Gatekeepers in the Regulatory Structure: A Look at Directors’ Duties and Liability
In the complex landscape of financial services regulation, gatekeepers play a crucial role in ensuring that institutions operate within the bounds of the law. One such group is directors of financial services firms, who bear significant responsibility for the proper management and oversight of their organizations.
Directors’ Duties: A Summary
According to German regulatory authority BaFin, managing directors of regulated institutions are jointly responsible for:
- Establishing a business strategy
- Gaining an overview of risks faced by the institution
- Implementing a risk strategy
- Setting up a strategy process
- Approving audit planning
- Providing information on serious findings identified by internal audits
Liability: When Directors May Face Sanctions
Senior managers can be held individually accountable for:
- Committing a crime or offense
- Being the factual leader of the offense
- Failing to prevent a breach of law despite having the power to do so
Additionally, directors may face administrative sanctions for breaches of personal legal obligations.
Private Rights of Action: An Overview
Generally, violations of national financial services authority rules and regulations do not result in private rights of action. However, in exceptional cases where regulatory laws serve to protect individual rights, individuals may assert claims against regulated institutions.
Standard of Care: A Key Consideration
When dealing with retail customers, German law does not differentiate between wholesale and retail clients. Regulated entities must apply due care when interacting with any counterparty, although rules implementing MiFID II provisions provide for different treatment of:
- Professional clients
- Eligible counterparties
- Retail clients
Rulemaking Process: A Consultative Approach
Laws affecting the financial services industry are typically subject to a consultation process, which allows industry groups and market participants to comment on proposed regulations. This consultative approach plays a critical role in shaping the regulatory landscape in Germany.
Cross-Border Issues: Challenges and Opportunities
Germany’s national financial services authority, BaFin, takes a strict view on the provision of licensable activities in Germany, but exemptions apply for:
- Servicing existing client relationships
- Reverse solicitation
Non-EU entities may benefit from passporting arrangements under MiFID II and CRD IV.
International Standards: A Key Influence
Germany’s regulatory framework is influenced by international standards, such as EU Directives and Delegated Directives. The implementation of these standards into national law follows a similar process to that described in question 20. Interpretations of provisions and specific circumstances by ESMA or EBA are also reflected in German regulations.
Conclusion
In conclusion, gatekeepers like directors of financial services firms play a critical role in ensuring the proper management and oversight of their organizations. As the regulatory landscape continues to evolve, it is essential for these individuals to stay informed about their duties and liabilities, as well as the latest developments in international standards and best practices.