BaFin in Sweat: Powers of German finance regulator beefed up after Wirecard failings

March 14, 2021

3 min read

Sign up to our mailing list! ūüĎá

What's going on here?

BaFin, Germany’s regulatory body for finance, is set to undergo a wide-ranging reform package to beef up its supervisory powers in light of its deficient handling of the Wirecard fraud.

What does this mean?

BaFin has been criticised for how it responded to the fraudulent scandal involving Wirecard, whereby ‚ā¨1.9bn was ‚Äúmissing‚ÄĚ from the FinTech company‚Äôs accounts in Singapore (to see our article on that, click here). Critics say that BaFin failed on three counts: it reacted too slowly to reports of suspected fraud, wrongly targeted the people who exposed Wirecard, and withheld information from the EU‚Äôs finance watchdog, ESMA. As a result, Germany‚Äôs Finance Minister has announced a seven-point reform package for BaFin. It is hoped that these will improve its ability to deal effectively with tip-offs about fraudulent activity at companies.

What's the big picture effect?

This story shows how a regulator’s supervisory duties can conflict with an interest in maintaining economic stability. When public reports of suspected fraud at Wirecard began to materialise, Wirecard’s share price began to fall. The downwards trend sped up as a result of short-selling Wirecard stock. Short-selling is basically a bet that a company’s share price will continue to fall; short-sellers make a profit by borrowing X shares at a certain price, purchasing X shares at a cheaper price, returning X shares to the borrower at the original price and pocketing the difference. Instead of BaFin focusing on investigating Wirecard, it decided to place a ban on short-selling its stock. This was founded on concerns that this practice would destabilise the whole German economy.

As a result, Germany wants to improve BaFin‚Äôs ability to undertake a forensic investigation when alerted to concrete tip-offs. Currently, BaFin only intervenes after red flags are raised by a company‚Äôs private auditor. In this case, it was EY, who failed to detect irregularities among Wirecard‚Äôs accounts in Singapore. Germany‚Äôs Finance Minister, Olaf Scholz, says that the reforms will allow BaFin to ‚Äúdirectly intervene‚ÄĚ rather than having to rely on private audits to raise the alarm. Scholz also wants BaFin to have more control rights over the financial reports of companies without banking divisions. Payment processing companies, such as Wirecard, PayPal and others, are regulated as technology companies rather than ‚Äúfinancial services operators‚ÄĚ, i.e. banks. Yet, Wirecard was relied upon by many millions of customers, as well as start-up banks, to process transactions. A lack of financial regulation, therefore, seems amiss.

The centrepiece of this reform is a new ‚Äúfocused oversight body‚ÄĚ to supervise complex companies. Presently, such companies are regulated by a range of supervisory bodies each responsible for different sectors and issues, such as the banking sector, financial markets and money laundering. A single body will help to prevent companies ‚Äėslipping through the net‚Äô. The package also includes a new BaFin task force that can investigate companies suspected of financial irregularities, more auditors to assist in probes and a commitment to take information from whistleblowers more seriously.

These seven reforms to BaFin will enable the regulator to intervene quicker, more directly and on the basis of less weighty evidence. Yet, beefing up BaFin is arguably insufficient to prevent similar crises without proper regulation of payment processor FinTechs as financial services companies.

Report written by Arun Allen

Share this now!

Check out our recent reports!