Germany’s financial regulator BaFin has completed an
extensive investigation into the production and sale of interest-bearing and
express certificates, finding no widespread misconduct among banks and product
providers.
However, the review raised concerns about customer
comprehension, inconsistent cost disclosures, and the potential for
sales-driven conflicts of interest.
Certificate Sales Rise, Triggering Regulatory
Attention
The investigation, conducted from May 2024 to February
2025, followed a sharp increase in the sales of certificates after the end of
the low-interest-rate phase.
BaFin examined product manufacturers, distribution
practices, and customer experiences. For the first time, the regulator also conducted a mystery shopping campaign and consumer surveys.
While BaFin concluded that regulatory obligations were
largely met, it identified shortcomings in how some institutions designed and
sold their products.
These included unclear cost structures, inconsistent
scenario analyses, and weak controls against potential sales pressure. BaFin
found that three out of five manufacturers failed to assess market risks adequately when designing express certificates.
In many cases, they did not consider how rising prices
of the underlying asset could lead to early product maturity, requiring clients
to reinvest at potentially higher entry costs. BaFin said this risk was not
sufficiently factored into product governance.
The regulator also reported inconsistencies in how
banks disclosed distribution costs to clients. Some institutions allocated
these margins to service costs, while others included them in product prices.
BaFin warned that this lack of uniformity may hinder customers’ ability to
compare investment options accurately, even if total costs are disclosed as
required.
Customer Understanding Lags Behind Sales
One of BaFin’s central findings involved consumer
understanding. Surveys revealed that nearly half of the participants struggled to follow the advisor’s explanations, particularly around express certificates. In a mystery shopping campaign involving 20 simulated
consultations, BaFin did not find active marketing of the certificates in
question.
Nevertheless, the regulator highlighted potential conflicts of
interest in certain cases, including where product issuers asked distributors
for sales commitments, potentially putting pressure on advisors to promote
specific products.
BaFin said it would follow up with institutions where deficiencies were found and require them to make corrections. The regulator will
also define new supervisory priorities and assess whether the same issues exist
at firms that are not included in the review.
Germany’s financial regulator BaFin has completed an
extensive investigation into the production and sale of interest-bearing and
express certificates, finding no widespread misconduct among banks and product
providers.
However, the review raised concerns about customer
comprehension, inconsistent cost disclosures, and the potential for
sales-driven conflicts of interest.
Certificate Sales Rise, Triggering Regulatory
Attention
The investigation, conducted from May 2024 to February
2025, followed a sharp increase in the sales of certificates after the end of
the low-interest-rate phase.
BaFin examined product manufacturers, distribution
practices, and customer experiences. For the first time, the regulator also conducted a mystery shopping campaign and consumer surveys.
While BaFin concluded that regulatory obligations were
largely met, it identified shortcomings in how some institutions designed and
sold their products.
These included unclear cost structures, inconsistent
scenario analyses, and weak controls against potential sales pressure. BaFin
found that three out of five manufacturers failed to assess market risks adequately when designing express certificates.
In many cases, they did not consider how rising prices
of the underlying asset could lead to early product maturity, requiring clients
to reinvest at potentially higher entry costs. BaFin said this risk was not
sufficiently factored into product governance.
The regulator also reported inconsistencies in how
banks disclosed distribution costs to clients. Some institutions allocated
these margins to service costs, while others included them in product prices.
BaFin warned that this lack of uniformity may hinder customers’ ability to
compare investment options accurately, even if total costs are disclosed as
required.
Customer Understanding Lags Behind Sales
One of BaFin’s central findings involved consumer
understanding. Surveys revealed that nearly half of the participants struggled to follow the advisor’s explanations, particularly around express certificates. In a mystery shopping campaign involving 20 simulated
consultations, BaFin did not find active marketing of the certificates in
question.
Nevertheless, the regulator highlighted potential conflicts of
interest in certain cases, including where product issuers asked distributors
for sales commitments, potentially putting pressure on advisors to promote
specific products.
BaFin said it would follow up with institutions where deficiencies were found and require them to make corrections. The regulator will
also define new supervisory priorities and assess whether the same issues exist
at firms that are not included in the review.
This post is originally published on FINANCEMAGNATES.
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