supervisory priorities for 2021 - bafin
TRANSCRIPT
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Supervisory priorities for 2021
Supervisory priorities for 2021
Supervisory priorities for 2021
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IntroductionWith this brochure, BaFin has published information on its supervisory priorities for the second time. The purpose of this brochure is to outline the issues that will be the focus of BaFin’s activities in 2021. Shortly after we had set out our priorities for 2020, the entire globe was hit by the COVID-19 pandemic. As a result, we had to realign and adapt our supervisory practices. The main objective was and is to mitigate the pandemic’s impact on financial stability and on the entities operating in the financial market.
In addition, the insolvency of Wirecard AG attracted a lot of attention in June 2020. The events surrounding the Aschheim-based company, including suspected accounting manipulation, also revealed weaknesses in the supervisory framework in Germany.
BaFin is playing its part to seek clarity on what happened. The Federal Government has already introduced a draft law to strengthen financial market integrity (Gesetz zur Stärkung der Finanzmarktintegrität – FISG), with the aim to grant BaFin more far-reaching financial reporting enforcement powers as a federal financial supervisory authority. In addition, a consulting firm has been appointed by the Federal Ministry of Finance to examine BaFin’s organisational structure, responsibilities and procedures, among other things. In 2021, steps will be taken that will set the course for the future, and BaFin is actively bringing this process forward – together with the Finance Ministry.
But one thing will remain unchanged in 2021: BaFin will continue to follow the principle of making its supervisory practices and underlying objectives as transparent as possible. BaFin will continue to respond to new challenges by making appropriate risk-based adjustments where required when performing its duties.
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Contents 3 Introduction
6 Supervisory priorities for 2021
10 Supervisory priorities for BaFin as a whole
18 BaFinʼs Sectors
40 Imprint
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Supervisory priorities for 2021
BaFin’s primary objective is to ensure the proper functioning, stability and integrity of the German financial market and to guarantee that the collective interests of consumers are protected. The purpose of BaFin’s restructuring and transformation process, which has already begun, is to help the authority swiftly identify new interdependencies and risks for supervised institutions and financial stability and assess their impact on various sectors. The objective is to enable all of BaFin’s Sectors to make use of the information that is available in relation to supervised institutions and the relevant markets and thus enable BaFin’s supervisors to take action rapidly.
At national level, BaFin is responsible for the supervision of credit institutions, financial services providers, asset management companies, insurance undertakings, pension funds and securities trading. In the area of banking supervision, BaFin – in cooperation with the Deutsche Bundesbank – is part of the Single Supervisory Mechanism (SSM), which is led by the European Central Bank. As the national resolution authority, BaFin is also part of the Single Resolution Mechanism (SRM).
As a supervisory authority following a risk-based approach, BaFin adapts its supervisory activities to take into account potential macroeconomic risks, microeconomic risks within the entities it supervises, and the collective interests of consumers.
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For 2020, BaFin had set the following four priorities – across all supervisory areas:
1. digitalisation, IT risk and cyber risk2. the integrity of the financial system and the fight
against financial crime3. sustainable business models4. sustainable finance
When BaFin set these priorities in 2019, nobody could have guessed that, just a few weeks after the new year, the global community would have to focus its efforts on fighting a pandemic and its consequences. When the number of COVID-19 infections rapidly rose in Germany and across Europe, BaFin realigned its supervisory priorities. From that moment on, it became imperative for BaFin to use part of its resources to mitigate the impact of the COVID-19 pandemic on the entities under its supervision and on financial stability on the whole.
As a result of the pandemic, BaFin was also required to reorganise large parts of its work. For example, on-site inspections at supervised institutions could not take place as planned. In addition, the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) had to postpone stress tests which had originally been planned for 2020 to the following year.
BaFin’s 2020 Annual Report will provide an overview of how BaFin has addressed its priorities for 2020 in practice – which were realigned to some extent.
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What are the priorities going to be for BaFin as a whole in 2021?
■ Dealing with the impact of the COVID-19 pandemic on supervised entities and financial markets will continue to shape BaFin’s supervisory activities in 2021.
■ As a result of the pandemic, BaFin’s supervisory activities will be focusing even more on IT risk and cyber risk, as a second BaFin-wide priority. This is because the digital services offered by financial institutions are being used more than ever before at a time where social life is restricted.
■ Increasingly digital business models offering customers new digital access and communication channels are another important reason why collective consumer protection has been set as a third BaFin-wide supervisory priority.
■ The priorities for 2020 that have not been explicitly kept as BaFin-wide priorities for 2021 will remain on the agendas of the individual BaFin Sectors.
In addition, BaFin will be asserting its position in all priority areas as it participates intensively in the work carried out by the supervisory and regulatory bodies at the European and international levels. Its core concern will be to achieve stronger supervisory convergence. In pursuing this aim, BaFin will also be taking into account the supervisory priorities of the European Central Bank (ECB) and the European Supervisory Authorities (ESAs).
The priorities mentioned above are in line with the measures that have been planned/already taken for the purpose of BaFin’s restructuring process. This particularly applies to the objectives that BaFin is
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pursuing: creating a Data Intelligence Unit, increasing digital expertise and strengthening collective investor and consumer protection.
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ISupervisory priorities for BaFin as a whole
ISupervisory priorities for BaFin as a whole
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ISupervisory priorities for BaFin as a whole
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1 Impact of the COVID-19 pandemic
Shortly after the outbreak of the COVID-19 pandemic, BaFin adapted its supervisory practices to the current situation and took a wide range of measures. The aim was and is to provide relief to the entities under BaFin’s supervision without compromising financial stability. In doing so, BaFin is taking action in line with the corresponding recommendations made by EU regulators and supervisors and international standard-setters. BaFin worked closely with the Deutsche Bundesbank on issues relating to banking supervision. In 2021, BaFin will continue to actively exchange ideas and information on the coronavirus pandemic with the Bundesbank, the European Central Bank and the European Supervisory Authorities.
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The measures that BaFin has taken in response to the pandemic are of a preventive nature. They are designed to provide the amount of flexibility that banks and Sparkassen (savings banks), insurers and financial services providers need by simplifying governance-related issues, allowing them to focus on maintaining their business operations. More financial leeway and greater loss-absorbing capacity
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are needed for this purpose. In particular, financial entities should be in a position that allows them to provide the real economy and private households with a stable supply of financial products, even as the pandemic continues.
With the measures it has taken, BaFin is also supporting government programmes aimed at helping to cushion the economic impact of the COVID-19 pandemic; in Germany, these programmes have mainly been launched via development banks (Förderbanken).
In 2021, too, on-site inspections will only be possible to a limited extent due to the pandemic. Where possible, BaFin will replace these with off-site inspections and analyses of corporate data and other information. As a supervisory authority following a risk-based approach, BaFin is also involved in an ongoing exchange with supervised entities. Furthermore, BaFin continuously gathers and analyses information on the income and risk situation. In addition to the reporting data that it has collected to date, BaFin will obtain further information from supervised entities and individual groups of entities where required. BaFin will systematically evaluate this information and reporting data. It is also very important for BaFin to examine and ensure that the risk management systems of entities are working properly. All of this information will enable BaFin to respond to new risk situations on a case-by-case basis.
BaFin is taking into account the impact of the COVID-19 pandemic in resolution planning, too. This is aimed at ensuring the resolvability of institutions despite the challenges posed by the pandemic.
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2 IT risk and cyber risk
The technological transformation of the financial sector is gaining further momentum. Firstly, digital business models with online distribution and service channels that are available around the clock are gaining more and more market share as a result of the COVID-19 pandemic. Secondly, innovations such as artificial intelligence, distributed ledger technology (DLT) and crypto assets based on these technologies are rapidly penetrating the industry.
This technological transformation is offering market participants many new opportunities. But at the same time, it is impossible for financial entities and supervisors to ignore the resulting increase in IT risk, such as risks arising from hacker attacks and IT system breakdowns at entities.
IT glitches and cyber crime can not only lead to significant financial losses or at least damage the reputation of the entities concerned – but they can have a systemic impact, too. For this reason, IT risk and cyber risk has been set as a BaFin-wide supervisory priority – as in 2020.
As part of its risk-based supervisory activities, BaFin will pay particular attention to critical infrastructures and the rise in the outsourcing of IT services. In 2021, BaFin will systematically ask outsourcing companies about the measures they have taken to limit or reduce IT risk and cyber risk. BaFin will also prioritise IT security and cyber security during special inspections. IT risk and cyber risk is an issue that will be addressed by the focus units to be established as part of BaFin’s reform process. These dedicated
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units will focus on various companies of particular significance, such as those which are highly complex, companies with international ties or those with an innovative business model. There are also plans to create a flexible task force which will be able to perform forensic audits independently.
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3 Collective consumer protection
Financial entities are increasingly shifting their processes for sales and services from face-to-face contact to processes online, which are more anonymous in comparison. BaFin’s aim is to ensure that the interests of consumers continue to be sufficiently safeguarded. For this reason, BaFin will continue to pay particular attention to consumer protection in 2021.
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The market turbulence caused by the pandemic is giving rise to uncertainty among investors. BaFin will therefore be monitoring the situation very closely to ensure that the COVID-19 pandemic is not used as an argument to lower consumer protection standards. In addition, BaFin is continuously increasing the amount of information it provides to consumers – especially online. In 2021, BaFin will continue to make use of market studies to identify consumer trends at an early stage so that it can respond to these appropriately.
Another key issue is the low interest rate environment, which has been a reality for some time now. This could prompt investors that are seeking to make a profit to invest in risky products on the unregulated capital market. It is also for this reason that BaFin is working together with legislators to enhance investor protection in Germany. Both the package of measures to further enhance investor protection in the area of capital investments and closed-end retail funds and the FISG are to be adopted by the end of this legislative period for this purpose. As a result, certain precious metal investments would have to be classified as capital investments in the future and would then be subject to the prospectus requirement and other investor protection provisions that BaFin oversees.
At the same time, collective investor and consumer protection activities will be expanded and intensified on the whole as part of BaFin’s reform process, which has already been initiated.
IIBaFin’s Sectors
IIBaFin’s Sectors
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IIBaFin’s Sectors
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1 Resolution
BaFin’s Resolution Sector has three main tasks. It can resolve an institution that is failing or likely to fail in an orderly manner if the statutory requirements are met. As the national resolution authority (NRA), BaFin has the power to do this.
In addition, BaFin’s Resolution Sector is tasked with preventing abuse of the financial system for money laundering and terrorist financing purposes.
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This BaFin Sector is also in charge of ensuring compliance with the authorisation requirement: business in the areas of banking, financial services, investments, insurance, payment services and e-money may not be conducted in Germany without the required authorisation. BaFin’s Resolution Sector provides clarifications on the authorisation requirement in cases of doubt and ensures that the authorisation requirement is complied with.
As regards the impact of the COVID-19 pandemic, which is a priority for BaFin as a whole, the Resolution Sector examines suspicious transaction reports in the area of money laundering prevention. Due to the pandemic, the special inspections that had been scheduled for 2020 did not take place as planned. As a result, the issue of suspicious transaction reports could not be addressed completely. For this reason, BaFin’s Resolution Sector will continue to prioritise
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this area in 2021. BaFin also intends to look into the extent to which suspicious transaction reports have changed due to the pandemic. In 2021, BaFin will also step up its efforts to further operationalise its resolution planning and ensure the resolvability of institutions. In its exchanges with the institutions, BaFin will be taking the impact of the COVID-19 pandemic into account as well.
In the cross-sectoral priority area of IT risk and cyber risk, BaFin’s money laundering prevention staff will continue to look into the spread and use of crypto assets in 2021. BaFin expects that it will complete the first authorisation procedures for crypto custody business. It is also planning on examining whether and which supervisory measures are to be taken for the financial services providers concerned.
In the priority area of collective consumer protection, BaFin’s Resolution Sector is ensuring that the authorisation requirement is complied with – including in the digital realm – to protect the integrity of the financial system and fight financial crime. BaFin will be taking an even closer look at whether the authorisation requirement is to be applied to new business models. Here, the focus will be on providers working with crypto assets (digital financial instruments stored on a decentralised basis). This also includes the issuers of stablecoins, i.e. tokens that are purportedly covered by a reserve made up of currencies, financial instruments or precious metals. BaFin’s objective is to mitigate systemic risks, enhance investor protection and ensure that the public’s confidence in the effectiveness of supervision is maintained in the long run. In doing so, BaFin will help maintain financial stability.
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Unauthorised business with digital financial instruments has the potential to cause significant damage. 2020 saw a further increase in such activity. For this reason, BaFin will put trading with binary options and payment methods via online platforms to the fore of its enforcement activities in 2021. It will also focus on deposit business and cases of direct investment and money remittance business in particular.
In this priority area, BaFin will take action in line with the Finance Ministry’s plans to reform BaFin and will strengthen digital expertise in its Sectors and supervisory areas. The objective is to further bolster BaFin’s ability to fulfil its mandate in the digital realm, e.g. in the fight against financial crime.
Other priorities for 2021:It has become apparent that money remittance business is particularly vulnerable to money laundering and terrorist financing. Since BaFin could not fully implement what it had planned to do in this priority area in 2020 due to the COVID-19 pandemic, further supervisory action will be taken in 2021. BaFin is planning on evaluating the supervisory measures that have already been taken and intends to introduce follow-up measures where required.
To ensure the resolvability of institutions, all the parties involved must meet the minimum requirements. This includes:
1. meticulous resolution planning for all the institutions concerned together with all the authorities involved, in Germany and abroad, and
2. robust and efficient crisis management procedures.
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BaFin’s 2021 resolution planning activities will include calculating and setting institution-specific minimum requirements for own funds and eligible liabilities (MREL) for further institutions. The aim is to ensure that these institutions have sufficient loss-absorbing and recapitalisation capacity. When determining the MREL requirements, BaFin will make sure that these correspond to the individual profiles of the institutions concerned and reflect the structure of liabilities in each case.
Not only in the event of a crisis but also in resolution planning, it is crucial to rapidly gain an overview of a large amount of institution-specific data and to process this information. To this end, BaFin’s Resolution Sector will be developing further methodological and data requirements in 2021, following on from a 2020 priority area. BaFin intends to issue new circulars and guidance notices to inform the institutions of the new requirements. In addition, BaFin’s Resolution Sector will continue to develop its analysis processes which are based on ongoing resolution planning and data that is provided on an ad hoc basis. Here, too, BaFin’s aim is to further optimise the basis for consistent administrative practices. Alongside this, BaFin’s Resolution Sector will continue to encourage institutions to improve the quality of their data. In 2021, the spotlight will be on the legal requirements for resolution reporting, resulting from the transposition of the European banking package into German law with the Risk Reduction Act (Risikoreduzierungsgesetz – RiG).
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2 Banking supervision
BaFin’s Banking Supervision Sector is responsible for the supervision of credit institutions, financial services institutions and payment institutions, aiming to counter violations of statutory provisions in the banking sector. Together with the Deutsche Bundesbank, BaFin’s Banking Supervision Sector sets out supervisory priorities for the less significant institutions (LSIs) on an annual basis. BaFin is directly responsible for these institutions under the Single Supervisory Mechanism (SSM). The supervisory priorities for the significant institutions (SIs), which are directly supervised by the European Central Bank under the SSM, are set out by the ECB. BaFin, in turn, takes into account the priority areas agreed as part of the SSM when setting out its priorities for LSIs.
BaFin’s Banking Supervision Sector will be taking the three BaFin-wide priority areas into consideration for the supervision of German LSIs. These priority areas are based on the significant risks that BaFin and the Bundesbank have jointly identified.
The institutions under their supervision are to be closely monitored with regard to the impact of the COVID-19 pandemic, which is a priority for BaFin as a whole. The COVID-19 pandemic’s impact on these institutions will be most apparent in the rise in credit risks. When and the extent to which credits will default from 2021 onwards will depend on how the COVID-19 pandemic evolves and will also depend on its economic impact and the effects of extensive state support measures. In 2021, BaFin will also provide assistance with EU-wide stress testing under the leadership of the European Banking Authority (EBA).
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Depending on the general situation and individual circumstances of each institution, BaFin’s Banking Supervision Sector will take a risk-based approach where required and request special reports and notifications on the impact of the coronavirus crisis and on credit risk trends, in addition to the information it exchanges directly with these institutions. BaFin is also planning on setting out further areas of emphasis relating to credit risks in accordance with section 30 of the German Banking Act (Kreditwesengesetz – KWG) within the scope of audits relating to the annual financial statements of credit institutions. Given the rise in credit risks, special inspections are growing in importance, particularly in relation to the recoverability of credit exposures and the assessment of internal capital adequacy. In 2021, BaFin’s Banking Supervision staff will continue to observe how the institutions under its supervision are dealing with dividends and the distribution of profits.
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In 2021, BaFin’s Banking Supervision Sector will continue to pay particular attention to another BaFin-wide priority area: IT risk and cyber risk. As digitalisation progresses and IT systems are playing an increasingly important role for the business activities of credit institutions due to the pandemic, this priority area has gained more significance.
Cyber attacks – especially data theft and system disruptions caused by hacker attacks – pose a particularly significant threat to institutions. Such attacks can rapidly lead to considerable losses and severe reputational damage. But even more serious scenarios are also possible. If many interconnected institutions are simultaneously attacked by hackers (either directly or indirectly by using the same resources or platforms), large parts of the financial system may be affected as well. These, too, are risks that BaFin’s Banking Supervision Sector will take into account in the work it carries out.
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Apart from that, it is to be expected that the potential risks associated with internal shortcomings and vulnerabilities in the IT systems of institutions will steadily grow. The consequences of poor decisions in IT strategy are comparable to what can happen as a result of hacker attacks. Obsolete systems that can be maintained only to a limited extent, and inadequate and insecure software facilitate disruptions and data losses.
During supervisory interviews and meetings with industry associations, BaFin’s Banking Supervision staff will therefore systematically seek to find out what the LSIs have done and are doing to protect their IT systems from cyber attacks and internal incidents. In addition, the analysis of IT risks will be a priority during special inspections and in the Supervisory Review and Evaluation Process (SREP), which is carried out on a regular basis.
In 2021, BaFin’s Banking Supervision staff will examine compliance with the requirement for strong customer authentication within the context of collective consumer protection, which is also a BaFin-wide supervisory priority. The objective is to tackle fraudulent online payments. In addition, BaFin will meticulously analyse the trends and figures relating to fraud in this area.
Other supervisory priorities for 2021:In addition to the three BaFin-wide priority areas mentioned above, BaFin’s Banking Supervision staff will be paying special attention to outsourcing, digital processes, operating models and IT security in 2021. Many institutions are operating in an increasingly competitive environment. In the case of banks and Sparkassen (savings banks), the outsourcing
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of key activities and processes within the meaning of section 25b of the KWG is becoming more and more important – especially the outsourcing of IT services. In the context of BaFin’s restructuring and transformation process, there are plans to carry out more in-depth quantitative data analyses to identify institutions in distress at an early stage and, as mentioned above, to establish dedicated units focusing on certain institutions and groups of institutions.
As regards the processing of payments, many credit institutions are no longer providing significant parts of their services or processes themselves. Instead, they are outsourcing them to specialised providers. This trend is not bad per se. But concentration risks could still emerge – for example, if institutions become excessively dependent on external outsourcing providers that have a significant amount of power on the market, or if many institutions rely on one and the same provider for specific services. BaFin will be paying close attention to this, not least because there are plans to reintroduce notification requirements for outsourcing. The objective is to analyse the risks associated with outsourcing more precisely and to identify risk concentrations sooner this way.
The BaFin division responsible for the supervision of payment institutions and e-money institutions will focus on examining IT security and data security at institutions undergoing the authorisation and registration process. In order to implement the guidelines issued by the European Banking Authority (EBA) on the assessment of information and communications technology (ICT) risk, BaFin is planning on developing supervisory requirements for IT that are specifically aimed at payment services
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(Zahlungsdiensteaufsichtliche Anforderungen an die IT – ZAIT). These requirements will be similar to the IT requirements that BaFin has already set out, for instance in the area of banking supervision (Bankaufsichtliche Anforderungen an die IT – BAIT).
In 2021, BaFin’s Banking Supervision Sector will concentrate on business model risk, interest rate risk, country risk and environmental and climate risks – as in 2020. In the area of country risk, BaFin is closely monitoring how Brexit – i.e. the United Kingdom’s departure from the European Union – has affected institutions since the transition period expired at the end of 2020. In its discussions with institutions and associations, BaFin will also encourage them to place greater emphasis on sustainability risks – e.g. in the area of credit risk management.
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3 Insurance supervision
The primary objective for BaFin’s Insurance Supervision Sector is to protect policyholders and those entitled to insurance benefits. Solvency supervision is of major significance in this context.
With regard to the impact of the COVID-19 pandemic, one of the BaFin-wide priorities, BaFin’s Insurance Supervision Sector, too, is continuously adapting its supervisory practices and measures to the current circumstances. Default risk and downgrade risk associated with interest-earning investments are increasingly growing in importance during the pandemic. The pandemic has been such a tremendous burden for many countries and economic sectors that they will be hard-pressed to repay their debts in full. Bonds offered by non-prime issuers are particularly affected. In order to measure the impact of risks on the value of
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capital investments, BaFin will continue to examine key exposures with BBB ratings, high-yield or equivalent investments in 2021. BaFin will make use of information from regular reports and seek information from insurers for this purpose.
This is the approach that BaFin’s Insurance Supervision Sector also takes for the real estate exposures and loans of undertakings. In addition, it is analysing the impact of the COVID-19 pandemic and examining how the low interest rate environment is affecting real estate prices. Higher default risks – in the case of commercial property, for example – may also become a focus of supervisory attention.
In 2021, BaFin’s Insurance Supervision Sector will continue to pay particular attention to how supervised undertakings are handling dividends and the distribution of profits. It is crucial that profits are distributed only if the undertakings concerned meet internal capital adequacy requirements in different stress scenarios.
In the area of IT risk and cyber risk, BaFin’s Insurance Supervision staff will continue to focus on IT security and cyber security in 2021, with a particular emphasis on IT governance at undertakings. In addition, BaFin will particularly examine – in an appropriate manner based on the situation at hand – the IT infrastructures of the undertakings it supervises.
In 2021, BaFin will also seek to analyse how the segment of cyber policies is developing. For this purpose, BaFin will be asking cyber policy providers a range of questions on the earnings situation in this segment and other questions on the content and scope of the insurance coverage provided.
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BaFin’s Insurance Supervision Sector has found that the COVID-19 pandemic has stepped up the pressure on insurers to make their business models more digital. BaFin will thus closely examine the extent to which insurers are able to finance and implement their own digital transformation processes.
In 2020, BaFin’s Insurance Supervision Sector was already focusing on the oversight of compliance with the provisions on distribution remuneration set out in section 48a of the Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG). This priority will be maintained for 2021. The focus will also be on analysing the distribution of payment protection insurance policies and examining the extent to which supervisory measures need to be taken on this basis as part of the BaFin-wide priority of collective consumer protection. BaFin’s Insurance Supervision Sector will continue to develop its concept for the supervisory oversight of the implementation of the provisions on distribution remuneration set out in section 48a of the VAG. In the segment of online distribution in particular, BaFin will look into whether insurers are complying with the regulatory requirements for consumer protection.
Other supervisory priorities for 2021:In 2021, BaFin’s Insurance Supervision staff will implement the requirements set out in BaFin’s Guidance Notice on Dealing with Sustainability Risks in its supervisory practices and will analyse how insurance undertakings are handling this issue. As insurers will be required to gradually fulfil the European disclosure requirements in this area from 2021 onwards and BaFin is responsible for the supervision of these insurers, a supervisory concept will be developed for this purpose in 2021.
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In addition, BaFin will closely examine how life insurers and Pensionskassen (occupational pension schemes) are dealing with the challenges posed by the low interest rate environment, which has been exacerbated by the COVID-19 pandemic. To this end, BaFin will continue its intensified supervisory activities and examine how undertakings are dealing with guaranteed interest rates in new business. BaFin will introduce appropriate measures if required. Like every year, it will prepare a forecast calculation as at 30 September for this purpose and analyse the results. Further analyses will follow if necessary.
In 2021, BaFin will continue to focus on the analysis of the premium situation and the associated risks as part of the supervision of reinsurers in the non-life insurance sector. Here, too, it will particularly take into account the impact of the COVID-19 pandemic.
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Furthermore, BaFin’s Insurance Supervision staff will assess the market-adjusted valuation of claims provisions in property and casualty insurance and technical provisions in the area of life insurance. For property/casualty insurers that fall under the scope of Solvency II, this assessment will continue to be made during on-site inspections using software for determining reserves – provided such inspections are possible. As for insurers subject to Solvency I, inspections will be conducted on the basis of the German Commercial Code (Handelsgesetzbuch – HGB).
In the area of life insurance, BaFin will continue its assessments of stochastic valuation models (own valuation model or the Branchensimulationsmodell
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simulation model provided by the German Insurance Association) at life insurance companies using the standard formula.
In 2020, BaFin’s Insurance Supervision staff had already applied the principle of proportionality with greater consistency, and it will continue to do so in 2021.
Analyses carried out in 2020 by BaFin’s Insurance Supervision staff on the scope and impact of the transferability of own funds in insurance groups resulted in important findings. BaFin will process this information in 2021 and follow up on this in the European supervisory colleges. The objective is to determine criteria with which capital management within insurance groups can be thoroughly assessed.
In 2021, BaFin’s Insurance Supervision staff will continue to focus on early risk detection. BaFin will establish procedures to identify solvency risks at insurers at an early stage and will make sure that insurers fulfil their obligation to provide information should the economic situation worsen. It will also be looking into the situation surrounding the obligations of auditors to provide information on risks that threaten the existence of undertakings. The objective that BaFin is pursuing here is to set and publish standards on section 132 of the VAG and on the disclosure obligations of auditors under section 341k (3) of the HGB.
BaFin’s Insurance Supervision Sector will also continue to ensure appropriate and cause-oriented profit participation and will take supervisory measures for this purpose if required.
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4 Securities supervision
In the area of securities supervision, BaFin is tasked with countering statutory violations having an adverse impact on investor protection and the transparency and integrity of the financial market. To ensure that consumers continue to have confidence in the capital market in the long run, the objectives that BaFin has set itself for 2021, as part of the BaFin-wide priority area of collective consumer protection, include tackling market abuse in securities trading. BaFin is specifically planning on addressing infringements of the rights of investors and minimising market asymmetries. In the context of collective consumer protection, BaFin’s Securities Supervision Sector will continue to monitor the implementation of the second European Markets in Financial Instruments Directive (MiFID II) in 2021. BaFin will initiate and carry out additional work to be done in the area of product governance – in some cases, together with the European Supervisory Authorities. BaFin’s aim is to detect and remedy shortcomings at individual institutions and product providers and to help with the development of common European standards.
BaFin’s Securities Supervision Sector, too, was particularly challenged by the impact of the COVID-19 pandemic in 2020. This showed how crucial it is to adequately prepare for such exceptional circumstances. Thanks to intensive preparatory work, asset managers have had new tools at their disposal since the end of March 2020, allowing them to better protect their liquidity. For instance, the German Investment Code (Kapitalanlagegesetzbuch – KAGB) now allows the
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providers of open-ended investment funds to respond to crises in three new ways: with notice periods, redemption gates and swing pricing. The use of such liquidity tools at an early stage should also help to prevent fund closures in times of crisis.
BaFin’s Securities Supervision Sector will continue to work intensively to ensure that asset managers are using the aforementioned tools in practice in 2021 so that they are equipped if the COVID-19 pandemic were to worsen or other crisis scenarios were to become a reality. BaFin will support the industry in this process within the means at its disposal, and it is involved in a working group with representatives from the fund industry, among other things.
BaFin’s Securities Supervision staff will also be actively working on another BaFin-wide priority area: IT risk and cyber risk. For instance, BaFin will be taking a close look at the institutions’ compliance with its Supervisory Requirements for IT in Asset Management Companies (Kapitalverwaltungsaufsichtliche Anforderungen an die IT – KAIT).
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Other supervisory priorities for 2021:In 2021, BaFin’s Securities Supervision staff will continue to provide support to the entities that are relocating their securities activities from the United Kingdom to Germany as a result of Brexit. The focus will be on processing authorisation applications for new entities in Germany and the ongoing supervision of the establishment of business after authorisation has been granted. Special attention will be paid to examining whether the entities’ process and organisation structure and staffing situation are appropriate. In addition, the requirements for risk management and outsourcing must be fulfilled. BaFin’s Securities Supervision staff will also be paying close attention to developments in the clearing activities of central counterparties in the United Kingdom and the EU. As clearing is crucial for the stability of the financial market, the focus from a supervisory law perspective is on whether and to what extent clearing activities are being relocated from the UK to the EU as a result of Brexit. BaFin will also be actively working on other Brexit-related issues, such as the cross-border activities of investment services enterprises, the treatment of over-the-counter derivatives agreements concluded with UK counterparties and dealing with UK trading venues.
The events surrounding the insolvency of Wirecard AG triggered a political and legal discussion on the financial reporting enforcement system in place. Politicians from various parties have called for BaFin’s powers in this area to be reviewed and strengthened where required. A government draft law for this purpose – the Act to Strengthen Financial Market Integrity (Gesetz zur Stärkung der Finanzmarktintegrität – FISG) – is being examined as part of the parliamentary legislative procedure
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involving the Federal Government, the Bundestag and the Bundesrat. If the amendments specified in the law are adopted, BaFin will be granted further financial reporting enforcement powers, which will lead to changes in the supervisory processes. BaFin will also be drawing on the planned recommendations made by the consulting firm that has been appointed.
New requirements for investment firms will enter into force in June 2021; these will be based on Directive (EU) 2019/2034 on the prudential supervision of investment firms and Regulation (EU) 2019/2033 on the prudential requirements for investment firms. The new requirements will also have an impact on BaFin’s supervision of these firms. To be more specific, this means – for both BaFin and firms – that new, more tailored and, in some cases, simplified requirements will apply, for instance in the areas of own funds, liquidity, reporting and disclosure requirements, and the internal organisation and remuneration systems of investment firms. One of BaFin’s priorities for 2021 in the area of securities supervision will be to provide assistance and to monitor the implementation of these new requirements by the financial services institutions and securities trading banks concerned. In accordance with the principle of proportionality, BaFin’s Securities Supervision Sector will categorise these entities into “small”, “medium-sized“ and “large” investment firms in order to tailor the specific scope of the relevant prudential requirements to the institution in question. BaFin will also introduce a new supervisory review and evaluation process for this purpose, which will be a key supervisory tool for medium-sized and large investment firms (and some small investment firms in exceptional cases).
ImprintPublisher:Bundesanstalt für FinanzdienstleistungsaufsichtFederal Financial Supervisory AuthorityDirectorate K (Communications)
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Phone: +49 (0) 228 4108-0Internet: www.bafin.deE-Mail: [email protected]
Bonn und Frankfurt am Main | May 2021
Editing:Organisationseinheit Strategie und RisikoDirectorate K (Communications)
Typesetting:Naumilkat – Agentur für Kommunikation und Design