Today, the Finance Committee of the German Bundestag is dealing in a public hearing with the Federal Government's legislative proposal to strengthen financial market integrity (FISG). Jan Krahnen, Director of the Leibniz Institute for Financial Research SAFE, welcomes the intention to reform and recognizes positive designs, especially for auditing, but considers the central proposals on the mandate and independence of the Federal Financial Supervisory Authority (BaFin) to be inadequate in essential parts, not purposeful and not far-reaching enough.
The proposals made by Krahnen are based on an expertise on the Wirecard case commissioned by the European Parliament and submitted by an international research team around SAFE. “A smart redesign of the law holds the chance of rehabilitating market supervision in Germany,” Krahnen explains in an official statement on the FISG proposal (available in German language only). In his view, the draft law fails to implement three key aspects of a necessary reorganization of BaFin: the authority should be given clear responsibility for all examination and enforcement tasks, be able to act independently of a ministry in its day-to-day business, and be redesigned with foresight in view of a single European securities market supervision.
“BaFin is currently only granted the right to act independently in serious individual cases, so-called cause examinations,” says Krahnen. The much more frequent regular examinations, on the other hand, are to continue to be carried out outside BaFin by the German Financial Reporting Enforcement Panel (FREP). In the SAFE director's view, however, this arrangement is counterproductive; rather, it would work the other way around: “BaFin conducts the regular audits, develops and maintains a high level of audit expertise, but in special situations can call on special external audit expertise or even an accounting review body organized under private law.”
Make BaFin more independent and European
In addition, the integration of BaFin into a coordination hierarchy of the German Federal Ministry of Finance also proves to be disadvantageous. “This almost inevitably leads to a harmful conflict of objectives,” Krahnen argues. In the Wirecard case, for example, the political goal of strengthening German, internationally successful fintechs collided with the goals of supervision oriented toward market integrity and financial stability. “The increased independence of BaFin must be balanced with more accountability to democratically legitimized institutions such as the parliament,” he says.
Finally, Wirecard also serves as an object lesson for the mismatch between historically evolved capital markets in individual EU member states and the establishment of a single, integrated and internationally recognized securities market. “While particularly international investors see Europe as a cohesive economic area, this area is fragmenting in regulatory and practical terms into many small markets along national borders,” Krahnen notes. “I therefore propose the creation of a responsible securities market supervisory authority at the European level, which could be called a European Single Capital Market Supervisor. The rules of a FISG should already refer to this European further development and prepare BaFin for it.” European market supervision does not appear in the FISG draft so far.