06 Nov 2020

SAFE research team proposes comprehensive market and regulatory reforms following Wirecard case

International financial and legal researchers break down what politics can do to better protect markets and investors against corporate fraud in the future.

The case of the insolvent payment service provider Wirecard has revealed that the market and institutional oversight architecture against illegal corporate practices are incomplete. A number of political reforms are necessary to ensure market integrity and to better protect investors in the future. In addition to reforms for internal company controls and external auditing, these steps include a more powerful role for market supervisors at the German and European level.

An international team of financial and legal experts around the Leibniz Institute for Financial Research SAFE discloses these points in a report on the Wirecard case commissioned by the European Parliament.

"In our view, the Wirecard scandal and its enormous international resonance justify the urgent call for a comprehensive revision of the supervisory regulations for the capital markets in Germany and beyond in Europe," says SAFE Director Jan Pieter Krahnen, one of the authors of the report. "In order to ensure that markets are fair for all participants, we make suggestions on how the current supervision of listed companies can be improved," adds Loriana Pelizzon, head of the Financial Markets department at SAFE and also author of the report.

A common supervision for the single capital market in Europe

A key proposal of the experts around SAFE consists of equipping the German Federal Financial Supervisory Authority Bafin with far-reaching supervisory and enforcement powers. This strengthening of powers should be accompanied by a clear accountability of the Bafin for fulfilling its overarching mandate of market integrity and investor protection. In addition, the researchers believe it is appropriate to further subordinate the many member state supervisory authorities in Europe to a supranational institution that could take up its work as the European Single Capital Market Supervisor (ESCMS).

"The aim of these steps is to increase confidence in the functioning of the European capital market and thus ultimately to keep Europe attractive for national and international investors," summarizes Jan Krahnen.

Greater transparency and stricter rules

Among the proposed actions for policymakers is also to obtain more and earlier information regarding manipulation and fraud at listed companies. According to the report, this can be achieved, for example, through financial incentives for whistleblowers and a more relaxed attitude to short selling – supervisory authorities should not be able to prohibit short selling so easily.  At the same time, the liability of external accountants and auditors who scrutinize the company in question should be significantly increased. In this context, the experts also recommend that key figures, such as those of the German Auditors Oversight Body (AOB/APAS), which monitors the work of auditors, should be made public in order to ensure greater transparency for customers and investors.

The research team also advises that internal control departments of companies report directly to the supervisory board. In order to fundamentally strengthen the mandate of supervisory boards, listed companies should also be required to set up their own audit committee. The chairman of this committee should be a financial expert and independent, as should the majority of the members of the audit committee.

Finally, the report criticizes the legally regulated sharing of functions between state supervision and the private German Financial Reporting Enforcement Panel (FREP), which is considered to be the cause of the weakness of the securities market supervisory authority in Germany. Consequently, the mandate and the associated rights of investigation should be transferred back to the supervisory authority without delay.

Download SAFE White Paper No. 74: What are the wider supervisory implications of the Wirecard case?