Provision – funds as an investment trap also for the generation 80-plus

At times – fortunately not universally – it happens that investors in asset matters do not necessarily experience the disposition care for their assets that should obviously be readily apparent. So in the case described. Then it is important to have the script of a reversal consultation in mind. Red.

The inglorious case: When Rosalinde von Altenthann (name changed) had turned 85, she was approached by the advisor of her major bank. According to the advice sheet, the investment horizon is estimated at more than twelve years, and so she is sold a closed-end fund as an “additional retirement provision” – term 20 years. According to the internal advice sheet, this “portfolio optimisation” is also carried out “from a tax perspective” – although the pensioner pays virtually no tax.

The successor to this painless bank advisor, a Sicilian, does no better – he transfers the remaining portfolio assets into certificates and derivatives. If the now 93-year-old investor is lucky, she will get that money back (minus usual commissions, including kickbacks around eight percent) around 2013.

Quite naturally the pensioner cannot remember that it was cleared up over the fact that apart from an issue surcharge (Agio called) to the fund company also an internal commission (also called Kickback) of the fund company to the mediating bank flowed.

After the paid-in capital was invested for about 20 years in a non-cancellable manner, the customer did not receive an “old-age provision” at all. Fact was “riveting advice” along the lines of “you won’t see your money again in your lifetime – and your heirs will be able to wait until you would have been about 105 years old.”

Investment with total loss risk -obviously without prospectus delivery

Closed-end investments are associated with an entrepreneurial risk, which can often extend to a total loss. However, the counselor documented a “limited willingness to take risks” in the counseling sheet. In addition it comes that the Anlegerin cannot remember to have ever received – also not before the subscription of this participation – a folder.

Unethical injury

In a complaint (LG Munich I, Az.: 28 O 16819/10) against the bank writes the legal representative, attorney Thomas Keppel: “Such investment recommendations fulfil without further ado the facts of an intentional immoral damage in the sense of § 826 BGB, since they are justifiable by nothing else than the commission interest of the bank and disregard the obligation to an investor and object-fair consultation completely.”

Kickbacks, retrocessions or rebates

Increasing one’s own income “behind the back and at the expense of the customer” is the rule with almost all brokered open-ended and closed-end funds. Credit institutions then like to hide behind the protective claim that they were unaware of any illegality.

The Stuttgart Higher Regional Court (judgment of 16 March 2011, ref.: 9 U 129/10) countered: “This representation is untenable against the background of a completely clear legal situation including the explanations in the standard commentaries. Already the decision to enter into commission agreements with the inherent intention not to pass on the commissions received to the customers raises questions of the criminal liability of the defendant’s executive bodies (cf. already BGH, judgement of 28 February 1989, XI ZR 70/88, marginal no. 30; decision of 29 June 2010, ref.: XI ZR 308/09, marginal no. 5). This applies irrespective of the question whether so-called genuine rebates or other internal commissions are involved.”

Up to over 90 percent kickback to the bank

Of the fund company’s costs of 3.75 percent front-end load and 1.25 percent management fee, 3.4 percent were returned to the bank on a one-off basis and 0.41 percent on an ongoing basis. The bank would have had to hand these over to the investor in the case of such a financial commission transaction as advantages obtained from third parties – the fund company – according to the clear legal position. However, the bank – reinforced by a letter from its association – said that the fund company was not such a third party at all. It did not occur to her that the bank and the fund company were different legal entities and that mutual payments were also always properly accounted for, nor did it occur to her to question the contradictions, which are obvious even to a legal layman.

Question about BaFin supervision

Associations of banks and insurance companies play an inglorious role in encouraging banks and insurance companies in legally untenable views. This does not always affect supervisory issues, because a certain scope of misconduct is required for BaFin to intervene, which goes beyond legal issues relating only to the individual customer.

For others, BaFin refers customers to the ordinary courts even in the case of systematic errors – such as ineffective premium adjustments in health insurance. A complaint to BaFin is merely a suggestion for BaFin to take action and a source of information for the supervisory authority. The demise of banks and insurance companies in the interest of a large number of also justified customer claims contradicts the supervisory objectives and is also not in the interest of the customers themselves. Thus, the individual remains dependent on enforcing his claims in court himself.

BaFin has incompetent board members dismissed

This means that financial institutions can, for the most part, discriminate against their customers – including embezzlement and fraud – without fear of regulatory action. In principle, it would be possible for BaFin to instruct the supervised banks how they should behave. If necessary, BaFin would have to revoke the licence for the financial commission business, which is subject to supervision, demand the dismissal of incompetent board members or even withdraw the entire banking licence. It would not be the first time that serious doubts about the qualifications of a board member had led to his dismissal by BaFin and even replacement of the entire board by a state commissioner.

bank bailout

However, prosecutors are also bound by instructions, so one should ask the question about political interests. In view of the billions spent on rescuing ailing banks from taxpayers’ money, one may ask whether the inactivity of BaFin, which is subordinate to the Ministry of Finance, is systematic. After all, without the kickbacks that were illegally collected and not passed on to investors, much more taxpayer money would be needed to bail out banks.

Also, the state is possibly directly interested in the profitability of rescued banks at the expense of investors through its participation in them – demands for legally compliant behaviour including corresponding supervisory measures by BaFin would perhaps interfere with this, despite all the fundamentally good will there. After the investor may hope here hardly something, remains to him only the legal way and hopefully good lawyers and experts, who know themselves with the topics.

Banking Tip

Brokering funds to the bank in exchange for commissions would be quite easy if you wrapped it all up with a unit-linked life insurance policy. If so, the same objective would be achieved, except that it would now be insurance brokerage, for which the bank would be allowed to keep the insurer’s commission, even if the insurer financed it out of its kickbacks from the fund company – rather than a financial commission business.

This view may also prove to be wrong in court at some point, but the current prevailing legal opinion at least states that the bank is not liable to prosecution for intent.

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

by courtesy of

www.kreditwesen.de (published in Vermögen & Steuern 8/2011, page 32-33)

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

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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