Economy & Politics

The reform of financial supervision is a reform

The financial service provider Wirecard
The billion-dollar fraud and the bankruptcy of the payment service provider Wirecard in the summer have exposed gaps in the state financial supervisionWirecard

One would think that the German government would respond to a Wirecard scandal with really powerful reforms. But the current status of the Financial Market Integrity Strengthening Act, which gives Finance Minister Olaf Scholz and Justice Minister Christine Lambrecht an initial cause for consequences from the scandal, includes too many half-hearted regulatory proposals. This applies not only to corporate governance or the duties of the auditor, but also to the tasks of financial supervision by Bafin.

Of course, the grand coalition has to be acknowledged that after the Wirecard scandal it wants to implement what it can implement together during this legislative period. But it is also clear that this common denominator has so far been very small. Apparently, many large construction sites remain.

But even if you only focus on the issues that the draft bill for the Financial Market Integrity Strengthening Act addresses with regard to financial supervision, the conclusion is sobering. In particular, the law is intended to remedy two very obvious weaknesses in the previous regulations: the requirements for securities transactions by Bafin employees and the two-stage balance sheet control. However, both aspects would only be inadequately regulated if the previous draft were implemented.

With the audit of the balance sheet, an information tool that is so important for the supervisory authority has so far been placed in the wrong place. For cases such as Wirecard, a purely private balance sheet control – at least at the first stage of the so-called enforcement process – has proven to be unsuitable. Warnings were lost in the system and the review process was taking too long. Conflicts of interest and the understanding of private auditors from the German Audit Office for Accounting also diluted this knowledge tool. And no one pushed for progress with a time lag. So far, the two-stage balance sheet control has mainly served to shift responsibility back and forth between the financial supervisory authority Bafin and the German audit office for accounting.

The state lacks staff with examiner expertise

Now, according to the draft law, the system is to be fundamentally rebuilt “in favor of a more state-sovereign procedure”. The Bafin should be able to act immediately and with its own investigative powers vis-à-vis capital market companies, especially if they suspect balance sheet fraud. However, it should not come to a balance sheet control procedure from a single source at a government agency. Statements by the Ministry of Finance in connection with the processing of the Wirecard scandal had suggested this so far.

This means that a birth defect made by the Federal Supervisory Office for Securities Trading and the Federal Supervisory Office for the Credit System in the merger in the Bafin from May 1, 2002 is continued in the balance sheet audit: the Bafin waiver of an independent state audit system and the “outsourcing” of this knowledge tool private auditors who are already commissioned by the audited companies to audit the annual financial statements. Incidentally, something that is unique in financial market supervision in the EU countries.

It is imperative that balance sheet audits as well as special audits and not just the accompanying enforcement of measures be carried out by employees of a public institution such as the Bafin. In this context, the question arises as to how even this “increased enforcement” can be used adequately and precisely by the Bafin, if the employees of the authority do not have any know-how about the core business of balance sheet control and this competence is not built up in the future shall be. In any case, the current draft law does not lead to a balance sheet check with depth of focus. The draft provides that the Bafin can also examine reports and financial statements. Nobody should believe, however, that this should lead to a substantial change of course or even to an “alternative auditing system” as a corrective and supplement to the activities of the private annual auditor.

Rather, the misguided approach that the Bafin will not employ qualified staff with auditor expertise and criminal know-how due to the outsourcing of this auditing task to private auditors and that auditor expertise should not be built up in the future by the supervision also persists. In practice, the Bafin will continue to outsource these auditing activities to private auditors – then outside of the German auditing office – as permitted by the draft bill. The old conflicts of interest persist.

Private business endangers integrity

But it is not only this issue that the Federal Government is tackling half-heartedly. The draft bill also falls short of what is necessary when it comes to employee securities transactions. Several dozen Bafin employees traded in Wirecard securities, and some gambled regularly. These people included some from the securities oversight department, which is responsible for tracking down market manipulation and overseeing short selling and insider trading, among other things. One would have thought that this type of business would be prohibited from the outset under government supervision. This is the only way to prevent any suspicion of insider trading or a conflict of interests. But the business has not yet been prohibited. Incidentally, not in the Federal Ministry of Finance, which has legal and technical supervision over the Bafin. The Wirecard business of Bafin employees is currently being examined again, unfortunately only through an internal review.

The Ministry of Finance now wants to address this issue in a regulatory manner. To this end, it wants to be based on the code of conduct of the Deutsche Bundesbank. But this is not enough. As part of ongoing supervision, Bafin employees receive a large amount of specific internal information on the supervised companies. This information exceeds that of the Deutsche Bundesbank and its employees by far. For example, the Bundesbank does not have any data generated within the framework of market supervision because it is not involved in market supervision. Instead of mirroring the code of conduct of the Deutsche Bundesbank, stricter requirements should rather be the rule, based, for example, on the code of the European Commission. Not only certain financial instruments, but all products and forms of conflict of interest between private investments by employees and supervisory activities in all supervisory areas would be covered.

The integrity of a government regulator should not be jeopardized by the private dealings of individual employees. This deficiency must be remedied, which is why the federal government must also sharpen the bill at this point. Incidentally, it would be appropriate to introduce stricter rules of conduct for other ministries and authorities before the next authority after the Bafin is rightly in the crossfire of the public. For example, the Financial Intelligence Unit, to which financial institutions transmit their reports of suspected money laundering, apparently even lacks an obligation to notify and thus an internal control structure for transactions carried out.

If the federal government has not yet found a solution to these obvious and less complex regulatory problems, then this does not bode well for the tougher boards such as the realignment of the Bafin and radical reforms in the auditors.


Michael Findeisen is a fellow of the citizens’ movement Finanzwende and was in charge of its position on the draft of the Financial Market Integrity Strengthening Act for the Bundestag. For many years he was head of the money laundering and payments division in the Federal Ministry of Finance.


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