New coalition agreement with Germany: is a change underway for the financial services sector? | Allen & Overy LLP

The three political parties called to form the next German government published a coalition agreement on November 24. Its intervention in the German and European financial markets seems in many ways to indicate only modest changes in current policy. Its spirit is rather “favorable to industry and innovation” insofar as the financial industry is perceived as a partner rather than an adversary: ​​it supports the main European reform proposals, in particular the revision of MiFID / MiFiR, the promotion of sustainable finance, money laundering and implementation of Basel III / IV. EU member states and its credit institutions will also take particular note of the commitment to complete the banking union involving a compromise position on the controversial European deposit guarantee scheme.

1. Banking union: long-term commitment, but no mutual risk sharing

In terms of commitment to the Banking Union, the new government seeks to strike a delicate balance. While emphasizing his goal of completing the Banking Union (i.e. the missing European Deposit Guarantee Scheme) by establishing a reinsurance model for the transfer of risk from national deposit systems, he insisted on the differentiation of contributions to this deposit reinsurance system strictly according to the respective risks. In addition, the engagement is subject to three important caveats:

  • Further reduction of risk on bank balance sheets, in particular over reliance on government bonds;
  • Continued strengthening of the bank recovery and resolution regime;
  • Safeguarding the institutional protection of German savings banks and cooperative banks which are among the most severe critics of a European insurance scheme, fearing that it might impose an excessive burden on them.

The coalition document explicitly states that a common European deposit insurance system with mutual risk sharing is “not the goal”.

Interestingly, the section on banking union contains an almost fleeting reference to facilitating the movement of capital and liquidity within EU banking groups. It remains to be seen whether this alludes to cantonment initiatives by regulators or if it even indicates an interest of the new government in supporting cross-border bank mergers.

2. Capital Markets Union: support, but no details

The coalition agreement underlines that the new government will seek to strengthen the Capital Markets Union by reducing obstacles to cross-border transactions through further harmonization and by facilitating access for small and medium-sized enterprises; however, no details have been released in this regard.

3. Prudential regulation and financial markets

The new government wishes to transpose the central aspects of Basel III / IV into German law while paying particular attention to favorable conditions for investment. The competitive disadvantages of small banks in terms of supervision and regulation must be reduced by emphasizing proportionate supervision.

The coalition also plans to systematically assess the capital requirement reliefs that have been granted due to the Covid-19 pandemic to determine if they continue to be needed.

Other plans include:

  • Strengthening the supervision of shadow banks in accordance with the approach proposed by the Financial Stability Board;
  • Limit market distortions caused by high frequency trading through appropriate market rules; and
  • Restrict speculation on (agricultural) raw materials by reducing position limits at European level.

In the context of the review of MiFID / MiFIR, the focus is on improving market transparency.

4. Fintechs and digital currencies: Expression of support

The relevant chapter begins by expressing an ambition of the new government: it wants to ensure that Germany becomes one of the leading jurisdictions for fintechs, insurtechs, platforms and neo-brokers. This membership is almost a slight surprise given that neo-brokers in particular have faced a lot of skepticism rather than enthusiasm in the recent past. It remains to be seen what the support expressed by the government for these new players will mean, in particular for the ban on payment to the order of the flow envisaged by the European Commission.

In any case, the coalition agreement underlines that in order to make Germany more attractive to fintechs, insurtechs and neo-brokers, the approval procedures of these companies must be made faster and more efficient. effective, thus echoing practical challenges that in the recent past seemed to have worsened rather than improved. In addition, a comprehensive legal framework for digital financial services must be created, regardless of the technology involved, and the possibility of electronic securities issuance extended to equities.

With a nod to Germany’s more traditional banking sector, the government expresses support for “a level playing field … between traditional and digital business models as well as with regard to big tech.” The regulatory framework for European financial markets should be adapted to the needs of digitization and complex group structures, in order to ensure holistic and risk-sensitive supervision of new business models. This acknowledges the complaint of banks who argue that fintech companies gain a competitive advantage by not being subject to the same prudential regulation as banks.

The parties endorse the regulation of the crypto industry at European level, which will likely refer to the crypto asset markets regulation that the European Commission is expected to finalize in 2022. In addition, the coalition agreement highlights the need for payment independent European. infrastructure, which should be understood as support for the European Payments Initiative.

The new government is quite reserved vis-à-vis the digital euro proposed by the ECB, the implementation of which it “will constructively support” in addition to the established payment methods. This lack of enthusiasm was to be expected in a largely monetary economy like Germany.

5. Leading role of sustainable finance

Given the focus of the entire coalition agreement on climate change issues, it is no surprise that the new government’s ambitious goal is for Germany to become the number one market place. for sustainable financing. It thus underlines its support for green bonds and financial products.

He stresses that climate and sustainability risks should be viewed as financial risks for the purposes of capital requirements, a position shared by a growing number of financial regulators, including the ECB.

It also aims to implement minimum market standards for ESG ratings and the mandatory consideration of sustainability risks in credit ratings.

In addition, a European standard for transparency of sustainability information should be created. With regard to Germany, a Sustainable Finance Strategy with international implications will be implemented.

6. Fight against money laundering

The new government supports the implementation of the new anti-money laundering framework proposed by the Commission in June 2021 which would create harmonized AML regulations at European level. Its support for the creation of a central anti-money laundering authority is not surprising given the stated objective of having its headquarters in Frankfurt.

In general, the need to further strengthen AML measures is underlined. This includes an extension of the competence of the BaFin for certain non-financial service providers.

7. The future of BaFin

The new government plans to continue on the current reform path and further strengthen the role of the German financial services regulator, BaFin. Collaboration and information exchange within BaFin itself and with other national and international authorities will be intensified. BaFin will become a more attractive employer. The new government intends to ensure that the creation, acquisition and restructuring of banks and financial service providers proceed more quickly than so far, an area where supervisors are known to hamper transactions. This echoes a similar commitment in the fintech setting.

In addition, BaFin will be given more powers in the supervision of investment prospectuses and will be responsible for filling regulatory gaps in the gray capital market.

8. Consumer protection and what is not covered

The coalition agreement stipulates that (additional) restrictions on residual debt insurance (Restschuldversicherungen) need to be implemented, which can have a significant impact on the business model of some vendors. What is probably more relevant for most banks, however, is what he did not address: The agreement neither addresses the issue of incentives nor requires a ban on investment advice based on commissions. This is a bit surprising, when two of the three parties forming the coalition mobilized for a complete ban on the latter during the election campaign. It remains to be seen whether this really means that the new government will take a liberal stance in this regard and, if so, even oppose the Commission’s plans to restrict payments for order flows.

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