Banking regulation

The main sources of German regulatory laws applicable to credit institutions are the KWG, the Solvency Regulation (Solvabilitätsverordnung or "SolvV"), the Liquidity Regulation (Liquiditätsverordnung or "LiqV") and the Large Exposures and Million Credits Regulation (Groß- und Millionenkreditverordnung or "GroMiKV").

The KWG has implemented, among other things, the EU Capital Requirements Directive V (CRD V). The impact of the SolvV, the LiqV and the GromiKV has been drastically reduced as a result of the enactment of the EU Capital Requirements Regulation (CRR I and II). The CRR is directly applicable, i.e., it does not have to be implemented. The SolvV, the LiqV and the GroMiKV now only provide limited supplementary regulation on top of the CRR.

Further major banking regulations include the Ownership Control Regulation (Inhaberkontrollverordnung), which covers the ownership control procedure, and the Institutions Remuneration Regulation (Insitutsvergütungsverordnung), which deals with the regulation of variable compensation systems.

Under several provisions of the KWG, the BaFin may issue regulations, guidelines or orders that apply to those it regulates. Such (written) communications (other than those addressed to individual institutions) are disclosed on the BaFin or the Bundesbank website. Moreover, the BaFin provides guidance on its regulatory practice in circulars, guidance notices and interpretative letters.

Banking regulation for certain special banks is also contained in the Building Societies Act (Bausparkassengesetz) and the Mortgage-Covered Bond Act (Pfandbriefgesetz), which requires an additional license for banks that want to issue mortgage-covered bonds.

Savings and loan institutions (Sparkassen) are also regulated under the laws of the federal states since most such institutions are incorporated under public (state) law.

The BRRD (I and II) has been implemented in Germany in separate legislation, the Recovery and Resolution Act (Sanierungs- und Abwicklungsgesetz or SAG).

Regulation of financial services

The KWG also regulates financial services providers (that qualify neither as credit institutions nor as investment firms), such as financial leasing companies and factoring companies. These services are not MiFID II investment services but are regulated under German law (i.e., the KWG).

Regulation of investment services

The WpIG introduced, on 26 June 2021, a regulatory regime that is applicable to investment firms that do not at the same time qualify as credit institutions under the provisions of the KWG; these investment firms are referred to as "securities institutions" (Wertpapierinstitute), but which we will refer to as investment firms to keep the terminology consistent with the EU law. The WpIG has implemented Directive (EU) 2019/2034 (Investment Firm Directive or IFD) and goes along with Regulation (EU) 2019/2033 (Investment Firm Regulation or IFR).

The WpIG applies to all institutions providing investment services with the exception of those that qualify as CRR credit institutions under CRR (cf. section 32 (1) sentence 2 KWG) (so-called class 1a firms under the IFR) because they are deemed systematically important due to their business model and risk profiles being similar to those of significant credit institutions.

Also, large investment firms that meet certain size requirements that do not qualify as class 1a firms but whose size and activities present some risk to financial stability (so-called class 1b firms under IFR) are captured by the WpIG (and not the KWG) in principle but will remain subject to the CRR and CRD (and not the own prudential requirements of the IFR/WpIG) although not qualifying as credit institutions (as the class 1a firms do).

The remaining medium-sized investment firms (so-called class 2 firms) and small-sized investment firms (so-called class 3 firms) will be governed by the WpIG, including the prudential regime of the IFR.

The conduct of business supervision of investment firms continues to be based under the provisions of the Securities Trading Act (Wertpapierhandelsgesetz "WpHG"), which implements MiFID II. Germany has recently adopted the Remuneration Ordinance for Investment Firms (Wertpapierinstituts-Vergütungsverordnung or “WpIVergV”), which deals with the regulation of variable compensation systems of investment firms and which entered into force on 12 January 2024.

Payment services regulation

Payment services and e-money are regulated under the Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz or ZAG). The ZAG implements Directive 2015/2366/EU (second Payment Services Directive) and Directive 2009/110/EC (second E-money Directive).Payment services institutions and e-money institutions are subject to supervision by BaFin and Bundesbank (the same cooperation principles apply as outlined above).

Fund manager and fund regulation

Fund management companies and investment funds are regulated by the German Capital Investment Code (Kapitalanlagegesetzbuch or KAGB). The KAGB implements Directive 2009/65/EC (UCITS Directive) and Directive 2011/61/EU (Alternative Investment Fund Managers (AIFM) Directive), but it also contains fund regulation for open- and closed-end investment funds marketed with the general public as well as regulation of institutional funds (so-called special funds). Fund management companies are subject to supervision by BaFin.

Credit servicing regulation

Since 30 December 2023, the Act on the Secondary Market for Distressed Land and regarding Credit Servicing Institutions (Kreditzweitmarktgesetz or "KrZwMG") entered into force, which implements Directive (EU) 2021/2167 of the European Parliament and of the Council of 24 November 2021 on credit servicers and credit purchasers. The law created a licensing requirement for credit service providers. The competent supervisory authority is the BaFin, which cooperates with the Bundesbank for this purpose.

Money laundering regulation

An essential additional regulation applicable to all banks, financial services providers, investment firms, fund managers and payment services providers is contained in the Money Laundering Act (Geldwäschegesetz or GwG). In the financial sector, the competent regulator under the GwG is the BaFin.

Insurance regulation

The main sources of German regulatory laws applicable to insurance undertakings are the "Versicherungsaufsichtsgesetz" ("VAG") and the Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 ("Solvency II Regulation"), which is directly applicable in Germany without further implementation laws. 

The VAG has implemented, among other things, the Directive 2009/138/EC of 25 November 2009 on the taking-up and pursuit of the business of insurance and reinsurance ("Solvency II Directive"). Further major insurance regulations include the Ownership Control Regulation ("Inhaberkontrollverordnung"), which covers the ownership control procedure, and the Insurance Remuneration Regulation ("Versicherungs-Vergütungsverordnung"), which deals with the regulation of remuneration systems for the management and employees in insurance undertakings and pension funds.

Under several provisions of the VAG, the BaFin may issue regulations, guidelines and orders that apply to those companies it regulates. Such (written) communications (other than those addressed to individual institutions) are disclosed on the BaFin website. Moreover, the BaFin provides guidance on its regulatory practice in circulars, guidance notices and interpretative decisions.

Insurance mediation regulation

The licensing and business conduct rules for insurance intermediaries are mainly set out in section 34d of the Trade Regulation ("Gewerbeordnung" – "GewO") and in the Insurance Mediation Regulation ("Versicherungsvermittlungsverordnung"). Those two regulations have implemented, in particular, the corresponding rules of the Directive (EU) 2016/97 of 20 January 2016 on insurance distribution ("Insurance Distribution Directive" - "IDD").