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3 February 2021

More “bite” for the Financial Supervisory Authority

Former German Finance Minister Olaf Scholz wants to reform the Federal Financial Supervisory Authority (BaFin) fundamentally to make it more flexible and effective. In particular, BaFin will be given the authority to focus more heavily on preventive action and investigate suspicious cases more swiftly and efficiently as part of financial reporting enforcement.

The German Finance Ministry has already taken important first steps towards strengthening BaFin by drafting the Act to Strengthen Financial Market Integrity (Finanzmarktintegritätsstärkungsgesetz), which has been adopted by the German cabinet in December 2020.

In addition to these legal measures, BaFin’s structures have, at the request of the German Finance Ministry, been put to the acid test since autumn. At the same time, proposals have been drafted as to how BaFin must be structured to be able to perform its tasks more effectively than before. The enquiry was launched in September in response to financial reporting manipulations by DAX-listed company Wirecard AG. Simultaneously, the German government published its Action Plan to Combat Financial Reporting Fraud and to Strengthen Controls over Capital and Financial Markets.

The enquiry incorporated input from expert external consultants, opinions from consumer protection organisations and NGOs, as well as expertise from the financial sector. Working on the basis of this enquiry, the Ministry will now be tackling the restructuring and transformation of BaFin, together with BaFin and with the help of external consultants. Initial substantive results of the implementation will be presented in the summer.

In restructuring BaFin, the German Finance Ministry is pursuing three overarching goals:

  • Making supervisory and auditing activities more effective
  • Streamlining internal structures and procedures, allocating responsibilities more clearly
  • Supervising the financial market more effectively with state-of-the-art technology

The Ministry’s seven-point-plan to restructure BaFin provides for substantive improvements that will allow BaFin to better fulfil its responsibilities in the future. Furthermore, BaFin needs a fundamental change in its culture.

  1. A focus unit dedicated to complex companies will be created; it will cover all sections of supervision under the roof of BaFin and supervise companies even more closely than before. This will enable BaFin to react more quickly to developments on the financial markets, which can sometimes unfold at breakneck speed.
  2. A new, forensically trained task force will be established so that BaFin can independently perform ad hoc audits and special audits in the future and, where appropriate, perform them on site in cooperation with the public prosecution office.
  3. The financial reporting enforcement system will be fundamentally reformed. BaFin will receive substantially enhanced enforcement rights, plus additional experts, especially auditors, to enable it to check financial reports more effectively. Thanks to extended enforcement rights, BaFin will have the authority to perform forensic audits independently. This will be possible, at a minimum, at the level of intervention that allowed to uncover financial reporting fraud in the Wirecard case.
  4. There will be a closer exchange with market participants; whistleblowers’ findings will be systematically recorded and evaluated. Information obtained from the market and from whistleblowers is particularly valuable for BaFin’s work. Optimised internal processes will help enhance findings, monitor how information is processed, and detect irregularities.
  5. There should be regular, in-depth discussions with consumer and investor protection advocates, and the findings from these discussions will be incorporated into BaFin’s supervisory work. BaFin’s powers will be strengthened and the instruments for proactive investor and consumer protection will be expanded.
  6. The position of the future BaFin President will be strengthened. The future President will be given more responsibility in terms of managing BaFin centrally. This will allow management-level decision-making processes to become more streamlined and more effective. In addition to coordinating BaFin’s modernisation, the President will also coordinate the task force and focus unit described in 1. and 2. above.
  7. A central Data Intelligence Unit (DIU) and a digital supervisor cockpit will form the backbone of an IT-driven supervision of the financial sector.

Further details on the Act to Strengthen Financial Market Integrity:

As early as December, the German government drafted the Act to Strengthen Financial Market Integrity, which provides for far-reaching measures in three areas: Firstly, improved auditing systems and enhanced supervisory rights for the supervisory board will improve companies’ corporate governance. Secondly, the independence of auditors will be strengthened, ensuring that all market players can rely on their reports. Auditors will be obliged to rotate at least every ten years, while the requirements for the separation of auditing and consulting will be tightened to prevent conflicts of interest. In addition, auditors’ liability under civil law will be expanded, and misconduct by auditors will be sanctioned more harshly. And thirdly, the Act to Strengthen Financial Market Integrity gives BaFin more rights to intervene in financial reporting enforcement. In future, the procedure will be more strongly influenced by governmental authority, so that ad hoc and suspicion-based inspections will in principle fall under BaFin’s sole responsibility. To ensure that supervision is not circumvented by outsourcing, BaFin will also be given more possibilities to perform controls. In addition, the new Act also includes measures to improve investor and consumer protection and to combat terrorist financing and money laundering. A very far-reaching ban on private trading in financial instruments for BaFin employees ensures that the integrity of supervision cannot be called into question.