BaFin License

The most important facts in brief:

1. The term "BaFin License" refers to the permits under a variety of laws issued by the Federal Financial Supervisory Authority (BaFin) and relating to the operation of a business in the financial sector. Certain regulated activities trigger a license requirement for the provision of banking transactions or financial services in accordance with the German Banking Act (KWG) or for the provision of payment services or the issuance of e-money in accordance with the German Payment Services Supervision Act (ZAG).
2. A permit or license from BaFin may also be required for the conduct of business which is traditionally not considered to form part of the financial sector, as long as a (minor) part of the main street business model resembles, if considered separately, to a financial service. For example, online retailers that forward payments from their customers to their suppliers may also require a permit from BaFin for their business.
3. If a business is operated without the required permit from BaFin, there is a risk of severe penalties: fines or, albeit in practice rare, even imprisonment. BaFin may also order such business to cease business operations.

What is a BaFin License?

There is no such thing as "the one BaFin License". Rather, there is a variety of transactions in the financial sector that may only be operated with a permit from BaFin. These permits issued by BaFin are also referred to as BaFin Licenses. A BaFin License ensures that companies meet the legal requirements necessary to maintain a secure and transparent financial market.

For which activities is a permit from BaFin required?

There is no such thing as "the one BaFin License". Rather, there is a variety of transactions in the financial sector that may only be operated with a permit from BaFin. These permits issued by BaFin are also referred to as BaFin Licenses. A BaFin License ensures that companies meet the legal requirements necessary to maintain a secure and transparent financial market.

For which activities is a permit from BaFin required?

The following laws stipulate the requirement of a BaFin permit in case the respective regulated activities are carried out:

• Section 32 German Banking Act (KWG): A license in accordance with Section 32 KWG is required for companies that conduct banking business or provide financial services, such as lending or deposit taking, securities trading, investment brokerage and financial portfolio management. The license according to Section 32 KWG is also referred to as a BaFin banking license.
• Section 20 German Capital Investment Code (KAGB): A license in accordance with Section 20 KAGB is required for the management of investment funds, i.e. for capital management companies that manage investment funds.
• Section 15 German Investment Firm Act (WpIG): Pursuant to Section 15 WpIG, securities institutions that offer investment services such as investment advice or proprietary trading require a permit from BaFin.
• Section 10 Germany Secondary Loan Market Act (KrZwMG): A permit is required for companies that provide credit services in relation to a non-performing loan agreement; this includes, for example, the collection or enforcement of due payment claims.
• Sections 10 and 11 ZAG: A ZAG license is required for companies that offer payment services, such as bank transfers or payment processing or issue e-money. It is important to note that the ZAG has a very broad scope of application, meaning that airlines, online market places and delivery services can also fall within this categories.
• Art. 59 MiCAR: A license is also required for the provision of services related to crypto.
• Section 8 German Insurance Companies Supervisory Act (VAG): Insurance companies also require a license from BaFin to conduct business.

There are also BaFin fact sheets on the individual standards, which explain the transactions covered and the requirements for approval (e.g. on financial services)

When is registration with BaFin sufficient?

In some cases, a full "license", i.e. permission, is not required, but registration with BaFin is sufficient. For example, account information services only have to register with BaFin without a license being required. Overall, however, sufficiency of a registration is the exception.

What are the consequences of operating without the required BaFin License?

Operating without the required BaFin License can have severe legal consequences. The following penalties are possible if the business is operated without the required BaFin License:

• Prison sentences of up to five years;
• Fine

The following can also be considered

• cessation of business operations or the
• unwinding of unauthorized transactions.

The possible penalties in individual cases depend on what permission would have been required. In addition, companies that have a subsidiary which provides financial services in Germany without the relevant BaFin permit run risk that their statutory auditor may refuse to issue its auditor’s certificate until this regulatory non-compliance is resolved.

What requirements must be met for the issuance of a BaFin License?

The requirements that must be met for the issuance of a permit depend on which permit is to be issued.

However, there is a high degree of overlap in the permits, so that the following requirements usually have to be met:

• Professional and personal suitability of the management: The persons in charge must be reliable and professionally suitable.
• Capital requirements: Companies must meet certain capital requirements, which may vary depending on the type of license.
• Reliable owners: The owners and legal representatives of a company that hold a significant stake in the financial services institution must also be reliable.
• Organizational requirements: A company must have a suitable business organization, including internal control mechanisms and risk management systems.

How does the BaFin approval procedure work?

The procedure for issuing a BaFin License is complex and involves several steps:

1.  Analysis of the (planned) business: The first step is to check which permits are or will be required.
2. Submission of the application: The application must contain all the necessary documents and information, such as business plans, internal control systems and evidence of the professional suitability of the management. Applications for a license from BaFin are usually very extensive and detailed. Due to the serious consequences of errors, it is advisable to proceed thoroughly when preparing the application.
3.  Examination by BaFin: BaFin examines the application for completeness and checks whether the requirements for granting the license have been met.
4. Decision: After a thorough examination, BaFin decides whether to grant or reject the license. The entire process can take several months, or longer.

What are the obligations under a BaFin License?

Companies that have been granted a BaFin License must comply with a considerable number of obligations, including

• Reporting obligations: Regular notifications, disclosures, and reports to BaFin, such as reports on capitalization.
• Proper business organization: There are variety of regulations that govern the business organization. This includes, for example, the requirement for effective and appropriate risk management or precautions to protect IT systems.
• Customer protection: Ensuring the protection of customers, for example through the secure investment of customer funds.
• Money laundering: As a company in the financial services sector, money laundering regulations are applicable.

What are the costs of a BaFin License?

The costs for a BaFin License can vary considerably, depending on the type of license and the size of the company. They include application fees, ongoing supervisory costs, costs for setting up internal systems and, where applicable, external consultancy costs. The application fee can range from a few thousand to several tens of thousands of euros, while the ongoing costs depend heavily on the specific requirements and the complexity of the business model.

Thorough preparation and advice from experts can help to minimize costs and effort and make the licensing process a success.

• Dr. Martin-Gross Langenhoff
• Dr. Carsten Lösing