“The hardest part of having an idea is not having it, but knowing whether it’s any good.” (Chris Howland)
Payment processing for time-value accounts or for “contractual portability”: Innovative initiators in the field of occupational pension schemes (bAV – betriebliche Altersversorgung) and the administration of time-value accounts have brought models to market in which they themselves manage the money “saved” by employees (financial portfolio management) or pass it on (money remittance business) and account for it.
A typical model is one in which the initiator offers to ‘collect’ the contributions from the current employer – and perhaps also from a new employer – in order to secure portability, and then to forward them to the respective product provider (life insurance policy, investment fund, etc.) so as to simplify the payment flows. Similar models can also arise with providers of working-time accounts.
Risk of misappropriation: Naturally, this service also costs something – the initiator deducts a few euros for administration. It becomes particularly delicate when these additional costs are not transparent to the employer and the employee, because a public prosecutor could later take the view that the “inexperience” of the contracting parties was exploited here.
The breach of statutory prohibitions (for example, the failure to provide complete insolvency protection) or of statutory requirements (for example, the principle of “equal value”) can have similar consequences. This category also includes so-called “kick-backs”, in which fees or commissions are charged and shared “behind the scenes” in a way that is not initially apparent to the investor.
The risk of unlawful money remittance business: Matters become especially tricky when the collection of funds and their onward transfer require a licence.
The Fourth Financial Market Promotion Act (Viertes Finanzmarktförderungsgesetz), for instance, stipulated that, pursuant to section 1(1a) sentence 2 no. 6 KWG (German Banking Act), the “execution of payment orders” constitutes a financial service requiring authorisation. For money remittance business it makes no difference whether settlement takes place partly in cash or solely as book money via bank accounts.
Safeguarding through enquiries with the authorities: In the area of working-time accounts and occupational pension schemes, a variety of permits may be required – permits that are sometimes not held by the initiators and their partners. For example, the question may arise as to whether:
a licence for debt-collection business exists (enquiry with the competent Local Court (Amtsgericht) and the trade office (Gewerbeamt));
authorisation to provide tax or legal advice exists (enquiry with the President of the competent Local Court and the local Bar Association (Rechtsanwaltskammer));
a licence for financial portfolio management or money remittance business exists (enquiry with BaFin (Federal Financial Supervisory Authority)).
Caution – because of “risks and side effects”: As a rule, such contracts that breach statutory prohibitions are null and void, section 134 BGB (German Civil Code). There is then often the further threat of compensation in the form of an unwinding of the transaction. Professional liability insurance will provide no cover for such losses.
The financial advisor’s duty to check initiators’ concepts for plausibility before recommending a placement is therefore in the interests of both the clients and their advisors.
*by Johannes Fiala, Lawyer (Munich), Mediator (Univ.), MBA Financial Services (Univ. of Wales), MM (Univ.), Certified Financial and Investment Advisor (A.F.A.), EC Expert (C.I.F.E.), Lecturer (Univ. of Cooperative Education), Banker
