BaFIN: The pot that calls the kettle black – Op Ed

Germany’s regulatory authority picked unfounded holes in Cyprus brokers in a public report, just a week after ESMA declared BaFIN ‘useless’ as it allowed a bankrupt entity to rip off customers for years. Here is our analysis of the hypocrisy

Those in glass houses should not throw stones, wisely states the old adage.

Yesterday’s bout of regulatory hypocrisy comes courtesy of Germany’s bureaucratic financial markets competent authority BaFIN, which made the brazen statement that almost half of the FX brokerages based in Cyprus which operate under the CySec regulatory structure are responsible for what it deems to be ‘infringements.’

Of course, all seasoned professionals in the FX and electronic trading industry worldwide are of the full and valid opinion that Cyprus, with its plethora of retail FX brands, some of which are brokerages and some of which are white labels of other brands or brokerages, is a mixed bag.

There are excellent, high quality and large companies which originated from the small Mediterranean island, and there are nefarious ne’erdowells whose owners rarely show their face at Larnaca airport and whose client bases are made up of unsuspecting novices who are being onboarded elsewhere and whose funds are being held in a dubious bank account in a former Soviet state with no transparency or recourse should the client be slipped a fast one.

There have been many criticisms and many reasons to admire the enterprises in Cyprus, however one regulator that should perhaps look to its own standards before criticizing adherents of others so quickly is BaFIN.

Yesterday, BaFIN’s scathing diatribe indicated that Cyprus based FX and CFD brokers are responsible for violations of the product intervention measures in 49% of all CFD providers.

BaFIN’s report, published on its website in German, insinuated that almost half of the 40 CFD providers which it considers to be in breach of the prescribed risk warnings and product intervention procedures were based in Cyprus, 12% from the UK and 29% in Germany.

BaFIN particularly noted that the majority of violations were relating to risk warnings, the remainder to leverage restrictions and brokerages attempting to pressure sell to customers by using bonuses, which is not legal under European rulings overseen by the European Securities and Markets Authority (ESMA).

Whilst that is very true, most of the firms offering bonuses and high leverage are onboarding clients via offshore entities with common ownership between the Cyprus and offshore divisions of the same firms. Opinions on that vary, however unfortunately it is legal as CySec has no jurisdiction over offshore entities even if owned by the same company and using the same brand name and identity, thus BaFIN’s assertions are borderline defamatory.

BaFIN’s timing in making these claims is either coincidental, or is an intentional smokescreen to deflect attention from the scathing attack directed at its own regulatory incompetence last week by ESMA, which described the German regulator as ‘useless’.

Pointing the finger at Cyprus brokers on a point that is potentially not illegal when BaFIN allowed a bankrupt payment processor called Wirecard to bilk its customers for several years is anathema.

The findings by the ESMA last week, upon which FinanceFeeds reported in detail, identified a number of “deficiencies, inefficiencies and legal and procedural impediments” in the two-tier German supervisory system, which splits responsibilities for enforcement between BaFin and the Financial Reporting Enforcement Panel (FREP).

Problem areas highlighted include the independence of BaFin from issuers and government, including “a heightened risk of influence by the Ministry of Finance” given the frequency and detail of reporting by BaFin before actions were taken.

Wirecard was a rising blue chip star before its collapse following the discovery of a gaping €1.9 billion hole in its balance sheet and regulatory bodies appeared at times to be more interested in defending the firm against a rising tide of allegations rather than dig deeper into its financial accounts. Esma says Frep’s examination procedures of Wirecard financial reports did not appropriately address areas material to the business of Wirecard, nor the media and whistle-blowing allegations against the firm.

Equally, a lack of information about Wirecard’s employees’ shareholdings was found to raise doubts on the robustness of BaFin’s internal control system regarding conflicts of interest of its employees vis-à-vis issuers

Steven Maijoor, Esma chair, says: “The Wirecard case has once again highlighted that high-quality financial reporting is essential for maintaining investor trust in capital markets, and the need to have consistent and effective enforcement of that reporting across the European Union.”

“Today’s report identifies deficiencies in the supervision and enforcement of Wirecard’s financial reporting. The report’s recommendations can contribute to the review of the German regime for supervision and enforcement” he said at the time.

The outcome is likely to lead to an overhaul of the German supervisory regime to address the limitations in the two teir reporting system and the respective roles of BaFin and Frep.

Pointing the finger at more successful and important FX and CFD trading centers by BaFIN which presides over a region with no standing on the worldwide electronic trading stage is not a new thing.

It was always relatively obvious to those in major capital markets regions that Germany’s arrogant regulatory authority which requires all OTC firms to lodge client funds with German banks only, and had the audacity a few years ago to infer that a ‘latency floor’ would be enforced on FX brokers making their execution slower in order to level the playing field – ie thwart more efficient OTC firms to allow the large, old fashioned Frankfurt-based venues to keep their stronghold, is odious to say the least and perhaps akin to Volkswagen Group which could not make its diesel engines modern and sophisticated enough to comply with emissions rules in the United States, cheating instead. The furore was immense, that is if you could hear it over the clattering and see it through the smoke generated by those engines.

BaFIN is regarded by many as one of the most recalcitrant and difficult organizations to operate under, and whose rules and imposed obstacles favor neither capital markets entities or their clients.

During the run up to the exit from the European Union of Great Britain, and during the absurd attempts by Frankfurt to merge Deutsche Boerse with London Stock Exchange – something FinanceFeeds stated from the outset would never happen – in order to try to encourage derivatives trading into Germany from London, a feat that would never be possible without political coercion because Germany cannot hold a candle to the UK when it comes to any form of expertise, infrastructure or market presence, attempts were made to take clearing to Europe, which of course failed, and here we are today with very few brokers operating under the BaFIN regime.

Last weeks lambasting by ESMA stopped just short of being expletive. Perhaps BaFIN’s unfounded finger-pointing should be viewed with a grain of salt.


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