined as placing financial instruments without a firm underwriting commitment;
Operating a multilateral trading facility which is defined as operating a multilateral system which brings together multiple third-party interests in buying and selling financial instruments within the system and in accordance with established rules in a way that results in purchase contracts over those financial instruments;
Operating an organised trading facility which is defined as operating a multilateral system, other than an organised market or a multilateral trading facility, which brings together multiple third-party buying and selling interests in bonds, structured finance products, emission allowances or derivatives within the system in a way that results in purchase contracts over those financial instruments;
Contract brokering services which are defined as acquiring and selling financial instruments in the name and for the account of a third party;
Financial portfolio management services which are defined as managing individual assets invested in financial instruments for others with discretionary powers;
Proprietary trading services which are defined as proprietary trading by one of the following alternatives:
holding oneself out on a continuous basis as being willing to deal on own account by buying and selling financial instruments against the own proprietary capital at self-defined prices (market making);
frequent organised and systematic trading for own account on a substantial basis outside an organised market or a multilateral or organised trading facility, where client orders are executed outside a regulated market or a multilateral or organised trading facility without operating a multilateral trading facility (systematic internalization);
buying or selling financial instruments for one's own account as a service to others;
buying or selling financial instruments for one's account as a direct or indirect participant in a domestic organised market or multilateral or organised trading facility using a high-frequency algorithmic trading technique characterized by (a) an infrastructure to minimize network latency and other order transmission delays (latencies) that includes at least one of the following devices for the entry of algorithmic orders: collocation, proximity hosting or direct high-speed electronic access, (b) the ability of the system to initiate, generate, route or execute an order without human intervention as defined in Article 18 of Commission Delegated Regulation (EU) 2017/565, and (c) a high volume of intraday messages as defined in Article 19 of Delegated Regulation (EU) 2017/565 in the form of orders, quotes or cancellations, even without providing a service to others (high frequency trading);
Third-country deposit brokering services which are defined as brokering deposit transactions with companies domiciled outside the European Economic Area;
Crypto custody services which are defined as custody, management and safeguarding of crypto assets or private cryptographic keys used to hold, store or dispose of crypto assets for others, as well as the safeguarding of private cryptographic keys used to hold, store or dispose of crypto securities for others in accordance with Section 4(3) of the German Electronic Securities Act (Gesetz über elektronische Wertpapiere, eWpG);
Foreign cash services which are defined as trading of foreign notes and coins;
Crypto securities register services which are defined as keeping of a crypto securities register pursuant to Section 16 of the German Electronic Securities Act (Gesetz über elektronische Wertpapiere, eWpG);
Factoring services which are defined as continuously purchasing receivables on the basis of framework agreements with or without recourse;
Financial leasing services which are defined as concluding finance leases as lessor and managing certain special purpose vehicles, excluded managing an investment fund within the meaning of Section 1(1) of the German Capital Investment Act (Kapitalanlagegesetzbuch, KAGB);
Investment management services which are defined as purchasing and selling financial instruments, excluding managing an investment fund within the meaning of Section 1(1) of the German Capital Investment Act (Kapitalanlagegesetzbuch, KAGB), for a community of investors who are natural persons with discretion in the selection of the financial instruments, provided this is a focus of the product offered and is done for the purpose of these investors participating in the performance of the financial instruments acquired;
Restricted custody services which are defined as the custody and management of securities exclusively for alternative investment funds (AIF) within the meaning of Section 1(3) of the German Capital Investment Act (Kapitalanlagegesetzbuch, KAGB).
c. Financial Instruments
Most of investment services and one banking service refer to the term "financial instrument". This German term is broader than the respective term of the Markets in Financial Instruments Directive (Directive 2014/65/EU, MiFID), which causes additional market entry barriers. As crypto currencies are also part of the definition of financial instruments, several foreign crypto service providers have been kept distant from the German market, however, the planned Markets in Crypto-Assets Regulation (MiCAR) will level the playing field insofar. For authorization purposes, financial instruments in the German sense include the following categories:
Shares and other interests in domestic or foreign legal entities, partnerships and other companies, insofar as they are comparable to shares, as well as depositary receipts representing shares or interests comparable to shares;
Investments within the meaning of Section 1(2) of the German Investment Act (Vermögensanlagengesetz, VermAnlG) with the exception of shares in a cooperative within the meaning of Section 1 of the German Cooperative Societies Act (Genossenschaftsgesetz, GenG);
Debt instruments, in particular profit participation certificates, bearer bonds, registered bonds and rights comparable to these debt instruments, which by their nature are tradable on the capital markets, with the exception of payment instruments, as well as depository receipts representing these debt instruments;
Other rights which entitle the holder to acquire or dispose of rights in the sence of shares and debt instruments (see above) or which give rise to a cash payment which is determined on the basis of such rights, currencies, interest rates or other yields, commodities, indices or measures;
Units in investment funds which are defined under reference to Section 1(1) of the German Capital Investment Act (Kapitalanlagegesetzbuch, KAGB);
Money market instruments;
Foreign exchange;
Units of account;
Derivatives which are defined as (1) fixed transactions or option transactions structured as a purchase, exchange or otherwise, which are to be fulfilled with a time delay and whose value is derived directly or indirectly from the price or measure of an underlying asset (forward transactions) with reference to the following underlying assets: (a) transferable securities or money market instruments, (b) foreign exchange, unless the transaction meets the requirements of Article 10 of Delegated Regulation (EU) 2017/565, or units of account, (c) interest rates or other income, (d) indices of the underlying assets of point (a), (b), (c) or (f) other financial indices or financial measures, (e) derivatives; or (f) emission allowances; (2) forward transactions with reference to commodities, freight rates, climate or other physical variables, inflation rates or other economic variables, or other assets, indices or measures as underlying, provided that they (a) are to be settled in cash or give a counterparty the right to require settlement in cash without giving rise to that right by default or other termination event, (b) are concluded on an organised market or in a multilateral or organised trading facility, provided that they are not wholesale energy products traded through an organised trading facility that must be effectively delivered; or (c) have the characteristics of other derivative contracts as defined in Article 7 of Delegated Regulation (EU) 2017/565 and are for non-commercial purposes, and provided that they are not spot transactions within the meaning of Article 7 of Delegated Regulation (EU) 2017/565; (3) financial contracts for differences; (4) fixed transactions or option transactions structured as a purchase, exchange or otherwise, which are to be settled on a deferred basis and serve the transfer of credit risks (credit derivatives); (5) forward transactions relating to the underlying assets referred to in Article 8 of Delegated Regulation (EU) 2017/565, provided they meet the conditions of point 2;
Emission allowances which are defined as allowances pursuant to Section 3 number 3 of the German Greenhouse Gas Emissions Trading Act (Treibhausgas-Emissionshandelsgesetz, TEHG), emission reduction units pursuant to Section 2 number 20 of the German Project Mechanisms Act (Projekt-Mechanismen-Gesetz, ProMechG) and certified emission reductions pursuant to Section 2 number 21 of the Project Mechanisms Act, to the extent that each of these may be held in the Emissions Trading Registry;
Crypto assets which are defined as digital representations of value that are not issued or guaranteed by any central bank or public body and do not have the legal status of currency or money, but are accepted by natural or legal persons as a means of exchange or payment by virtue of an agreement or actual practice; and
Crowd funding instruments which are defined as admitted instruments for crowdfunding purposes pursuant to Article 2(1)(n) of the Crowdfunding Service Provider Regulation (Regulation (EU) 2020/1503, CSPR).
d. Exemptions
German supervisory law provides for a variety of exemptions that might apply depending on particularities of your business model. Such exemptions include, but are not limited to, providing banking and investment services exclusively for parent or sister companies or subsidiaries, conducting certain banking or investment services exclusively with commodity futures, emission allowances and derivatives on emission allowances under certain further prerequisites, conducting certain banking or investment services under an authorization in accordance with the Crowdfunding Service Provider Regulation (Regulation (EU) 2020/1503, CSPR), and managing of an employee shareholdings system in the own or an affiliated company.
e. European Passport Regime
If your firm already holds a duly authorized subsidiary or branch in another member state of the European Economic Area (EEA), you are exempt from a German authorization requirement if you can provide your banking or investment services utilizing the so-called European passport regime via cross-border services or via a German branch. If this is possible for you, you will have to notify your home state regulator under the applicable set of rules of your intention to provide banking or investment services in Germany. However, you can rely on the passport regime only to the extent it is based on European law. If you intend to provide banking or investment services in Germany that are not covered by the Capital Requirements Directive (Directive 2013/36/EU, CRD) or Markets in Financial Instruments Directive (Directive 2014/65/EU, MiFID) there will generally still be an authorization requirement.
f. Reverse Solicitation
The German authorization requirement applies, if the services are offered "domestically". This is in turn the case, if a foreign company approaches the German market in a targeted manner in order to repeatedly and on a business-like basis offer banking or investment services to companies or persons who have their registered office or habitual residence in Germany. A foreign company does not approach the German market in a targeted manner, if German companies or persons request foreign services on their own initiative (reverse solicitation). The principle of reverse solicitation also expresses the right of persons and companies resident in Germany to request foreign services.
There are strict principles to follow when a credit institution or investment firm wants to rely on the reverse solicitation principle. In particular no marketing activities should be commenced in Germany, for example advertisements. The use of marketing material in German language via a website or otherwise is critical as it generally implies the intention to enter the German market. Foreign credit institutions and investment firms relying on the principle of reverse solicitation should have a very clear cross-border policy in place, follow it strictly and duly document internally each individual contact with German customers. Reverse solicitation is generally not a suitable way forward, if your strategy is to enter the German market.
g. Individual Relieve from Authorization
If your firm already holds a CRD or MiFID authorization but intents to provide banking or investment services not covered by the European passport regime, or if your firm is already duly authorized outside the European Economic Area (EEA), there is the possibility to request BaFin for an individual relieve from the German authorization requirement to perform cross-border services in Germany. You would then have to prove that "the nature of your business does not need an authorization". BaFin will make a case-by-case assessment in which the it takes into account the peculiarities of the individual case. BaFin might in particular decide in your favor, if you provide services only for institutional customers such as the Federal Government, federal states, local authorities and their institutions, credit institutions, investment firms, investment management companies within the meaning of the German Capital Investment Act (Kapitalanlagegesetzbuch, KAGB), private and public insurance companies, and medium- and large-sized corporations. If you also provide services to private clients, BaFin might grant a relieve if the services are effected through a domestic credit institution or investment firm, and in some cases through credit institutions or investment firms situated in the European Economic Area. There are several other prerequisites, including the submission of a certificate from the home state authority confirming to BaFin, that your firm has been granted a license for the respective banking or investment service, that there are no supervisory concerns against the commencement of such cross-border services in Germany, and, in the event that such concerns subsequently arise, this will be notified to BaFin.
2. German Branch vs. Subsidiary
Once it is clear that the banking or investment service you intend to provide in Germany requires an authorization, one of the next questions is whether to establish a German branch or subsidiary, as it is not possible to obtain an authorization without such physical presence. Both concepts – branch and subsidiary – are similar, although there are some differences that you should consider.
The most common company type used in Germany is the private limited company (Gesellschaft mit beschränkter Haftung, GmbH), which is quite easy to establish and administer. A public limited company (Aktiengesellschaft, AG), which does not need to be registered at a stock exchange, would be an alternative, although administration procedures upon establishment and during the running business are more formalized and thus a bit more costly due to, among others, the need to have a management and supervisory board. However, there is no clear-cut answer on which company type suits you best. The answer depends on the individual needs and aims that your firm pursues in Germany.
A branch is simply a physical German presence of a foreign company without being a separate legal person. However, it is treated very similar to a legal person, because, among others, it has to be registered in the German commercial register, can sue and be sued under its name, has to have its own accounting, needs to prepare separate annual statements, has to pay German taxes, and obtain a BaFin authorization (license). A draw back might be the lack of asset protection as the foreign owner of the branch would be liable for its liabilities. German branches of credit instiutions situated in the USA, Japan or Australia benefit from certain reliefs concerning the prudential requirements regime.
3. Application for Authorization
If the German undertaking would be (a) deposit and lending business or if it would qualify as (b) MiFID investment service dealing on own account or underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis, each of considerable scope, the European Central Bank (ECB) is responsible for granting the license. In all other cases, BaFin grants licenses for banking and investment services. In both cases, applications need to be submitted to BaFin, whereas in the first case, it would forward it to the ECB.
The procedure differs dependent on whether the application is directed on receiving a CRD or MiFID license. The information BaFin is to be provided with in the case of a CRD license is laid down in Delegated Regulation (EU) 2022/2580 and in the case of a MiFID license it is laid down in Delegated Regulation (EU) 2017/1943. The information that is to be provided shall bring the supervisor into a position to be sufficiently able to evaluate the applicant's ability to comply with all the laws and rules applicable. Dependent on the type and scope of the respective business model there are several core requirements for authorization, BaFin lies a special focus on. Two of general requirements are described below.
Managing directors must be qualified, reliable and devote sufficient time to the performance of their duties. The qualification to manage an institution means that a manager has sufficient theoretical and practical knowledge of the business knowledge of the relevant business as well as management experience. This requirement is determined on the basis of the institution's size and structure as well as the type and variety of the business on a case-by-case basis. BaFin regularly assumes a sufficient qualification if managing director has been employed in a managerial capacity at an institute for at least three years, without having to prove theoretical and practical in detail.
One further core requirement is the availability of sufficient capital. There is, on the one hand, the requirement to hold sufficient regulatory capital at least in an amount specified by law. For example, the required amount would be EUR 5,000,000 for deposit and lending services, EUR 750,000 for proprietary trading services and EUR 150,000 or EUR 75,000 for other services. Under the specific rules of the Capital Requirements Regulation (Regulation (EU) No. 575/2013, CRR) or the Investment Firm Regulation (Regulation (EU) 2019/2033, IFR) there might be a higher regulatory capital requirement. Additionally, there is an economic capital requirement which is to be determined on the basis of an economical risk assessment.
Disclaimer
This post shall provide a brief overview of some important aspects you should consider, if you intend to provide banking or investment services in Germany. Please note that there are further aspects depending on the circumstances of each individual case that should be considered. There might also be other authorization regimes applicable that are not considered in this post, in particular for payment and electronic money services in the sense of the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz, ZAG), conducting the business of an investment fund management company in the sense of the German Capital Investment Act (Kapitalanlagegesetzbuch, KAGB), data reporting services in the sense of the Markets in Financial Instruments Regulation (Regulation (EU) No 600/2014, MiFIR), operating a regulated market in the sense of the German Stock Exchange Act (Börsengesetz, BörsG), and crowdfunding services in the sense of the Crowdfunding Services Provider Regulation (Regulation (EU) 2020/1503, CSPR).
Contact
Attorney-at-law, LL. M. (UCL)
