The case of the now insolvent payment service provider Wirecard has exposed fundamental weaknesses in German securities market supervision. To strengthen the performance and credibility of the Federal Financial Supervisory Authority (BaFin), lawyers and financial economists propose in a White Paper published by the Leibniz Institute for Financial Research SAFE that BaFin should be insulated from government instructions from the Federal Ministry of Finance and instead be tied more closely to the German Bundestag.
“Re-establishing BaFin as an independent authority would send a clear signal to the capital and financial markets in Germany and Europe and would counteract the enormous reputational damage after Wirecard and currently after the insolvency of Greensill Bank,” says SAFE Director Jan Pieter Krahnen, one of the authors of the paper. “Transforming BaFin into an authority accountable to parliament is an important step to ensure that supervision is exercised effectively and impartially. Last but not least, this will strengthen BaFin’s international reputation,” adds Ann-Katrin Kaufhold, professor of constitutional and administrative law at Ludwig Maximilian University in Munich and also author of the SAFE White Paper.
Align BaFin with international standards
In detail, the reform proposal envisages amending the Financial Services Supervision Act (FinDAG) to the effect that BaFin, as the securities market supervisor, is no longer overseen by the Federal Ministry of Finance. Accordingly, the securities market supervisor is to be insulated from instructions from the ministry, both with regard to individual cases and general instructions in the area of securities market supervision. To compensate for the loss of democratic legitimacy that inevitably accompanies dissociating, BaFin should firstly be required to report directly to the Bundestag on an annual basis and to answer questions from members of parliament on these reports. Second, the authors of the SAFE White Paper propose that two international representatives from other securities market supervisors be appointed to BaFin’s administrative council. “It is not necessary to subject BaFin to instructions from the executive branch to ensure adequate democratic accountability,” says Ann-Katrin Kaufhold, “internationally, this is even extremely unusual.” In the U.S., for example, the government has no right to influence individual oversight processes or enforcement decisions of the U.S. Securities and Exchange Commission (SEC).
According to the researchers, BaFin being subject to government control is a gateway for political influence that goes against the purposes of securities market supervision and undermines BaFin’s credibility. "Abolishing the right to issue instructions would put securities supervision on a par with banking supervision, which already operates independently in important areas," says Jan Krahnen.