On the national level, the new EU Financial Markets Directive (MiFID II, [Directive 2014/65/EU]) has been implemented in the Securities Supervisions Act 2018 (Wertpapieraufsichtsgesetz, WAG 2018), among others, which will come into force on 3 January 2018. MiFID II provides for stricter requirements, above all for investor protection, and stricter transparency and information obligations for investment service providers (such as banks, investment companies, issuers). In implementing MiFID II, the WAG 2018 features the following key changes as compared to the WAG 2007:

Pursuant to section 55 WAG 2018, legal entities providing investment services have to ensure that investors have the necessary knowledge and experience in respect of the investments they make. In addition, section 48 WAG 2018 stipulates that legal entities providing investment advice must, in due time before providing such advice, disclose to clients, among other things, whether such advice is being provided independently. Where investment advice and portfolio management is provided on an independent basis, the legal entity is prohibited from accepting and keeping any benefits offered by third parties (in particular by issuers or product providers). However, this does not apply to minor non-monetary benefits; such benefits must be disclosed to clients and be capable of enhancing the quality of the service provided. Also, non-monetary benefits must not impair the ability of the legal entity to act in the best interest of their clients.

A key new feature in investment advice scenarios is that the person providing such advice has to document in how far the proposed product is suitable for the respective client. Pursuant to section 60 (2) WAG 2018, the person providing investment advice must deliver to the client a suitability statement on a durable medium prior to carrying out the transaction. Such statement must contain information about the advice provided as well as on how such advice was matched to the retail client’s preferences, objectives and other characteristics.

Pursuant to section 33 (2) WAG 2018, legal entities must also record telephone conversations or electronic communications. Such recordings have to be retained for five years and be made available to clients upon request. In addition, MiFID II provides for an increased level of cost transparency. Legal entities must inform their clients about all costs and associated charges relating to the investment services and financial instruments.

With a view to stricter product monitoring obligations, the explanatory notes on section 31 WAG 2018 make it clear that such obligations have to be met only in the case of “active marketing activities”. Active marketing activities include, for instance, when an adviser contacts the client in order to fix a date for a meeting for the purpose of providing investment advice and financial instruments are purchased during such meeting. On the other hand, merely passive marketing means that the clients themselves – without solicitation by the legal entity – ask for certain financial instruments. What is more, the legal entity must define a target market for each financial instrument within the scope of comprehensive product approval and monitoring (product governance). Pursuant to section 30 (10) WAG 2018, the product approval process must ensure that all relevant risks for such identified target market are assessed and that the intended distribution strategy is consistent with the identified target market.

Investment service providers have until January 2018 to adapt their own internal processes and systems to the new legislative framework.