Following a nine-month monitoring phase, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) has decided not to prohibit the distribution of credit-linked notes to retail clients. The Supervisory Authority monitored the issuance and distribution of these products intensively until the end of September 2017, and established that the voluntary commitment made by the German Banking Industry Committee (DK) and the German Derivatives Association (DDV) was broadly adhered to and protected retail investors sufficiently.

Due to investor protection concerns, at the end of July 2016 BaFin announced a prohibition of the marketing, distribution and sale of certificates linked to creditworthiness (formerly known as “Bonitätsanleihen” now called “bonitätsabhängige Schuldverschreibungen”) and gave those in the certificates industry the opportunity to state their position. BaFin based the intended prohibition of the marketing, distribution and sale of the credit-linked notes on section 4b (1) no. 1 in conjunction with section 2 no. 1a 1st alternative of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG). BaFin holds that the distribution, marketing and sale of credit-linked notes as defined above to retail clients raises significant investor protection concerns because they are (i) highly complex products, (ii) have a misleading product name and description, (iii) are part of a market dominated by professional players and (iv) there is an inherent risk of conflict.

In response, in mid-December 2016 the DK and the DDV announced a voluntary self-commitment for the issuance and distribution of credit-linked notes. The most important restriction is that credit linked notes will only be issued with a fixed coupon, a simple structure (single underlying reference entities and multiple reference entities only if used for diversification purposes) and a minimum denomination of EUR 10,000. Consequently, BaFin initially deferred the planned prohibition. Now that its intensive monitoring phase has been concluded, BaFin has made a final decision not to introduce a prohibition, but will continue to review adherence to the voluntary commitment as part of its market and product supervision

With respect to the principles regarding issuance, BaFin carried out checks on, among other things, securities prospectuses and product information sheets and inspected advertising and information material as well as product descriptions on the issuers’ websites. In addition, BaFin carried out on-site inspections to ascertain whether the principles regarding distribution were being observed, and to this end evaluated investment advice minutes, among other things. While it did find contraventions in isolated cases, these were not of a systemic nature, but rather due to individual wrongdoing.