(For German version click here)
On the 26th of June 2021, the new supervisory regime for investment firms - the Investment Firms Act (WpIG) - will go into effect in Germany. The new regulation will be relevant for all businesses which offer financial services such as investment brokerage, investment advisory services, proprietary trading or financial portfolio management and comparable services. Until now, the supervision of these businesses has been uniformly regulated together with the supervision of credit institutions in the German Banking Act (KWG). With the transfer of the supervisory regulations for investment firms to the WpIG, the German legislator expects to achieve a clearer, more efficient supervisory practice and simplifications with regards to the transposition of the European Investment Firm Directive (IFD), on which the WpIG is based. The KWG will stay in effect and will continue to provide the supervisory framework for companies that operate banking businesses, such as e.g. deposit business or credit business.
Crypto Custody Services Continue to be Regulated in the KWG
Not all activities that were formerly regulated as financial services will be transferred to the new WpIG. Crypto custody services which have been introduced as a financial service to the catalogue of the KWG on the 1st of January 2020 will remain exclusively regulated in the KWG as well as such activities as e.g. factoring, finance leasing and investment management. This is because the aforementioned activities are subject to authorization because of decisions made by the German legislator and not because of European provisions. Therefore, the abovementioned activities are not defined as investment services or investment ancillary services by the IFD and are therefore not subject to authorization according to the IFD. The application for an authorization to offer crypto custody services will therefore remain also in the future be regulated by the KWG after the WpIG has come into effect.
Clear Separation of the Regulatory Regimes of KWG and WpIG Intended
In order to ensure a strict separation between the regulatory regimes, the WpIG will include an exclusivity precept stating that an authorization in accordance to the WpIG cannot be connected to an authorization granted pursuant to the KWG, the Payment Services Supervisory Act (ZAG), the Insurance Supervision Act (VAG), or the Capital Investment Act (KAGB). This may be a valid measure for preventing regulatory contradictions with regards to the regulatory requirements which investment firms must fulfill. It nevertheless causes some interpretive problems. On the 5th of May 2021, BaFin contacted the German securities trading banks which are currently under its supervision and requested the provision of information regarding the actual use of possibly held authorizations for factoring, finance leasing and investment management. BaFin interprets the exclusivity precept of the WpIG in a way, that the aforementioned services may in the future only be provided by companies, which are regulated under the KWG and not under the provisions of the WpIG. By this request for information, the authority tries to get an overview of the effects that the introduction of the WpIG may have on the investment firms market.
How Does the Exclusivity Precept of the WpIG Affect Investment Firms?
The aforementioned interpretation of BaFin affects all investment firms and other companies that offer investment services insofar, as they will not be able to simultaneously also be authorized for providing crypto custodian business. Should these companies intend to integrate crypto custody services into their service portfolio, they will be forced to establish a separate legal entity which may apply for an authorization pursuant to the KWG. This approach has been advisable from a practical point of view even prior to the introduction of the WpIG, as crypto custody service providers that do not additionally offer other financial services are eligible for attractive privileges especially regarding their equity quotas to be fulfilled. It is however questionable, if the aforementioned legal position of BaFin is actually correct, because the legislator did also choose to apply changes to the KWG which strongly suggest a different interpretation of the exclusivity precept. In the future an authorization in accordance to sec. 32, subsection 2a KWG can only be granted if an authorization to conduct at least one of the banking businesses is simultaneously applied for. According to the new wording of the KWG, there will be no restrictions for companies which simultaneously apply for an authorization for provision of crypto custody services and which conduct the banking businesses or financial services exclusively in relation to units of account or crypto assets. In such constellations the KWG will remain applicable.
Attorney Lutz Auffenberg, LL.M. (London)
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