Businesses wishing to offer financial services in Germany must apply for a banking licence. Explore what a banking licence is, how the application process works, what businesses need to consider and what the risks are of not applying for a licence.

What's in this article?

• What is a BaFin licence?
  
• Which organisation regulates and issues licences?
  
• Who needs to apply for a BaFin licence?
  
• What criteria are considered when issuing a BaFin licence?
  
• What format does the application process take?
  
• How much does a BaFin licence cost?
  
• What are the pros and cons of applying for a BaFin licence?
  
• What are the risks of not having a BaFin licence?
  

What is a BaFin licence?

BaFin stands for "Bundesanstalt für Finanzdienstleistungsaufsicht", the German Federal Financial Supervisory Authority, and its licences and banking licences represent official authorisation for companies to offer financial services and typical banking services, respectively. People also refer to it as a "BaFin permit" or "KWG" licence. KWG stands for "Kreditwesengesetz", the German Banking Act.

Section 32 (1) sentence 1 of the KWG stipulates the requirement for companies to hold a BaFin licence prior to commencing activities of this nature.

Which organisation regulates and issues these licences?

The competent authority for issuing a BaFin licence is the Federal Financial Supervisory Authority (BaFin) in Bonn, Germany. Prior to May 2002, this organisation was known as the Federal Banking Supervisory Office (BAKred). As part of a reform, the authority was merged with the federal supervisory authorities for securities trading (BAWe) and insurance (BAV) to form BaFin. As a central organisation, BaFin is responsible for supervising banks, financial services companies, insurers and securities traders.

With the rise in online trading, BaFin increasingly finds itself dealing with companies from the financial technology (fintech) sector. These include crowdfunding platforms, online marketplaces or companies dealing in virtual currencies, for example.

BaFin is an independent institution that is incorporated under public law, and is in turn subject to the legal and technical supervision of the Federal Ministry of Finance. BaFin is led by a board of directors, and is financed by fees and contributions which are charged to the companies and institutions under its supervision.

In line with its articles of incorporation, BaFin is not only responsible for the general supervision of banking and financial matters, but it's also responsible for the prevention of money laundering and the financing of terrorism. A further part of its goal is consumer protection. As the supervisory authority, BaFin monitors developments on the financial markets. Where the authority recognises negative trends, it introduces preventative measures to counteract such developments.

Who needs to apply for a BaFin licence?

The aforementioned Section 32 of the KWG defines the mandatory licence obligation for conventional banking transactions and financial services. By law, companies also need a BaFin licence if they collect money from multiple persons with the aim of investing it – on their behalf and to their benefit – as part of a defined investment strategy.

Where this takes the form of a managed investment fund, the management company simply needs to register with BaFin in accordance with Section 44, in conjunction with Section 2 (4) of the German Capital Investment Code (KAGB). A BaFin licence is not necessarily required.

The following businesses from the banking and financial sectors require a BaFin licence based on their business model:

• Banking transactions: The typical operations performed by a bank include receiving financial deposits and issuing loans. A BaFin licence is required for both. Whether an institution offers all standard banking operations or specialises in just one or two specific areas, it makes no difference – a licence is still required.
  
• Securities trading services: Businesses engaged exclusively in the management and sale of securities require a BaFin licence.
  
• Financial services: A BaFin licence is required for all transactions conducted with regard to leasing, asset management or other financial models.
  
• Cryptocurrency trading: The issuing, management and hedging of crypto assets or private cryptographic keys with the aim of holding, storing and transferring crypto assets are also subject to the BaFin licence.
  
• Payment services and e-money: In order to provide certain payment services or issue electronic money (e-money), businesses require authorisation in the form of a BaFin licence.
  
• Mixed or hybrid business models: Where a company already offers some of the aforementioned transactions from the areas of banking and financial services, and is considering offering further financial services, an additional BaFin licence may be required.
  

What criteria are considered when issuing a BaFin licence?

Modern-day banking and the financial world have changed dramatically in the last few decades. The rise in digitalisation and new online business models mean that credit is often issued more or less without any physical consideration. In the past, precious metals were predominantly used as collateral for credit risks.

Moreover, the global finance system has become considerably more complex due to the increase in international networks. The globalisation of financial transactions has led to a rise in prosperity. At the same time, the propensity for the finance world to suffer major crises has also increased. In order to protect customers, BaFin applies certain criteria very stringently when considering licence applications.

Reliable business management is one major requisite for approving a BaFin licence application. Management is considered to be reliable when it demonstrates the necessary technical expertise. In addition, management teams should also hold a certain level of experience. BaFin would consider a company's management to be unreliable if certain criminal acts had been levied against it, such as fraud or embezzlement, or similar breaches of applicable laws and regulations.

To obtain a BaFin licence, the applicant business needs to have a funded business plan, with a budget forecast for at least three years. This requirement also serves to protect customers. Ultimately, BaFin would like to know whether a company's business idea is viable (i.e. whether it will have the necessary capital for at least three years).

Finally, BaFin also considers whether a business will observe and implement the provisions of the Money Laundering Act. This might sound difficult, as no one can predict the future. But on a practical level, a business must be able to demonstrate in its application that it has functioning compliance provisions – in other words, an expressive, written commitment to comply with the law in the future.

What format does the application process take?

Applications for a BaFin licence must always be made in writing. In the case of limited liability corporations, the board of directors or management is responsible for applying on behalf of the business. With a commercial partnership, each personally liable partner needs to submit a written application.

In addition to the criteria set out above, a specific minimum level of capital needs to be maintained. This starts at €50,000 for financial services. For companies in the securities trading and "pfandbrief" bond sectors, this sum rises to a maximum of €25 million.

Where a company fulfils the key criteria set out in Section 32 of the KWG, it has an enforceable legal claim to be granted a BaFin licence. However, the authority has the final say. With modern online business models in particular, such as fintech companies, businesses must be prepared to handle any queries from BaFin. To this end, businesses should apply great care and attention when completing their written applications.

As a rule, BaFin requires 6 to 12 months to check the submitted documents and to approve the relevant BaFin licence.

How much does a BaFin licence cost?

BaFin charges a licence fee. This is calculated differently depending on the applicant's business model.

• Fees for businesses providing financial services amount to between €2,000 and €17,000.
  
• Fees for businesses offering typical banking services are between €5,000 and €20,000.
  

In addition to the BaFin licence fee, other costs may arise, such as for legal advice, to give just one example. These are normally calculated on the basis of time spent on the application. Tip: ask for an overall price up front. Some law firms will offer a fixed-price service for BaFin licence applications.

What are the pros and cons of applying for a BaFin licence?

The most important benefit of holding a BaFin licence is legal security. With a banking licence, all financial transactions are automatically BaFin-compliant.

It also represents a quasi seal of approval, telling the outside world that a business places great value on customer protection. With a German banking licence, businesses also gain access to the EU market, as the licence also applies in the European Union. This opens up a marketplace with more than 500 million customers.

Applying for a BaFin licence requires time, money and diligence. The legal consequences of failing to acquire the relevant banking licence can result in significantly higher costs. For one, it may lead to sanctions in the form of written warnings, fines, compensation claims or – in particularly severe cases – custodial sentences. And further, the lack of a BaFin licence jeopardises the entire company.

What are the risks of not having a BaFin licence?

In principle, businesses subject to mandatory licencing take on a significant risk without a BaFin licence. The sanctions range from a simple fine to criminal investigations.

Even negligence can result in a custodial sentence of up to three years, depending on the severity of the offence. In addition, BaFin also reserves the right to partially or wholly ban the business from operating.

In terms of civil law, businesses may find themselves liable to compensation claims from injured customers. In addition, rival companies may assert claims under competition law and pursue companies without a BaFin licence in court.

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