Due to Brexit developments, for many non-European investors the option to acquire a German banking or financial licence, including the attached benefit of being able to use the European passport regime, is a part of their strategic thinking in terms of their future European business model.

In the following article, the application process for a German banking or financial services licence is set out.

Certain banking and financial services in Germany require a banking licence pursuant to section 32 of the German Banking Act (Gesetz über das Kreditwesen, KWG). (An English translation of the KWG is available at bafin.de.)

The KWG provides three categories of institution – credit institutions, financial services institutions and financial enterprises – to which different licence requirements apply.

Credit institutions are enterprises which conduct banking activities on a commercial basis or on a scale which requires a commercially organised business undertaking.

Banking Activities

Banking activities are defined conclusively in the KWG as any of the types of activity listed in section 1, para. 1 KWG. These include the acceptance of funds (deposit-taking activities), the granting of loans (lending activities), and the purchase and sale of financial instruments (prime brokerage services).

The commercial conduct of a banking business activity requires a licence. Conduct qualifies as commercial if the activity is to be undertaken for a certain length of time and with a view to a profit. Business volume, however, does not influence the licence requirement, so even ‘small’ banks need a licence.

Section 2 KWG lists certain entities which do not fall within the scope of the credit institution definition and so do not require a banking licence in order to conduct a banking business activity. For example, enterprises that conduct such activity solely with respect to their parent, subsidiaries or affiliated enterprises.

Certain types of banking business, such as specialised credit institutions, that do not intend to conduct any deposit-taking or lending activity may apply for a limited banking licence, as opposed to an unlimited, full licence.

Financial services institutions are enterprises that provide financial services on a commercial basis or on a scale which requires a commercially organised business undertaking; however, they are not credit institutions. Financial services are defined conclusively in section 1, para. 1a KWG and comprise, among others, investment brokerage, the purchase and sale of financial instruments for others (contract brokerage) and portfolio management.

The commercial conduct of financial services requires a written licence, which may be limited to certain financial services.

Enterprises conducting banking business activities or providing financial services are referred to in this memorandum as ‘institutions’.

Financial enterprises are enterprises that are not institutions but which conduct banking-related activities, such as factoring, leasing and investment advice. As financial enterprises neither conduct banking activities nor provide financial services, they do not require a licence pursuant to section 32 KWG.

Supervisory Body

The supervisory body responsible for granting banking licences is the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) or, in the case of licences for deposit-taking and lending activities (ie ‘credit institutions’, as defined in the Capital Requirements Regulation (CRR)), the European Central Bank (ECB). The application for a banking licence must be filed in writing with the BaFin or ECB, as applicable, and be accompanied by documentation demonstrating that the requirements for a licence are fulfilled.

Conditions to Granting a Licence

Below is a brief summary of the conditions for granting a banking licence pursuant to sections 32 and 33 KWG. There are special rules for opening branch offices of foreign institutions and for payment institutions, but these are beyond the scope of this update.

Pursuant to KWG, financial services institutions and credit institutions can be operated in any legal form available under German law except, in the case of credit institutions, in the form of a sole proprietorship (Einzelkaufmann).

Large commercial banks are usually run in the form of (publicly traded) corporations (Aktiengesellschaft, AG) and smaller banks in the form of limited liability companies (Gesellschaft mit beschränkter Haftung, GmbH). Partnerships (offene Handelsgesellschaft, oHG), limited partnerships (Kommanditgesellschaft, KG) and limited partnerships with a GmbH as sole general partner (GmbH & Co. KG) are also admissible. The forms AG, GmbH and GmbH & Co. KG have the advantage that the shareholders or limited partners, as the case may be, are generally not personally liable for the entity’s debt.

Depending on the legal form of the entity, the licence holder is either a legal entity or a natural person.

In the case of a partnership (oHG) or limited partnership (KG), it is generally acknowledged that the licence is held by the personally liable partners, who each require a licence. Any new partner that enters the partnership in a personally liable capacity must also obtain a licence. Partners who are not personally liable, such as limited partners and silent partners, do not require a licence.

In the case of corporations (AG and GmbH) the licence is held by the legal entity. A change in the shareholders, therefore, does not affect the licence. In the case of a limited partnership with a GmbH as the sole general partner (GmbH & Co. KG), the licence is held by the GmbH, being the sole liable partner.

Owing to its personal character, the licence cannot be transferred by way of singular or universal succession. This implies that a new licence is required in the event of a change in the legal form, for example, in the case of a merger or transformation from a partnership into a corporation. A new licence is also required for any other transfer of banking or financial services activities to a legal entity or natural person that does not already have a licence.

Initial Capital

The initial minimum capital requirement depends on the nature of the planned business activity and is detailed laid down in section 33 KWG.

Independent of the initial capital requirement, credit institutions conducting deposit-taking or investment fund activities, and financial services institutions providing financial services as listed in section 1, para. 1a, nos. 1-4 KWG (investment brokerage, contract brokerage, portfolio management or own-account trading) are obliged to secure all deposits.

With a view to fulfilling this obligation, such institutions must join one of the organisations set up by the various German banking groups in order to provide security for investors in case of a member institution’s insolvency (Einlagensicherungsfonds), pursuant to section 32, paras. 3 and 3a KWG and section 2 of the Deposit Guarantee and Investor Compensation Act (Einlagensicherungs- und Anlegerentschädigungsgesetz). For private commercial banks, the respective organisation is Entschädigungseinrichtung deutscher Banken GmbH.

Generally speaking, each institution needs to appoint at least two senior managers (Geschäftsleiter). The members of the institution’s future management must be deemed trustworthy and demonstrate their professional qualifications.

Trustworthiness must be demonstrated not only by the management, but also by holders of a qualified participating interest, as well as, in the case of an incorporated entity, a legal representative and, in the case of a partnership, a general partner. For practical purposes, trustworthiness is assumed unless any negative facts are established. The BaFin reviews submitted references, relies on its prior experience with the relevant person in that person’s former capacity as a manager of another institution and checks against criminal records.

Professional qualifications in this context means the theoretical and practical knowledge of the relevant business activity, as well as managerial experience. The extent of the professional qualifications required, therefore, depends on the business activity for which the licence is to be granted. A person is deemed to have the professional qualifications necessary to manage an institution if he/she has three years’ managerial experience at an institution of a comparable size and type of business. Such experience is considered managerial if the person worked in management or at a level immediately below management. As a general rule, senior managers are expected to have sufficient experience, in particular with respect to lending business activities. Lastly, professional qualifications are in each case assessed on an individual basis and with regard to the particularities of the respective institution.

Furthermore, the management must submit a viable business plan for the relevant institution, outlining the planned activity, organisational structure and internal monitoring procedures. The business plan and organisational structure must demonstrate that the institution is in a position to fulfil the requirements of section 25a KWG, including, among other things:

• A suitable arrangement for managing, monitoring and controlling risk.
• An established business organisation, an appropriate internal control system and adequate security precautions with respect to electronic data processing.
• Records of executed business transactions, enabling full and continued supervision by the competent supervisory body.
• Safeguards, as appropriate for the respective business activities and customers, against money laundering and other fraudulent activities that are to the detriment of the respective institution.

Client Alert 2016-201