Asset management: creative financial distribution without a licence and without financial supervision

– Products and concepts for formerly licensed intermediaries, brokers, tipsters and advisors –


Investors lose up to more than €40 billion every year because they did not really understand the financial products sold to them – or were the victim of fraud. It is typical that even formerly unsuspicious competence bearers or their financial house changed their business policy, and the trust of the customers led to a “deception”.


Up to more than half a million intermediaries and advisers without a licence

In 2007 at the latest, the legislator began to increasingly regulate the free brokerage of financial products. A good reputation, liability insurance, proven expertise, the obligation to hand over a wealth of documents to the interested party, including documentation, are all part of the standard programme in financial sales. This is no longer a matter of course for salaried advisors at financial institutions.

Hundreds of thousands of independent agents, brokers, tipsters and advisors have since withdrawn from the profession – another group are so-called “old hands” who were spared the proof of expertise in many cases, but as a species will die out as surely as the dodo in the medium term anyway. The new § 34 f IV GewO also massively restricts the possibilities of acting as a tipster or sub-broker since 01.01.2013.


Some agents have slipped under a so-called liability umbrella, have parked their portfolios with pools, and are surprised when, in the event of a claim, they do not even know where and with what gaps in cover their liability insurance exists. In addition, the portfolios – in the event of the pool going bust – turn out to be fat loot for the insolvency administrator, because the mere promise of insolvency protection to the intermediary was in the end often only an incorrect and non-binding declaration of knowledge. This is also one of the causes of involuntary professional abandonment.


Business model of the association, a foundation or a non-profit GmbH as a sales platform

For example, an association may well offer financial products to its members, for example without commission, premium or brokerage. This is then advertised as a net condition, net tariff or free of issue surcharges. If then rarely enough a consultation is additionally desired, the customer can buy it with a commercial enterprise with existing permission for example against fee.

However, if commissions do flow somewhere, for which one then receives “vouchers for advice on call” or is later reimbursed for a perhaps unavoidable commission due to the lack of advice, the Federal Financial Supervisory Authority (BaFin) will take an interest – perhaps ordering a transaction to be wound up, because it would have required a licence from BaFin in accordance with the German Banking Act (KWG).


Packaging financial instruments in an insurance policy

Anyone who brokers financial instruments or the conclusion of new insurance policies requires a licence. On the other hand, no licence is required for the brokerage of used policies, so that a market has already developed for buying them up – combined with betting on the early death of the insured persons. In conjunction with a trustee in Bermuda or Belize, such offers can also be used as a pyramid scheme that is often discovered too late. In the case of suitable used policies, the insurer can later acquire (or have acquired) any financial instruments for the new policyholder. Even a property can be put into a second hand policy.

Basically, a simple “1-euro policy with daily allowance” is sufficient for the time being. In the case of such models, there is then no need for large prospectuses, licences for the distribution of e.g. closed-end investments, broker training and licences. There are no obligations to provide advice on the financial products underpinning the unit-linked policy, not even in the case of the initial sale of such policies, because it is the insurer, not the policyholder, who acquires the funds. Nor are there any reporting obligations on the part of intermediaries or insurers vis-à-vis the tax authorities in the case of the acquisition of second-hand policies with day registration. In this way, any regulated financial products can be sold in the form of a fund policy without the need for costly consulting obligations and approvals.


Banking secrecy and insurance secrecy via trustees

If a reliable trustee manages the policy rights, not even the insurer abroad needs to know who the secondary market buyer of the insurance policy is. For it is only internally that the policyholder – e.g. a financial institution abroad – has assigned the rights to the policy together with the policy itself to the trustee, which only the trustee as administrator should notify to the insurer without having to disclose the reasons for such an assignment.

The buyer, on the other hand, does not have to act as a new policyholder – this is not common practice in the secondary market business either. In this way, asset protection can (only) be designed in compliance with the tax and legal framework conditions (mandatory) at home and abroad, but also a regulation for one’s own estate can be found.


Family Office Solutions

In particular, credit institutions and some other specially licensed asset managers offer their clients so-called family office solutions for the management of larger private assets. Tax consultants, lawyers and auditors have already been active in this field, and later had to realize that they do not have a license for it and will not get one.


However, a family office can be set up by anyone – without any licensing – for their own family assets by founding their own asset management company. This can mean a significant tax saving for income tax and inheritance tax. If experts who manage the assets of their “employer” in financial instruments are then employed, they do not require a licence under the KWG. “Their activity is attributed to the employer. The latter, acting through the employee, engages in own-account transactions not subject to authorisation within the meaning of section 1(1a) sentence 3 of the KWG pursuant to the exemption provision in section 2(6) sentence 1 no. 14 of the KWG.”

Employees are privileged in many respects from regulations with regard to their employer, and are therefore allowed, for example, to give him legal advice without restriction, or as employees of an insurer to sell his insurance policies even without a licence. At times, such a family office will be an alternative to insurance shells, foundations, trust & co.


by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm


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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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