Financial distribution without a licence and without supervision?

In 2007 at the latest, we began to regulate the free brokerage of financial products to a greater extent. Good reputation, liability insurance, proven expertise, the obligation to provide extensive information and documentation are standard. Some “old hands” have saved themselves into the new era without a certificate of competence. Since this year, financial investment intermediaries have also been regulated. This further limits the possibilities to operate without a licence.

Problem:

Despite all the regulation, however, financial sales without a licence still occur, including in the insurance sector.
Thus, an association can offer financial products to its members – this is not a trade, because the offer is directed at the limited circle of members and there is no direct appearance on the market. The association itself may perform in public. This is then advertised as a net tariff, special condition or offer free of issue surcharges – i.e. often as a product without remuneration. This is highly efficient for product providers.

If then – which is rarely enough the case – additionally also consultation is wished, the customer may not actually get this in the association. The right way: He looks for a licensed intermediary or fee-based advisor and pays for his services himself. However, it usually works out differently: the insurer offers the association commissions somewhere because there is no net product. A licensed intermediary or a trustee receives the remuneration. In return, the association member then receives “vouchers for advice on call” from the adviser or intermediary.

Or reimbursed by the consultant or the association later without consulting the commission. From a purely legal point of view, the Federal Agency must then
for Financial Services Supervision (Bafin) will be interested in this and may even order a transaction to be wound up because the association lacks a licence to engage in deposit-taking business. Or on the authorization for financial transfer transactions. Nevertheless, well-known insurers use associations precisely for this purpose, often creating sales without a license – actually a scandal.

This is used in numerous associations: in consumer protection, promotion of old-age pensions, support of certain occupational groups or hobbies. Occasionally, the association then also concludes framework agreements with insurers and claims to be the policyholder. Thus, he may, without admission, convey his own offer to the members, who merely become insured persons.

Even if this is done without compensation, it is actually prohibited without approval. Whether consumer centres, for example, require registration as insurance advisors has not yet been clarified by the courts. So they are outside the law.

A second problem area:

Anyone who brokers the purchase of new insurance policies needs to be licensed. On the other hand, no licence is required for the brokerage of used policies. In the case of used policies, the insurer can later acquire any financial instruments for the new policyholder. Basically, a “1-euro policy with daily allowance” is sufficient for the time being. Such models eliminate the need for prospectuses, distribution licenses and intermediary licensing. This means that all regulated financial products can be offered to customers as fund policies without the need for costly advice and approval.

A third inconsistency:

Not only banks and asset managers are allowed to offer family office solutions for the management of larger private assets, but also – without authorisation – the client himself if he establishes his own asset management firm. If experts who manage the assets of their “employer” in financial instruments are then employed, they do not need a permit.
The customer, acting through the employee, engages in own-account transactions that are not subject to authorisation under the exemption provision of Section 2 of the German Banking Act.

Bottom line:

It could well be that the legislator triggers a third wave of regulation in the next few years.

by Dr. Johannes Fiala

by courtesy of

www.portfolio-international.de

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Über den Autor

Dr. Johannes Fiala
PhD, MBA, MM

Dr. Johannes Fiala ist seit mehr als 25 Jahren als Jurist und Rechts­anwalt mit eigener Kanzlei in München tätig. Er beschäftigt sich unter anderem intensiv mit den Themen Immobilien­wirtschaft, Finanz­recht sowie Steuer- und Versicherungs­recht. Die zahl­reichen Stationen seines beruf­lichen Werde­gangs ermöglichen es ihm, für seine Mandanten ganz­heitlich beratend und im Streit­fall juristisch tätig zu werden.
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