MiFID II / MiFIR update - Germany

Ludger Verürth: MiFID II deadline has been postponed until 3 January 2018. Where do we stand with regard to implementation of MiFID II in Germany?

Rüdiger Litten: MiFID II is a wonderfully diverse law, piece of legislation. It affects, I don't know how many, at least a dozen different laws and acts in the German transformation law. It ranges from interesting topics such as market infrastructure to consumer protection law, to the very important issue which is the entrance of non-EU firms into the European market. And that is an area Ludger that you are very familiar with. Perhaps you can just tell us a little bit how Germany has transposed that piece of MiFID II legislation.

Ludger Verürth: Indeed, the access of third country firms into the EU market is a very important new bit that will be introduced by MiFID II. MiFID II introduces two regimes in this respect, one regime is the branch model [MiFID II] and the other regime is the registration model [MiFIR].

If you start with the registration model, this requires registration at ESMA as well as a positive decision by the commission regarding the equivalence of the regulation of the third country firm in that third country. The benefit of this registration model is that it provides the third country firm with a passport, that means that it can provide its services throughout the European Union once it has registered with ESMA.  The disadvantages are, however, that it only applies to services provided to per se professional clients as well as eligble counterparties. 

If you want to provide services to so-called elective professional clients as well as retail clients, you need to have a branch. And this is where MiFID II provides an option, the possibility for member states of the European Union to grant access to its country via a branch. In this respect MiFID II provides a new regime which is the branch model. However, having said that in Germany there already exists the possibility to implement or establish a branch in Germany, that branch requires a licence under the Banking Act and once you have received that licence, you can provide financial / banking services to retail as well as elective professional clients.

In Germany the disadvantage of this [existing] branch model is that it does not provide a passport. So if you want to provide the same service to retail clients, let's say in France, you need to establish a branch in France as well.

Those are the two regimes to be implemented or provided under MiFID II. Of course in Germany you can set up a full subsidiary and apply for a licence. So this is another way to access the German market, as well as providing services to clients in Germany on the so-called reverse solicitation model.  Those remain untouched by MiFID II.  As a footnote, the scenarios I just described will apply in the future to the UK after Brexit.

So having a branch in Germany means that the German banking provisions will apply to the branch and that means that, amongst other things, that the conduct rules under German law will apply to that branch.

Rüdiger where do we stand with regard to the implementation of MiFID II regarding conduct rules?

Rüdiger Litten: Conduct rules, or to put another name to it, consumer protection rules, are causing a headache to a number of market participants. Germany in particular has been suspected of gold-plating existing rules to an extent. Indeed to take the example of the famous product information brochure. That is a requirement for offerors of financial instruments to consumers to have product information available in written form, following a quite formalised approach. Germany introduced the requirement of product information brochures a number of years ago, pre-MiFID and now MiFID is sort of bringing the topic onto a European level.

In the pre-discussion for the [German] transformation law (in the consultation process) a number of arguments had been raised. In particular arguments [were raised] that it was really an over formalisation to have the requirements for product information brochures [applied to] simple products such as shares or certificates referring to shares. The voices that had been raised in the industry speaking against the over formalisation have been heard and this has been taken out in the actual law that has been enacted. So as far as simple products such as shares are concerned, simplified product information brochures can be used which shows that indeed it does make sense to participate in consultation.

Procedures. As I said initially, the main law has been enacted in Germany. It’s unlikely that things can be changed as far as that law is concerned. But at the moment it is level two legislation, so called regulations, that are being discussed. For one of the most important level two measures on German legislation, a draft regulation has just been put out for consultation until 30 May. 

Interesting topics such as product governance or inducements, what is possible and what is not, will be formulated in that piece of legislation and that is still up for consultation.

Which I think brings us really to the end of our brief news section on where we stand with the MiFID II transformation in German law. Lots of things have been done, a few are still open for consultation and therefore watch this spot.