Following the adoption of the Financial Market Integrity Strengthening Act (FISG) in June 2021, the German Federal Financial Supervisory Authority (BaFin) has meanwhile, according to its own information, either already implemented or is about to implement a large part of the measures envisaged in the FISG to reform the authority. Jan Pieter Krahnen, Director of the Leibniz Institute for Financial Research SAFE, comments on the matter as follows.
“With the new legislation, BaFin is taking important steps in the right direction, but it must be remembered that this does not yet ensure the desired finish line. It requires extended independence of the supervision of the authority superordinate Ministry of Finance.
In detail, it came as a positive surprise at today's press conference that a comprehensive modernization of BaFin is being sought, going beyond the changes to financial market supervision that have been much discussed in public. For example, a newly created Focus Supervision unit will bundle the complex supervisory issues of market, insurance, and banking supervision. This is the first time that the entire conceptual knowledge of three-sector supervision has been brought together in one place – and thus also made accessible to the supervisory management. There are also plans to set up a group of up to 60 experts in the field of auditing, which will help to catch up with the international discussion from a technical point of view as well. In times of globally active (financial) companies, such a build-up of expertise is overdue. It is good that it is now to happen.
The final closure of the German Financial Reporting Enforcement Panel (FREP) must be seen as a major plus of the new FISG. This ends a striking case of ‘industry capture’, which had contributed significantly to the professional deficit of the supervisory authority in accounting issues.
However, it is the last mile that counts – and this provides for at least two more fundamental reform measures. The first is enforcement of BaFin's independence from instructions from a politically appointed ministry, in this case, the Ministry of Finance. An independent BaFin can decide for itself where to establish which areas of competence and where not to. And it is not exposed to the conflicts of interest that a ministry in charge of supervision can unfortunately hardly avoid.
In addition to independence from the Ministry of Finance, the German supervisory reform debate still completely lacks a reference to a European capital market in the future. What is needed here is clear leadership from a pan-European securities regulator that sets and enforces uniform standards and thus achieves the level of integrity and credibility that Europe so urgently needs to keep pace with international competition for capital and listings.”