Compliance for Financial Institutions in Germany: A Complex Web of Requirements
Germany’s financial regulatory landscape is marked by a complex web of requirements and guidelines that institutions must adhere to ensure compliance. While German law does not prescribe specific standards for compliance programs, regulated entities are expected to implement measures to maintain sufficient compliance standards.
The Importance of a Compliance Function
According to Article 22(2) of the Delegated Regulation (EU) 2017/565, financial institutions in Germany must have a specified compliance function. This function is responsible for ensuring that institutions adhere to statutory, regulatory, and other legal requirements.
Key Responsibilities of the Compliance Function
- Ensure institutions adhere to statutory, regulatory, and other legal requirements
- Assign certain legal areas, such as investment services, money laundering, and data protection, to a compliance function
- Identify areas that present additional special compliance risks and handle them accordingly
Gatekeepers: A Critical Role in Germany’s Regulatory Structure
Gatekeepers play a crucial role in Germany’s regulatory structure. Senior managers are held accountable for the activities of financial institutions and must:
- Establish appropriate control and monitoring processes in their respective areas of competence
- Provide information on serious findings identified by the internal audit function to the supervisory board
Directors’ Duties and Liability
According to German law, managing directors have specific duties and liabilities. They are required to:
- Establish a business strategy
- Gain an overview of risks faced by the institution
- Implement a risk strategy
- Set up a strategy process
- Approve audit planning
- Provide information on serious findings identified by the internal audit function to the supervisory board
Senior Manager Accountability
Senior managers can be held individually accountable for criminal or administrative offenses, and their liability extends beyond criminal offenses to breaches of personal legal obligations. They may also face civil claims for compensation of damages by their company.
Private Rights of Action
Private rights of action do not generally apply to violations of national financial services authority rules and regulations. However, in exceptional cases where a regulatory law provision also serves to protect individual rights, an individual may assert a claim against the regulated institution.
Standard of Care for Customers
The standard of care for customers is applied equally to all financial services firms and authorized persons when dealing with retail customers, with no differentiation made based on customer sophistication or counterparty.
Rule-Making Process in Germany
Rule-making processes in Germany typically involve consultation with industry groups and other market participants. The German government and BaFin publish draft laws and circulars, which are then subject to a consultation process before being adopted. This consultation plays an important role in shaping the rules that affect the financial services industry.
Conclusion
Germany’s financial regulatory landscape is complex, and compliance requirements must be carefully considered by financial institutions. Understanding the importance of a compliance function, gatekeepers’ roles, directors’ duties and liabilities, senior manager accountability, private rights of action, standard of care for customers, and rule-making processes are essential for ensuring compliance with German regulations.