BaFin guidelines for retail banking products impose compliance checklist on manufacturers and distributors | Reed Smith


[co-author: Felicitas Scriba]

German financial regulatory authorities have implemented new disclosure and monitoring obligations to align the country’s retail banking system with the European Banking Authority (EBA) guidelines.

The German Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) recently issued a proposed circular aimed at protecting the interests, objectives and characteristics of consumers in accordance with European product governance and supervision guidelines. The circular may have an impact and impose new compliance obligations on manufacturers. and distributors.

BaFin is accepting comments on the circular until February 28, 2023. The circular goes into effect on May 1, 2023. It will apply to products placed on the market after May 1, as well as all products already are on the market and have undergone significant changes. from the effective date of the circular.


The European Banking Authority (EBA) issued guidelines on the supervision and governance of retail banking products for product manufacturers and distributors in 2015.

Initially there were doubts about a sufficient basis in European law, which is why BaFin did not initially adopt the guidelines in its German supervisory practice.

This has now changed with the ruling of the European Court of Justice (ECJ) of July 15, 2021, which clarified the validity of the guidelines. Following the CJEU ruling, BaFin is now implementing these guidelines in a circular closely aligned with the initial guidelines.

The circular is based on Section 15a (1) of the German Banking Act (KWG) and Section 27 (1) of the German Payment Services Supervision Act (ZAG). Regulates banking products (in particular, real estate), consumer loan agreements, deposit products and payment services) and organizational requirements for internal control systems of institutions as defined by KWG and ZAG . The standards are related to internal processes, functions and strategies of a product, based on its entire life cycle. Its objective is to ensure the interests, objectives and characteristics of the target market, that is, the consumers for whom each financial product was designed. The guidelines impose specific rules on both product manufacturers and product distributors, and regulate the disclosure and monitoring obligations of both.

What the regulations mean for product manufacturers

For the purposes of the Circular, product manufacturers are defined as companies that design products to offer to consumers, and are also subject to specific KWG and ZAG categories listed in the Circular. Under the circular, they:

  • They are encouraged to establish, implement and review arrangements for effective product monitoring and control, which should be commensurate with the nature, scale and complexity of each product manufacturer’s activities. In particular, they must respond to the interests, objectives and characteristics of consumers, to avoid possible harm to them and minimize conflicts of interest as far as possible.
  • You must perform an internal control function on a regular basis. This involves ensuring that the rules are properly integrated, based on the approval of the product manufacturer’s governing body. Top management is responsible for continuous competent monitoring and optimization.
  • You must design procedures and product monitoring according to and in coordination with the target market. To do this, they must first determine the target market and ensure that the product is compatible with the interests, objectives and characteristics of each market. The regulations require product manufacturers to conduct product tests to assess how a given product might affect consumers.
  • You must recognize: once a product is launched, the ultimate responsibility for monitoring the compatibility of that product with the interests, goals and characteristics of the consumer rests with the manufacturer of the product. They will be obliged to take the necessary countermeasures as soon as a problem arises with the product or with the control of the imposed product. Product manufacturers must also inform product distributors of the problem immediately.
  • You must select a suitable distribution channel for each target market. They must identify prudent and adequately trained product distributors for the target market. Product manufacturers must monitor the activities of distributors to ensure that products are sold only in the defined target market and that they are sold outside the target market only in exceptional and justified cases.
  • You will be required to provide product distributors with complete information about the respective product. This includes descriptions of the main features, risks and limitations, as well as the total price of the product. This product information must be clear, concise, and up-to-date in order for distributors of the product to understand the product, identify the appropriate target market, and thus successfully conduct business.

What the regulations mean for product distributors

Product distributors, as defined in the circular, are companies that offer and/or sell the product to consumers. This includes divisions of the product manufacturer that are not involved in design and serve solely to market a product. Product distributors:

  • You must establish, implement and review internal rules for effective product monitoring and control, specifically tailored to your own size and areas of responsibility. These rules exist to protect consumers in accordance with the laws that govern product manufacturers. These internal rules must be reviewed and updated periodically.
  • They are subject to a documentation obligation, which means manufacturers must adequately document the steps they took to monitor the product, and these documents must be retained for at least five years and submitted to the federal agency or product manufacturer for tracking purposes. audit, upon request.
  • The rules must be integrated into the procedures and controls already carried out to date, and where appropriate, the governing body must grant the necessary approvals for this purpose.
  • You must demonstrate a solid knowledge of the relevant target market. This will be based on the information provided by the manufacturers of the product from which the distributors will have to determine if a consumer belongs to the target market of the product.
  • You must develop your own information base, in addition to using information provided by product manufacturers, to determine the target market for a product. They should proactively engage with manufacturers when, exceptionally, they are considering offering the product to a consumer who does not fall within the identified target demographic. Distributors must report any potential problems between the product and the target market as soon as it is identified.

If product manufacturers or distributors outsource some or all of their activities to third parties, they should ensure that this happens in a manner that is compatible with outsourcing frameworks. In the case of subcontracting, the final responsibility rests with the higher level of performance of the institution that operates the subcontracting. Individual consumers are not subject to the Circular.

Customer Alert 2023-025


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