Act to Strengthen Financial Market Integrity: The aftermath of the Wirecard scandal
Executive Education / 25 March 2021
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Michelle Neumann is Marketing & Sales Coordinator Professional & Executive Education at Frankfurt School.

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After debating the draft bill on 26 October 2020, the German Federal Cabinet adopted the draft Act to Strengthen Financial Market Integrity (Finanzmarktintegritätsstärkungsgesetz – FISG) on 16 December 2020. The draft was prepared primarily by the Federal Ministry of Finance (BMF) and the Federal Ministry of Justice and Consumer Protection (BMJV), and contains measures that are intended to restore trust and permanently strengthen confidence in the German financial marketplace.

Why was a new law needed in the first place?

After the collapse of Wirecard due to alleged fraud at top management level, regulatory efforts to restore trust in proper accounting practices are very welcome. The scandal did, after all, highlight major inconsistencies and gaps in the supervision of corporate accounting and non-banking financial services. Critics also blame a lack of coordination between European and international supervisory agencies, which were jointly responsible for monitoring Wirecard AG’s business activities. Ultimately, it is important to ensure that an incident of this kind does not result in the criminalisation of companies that are properly managing and reporting their financial affairs. In an official statement, Germany’s Federal Ministry of Finance declared that “the viability of Germany’s financial market is of central importance to the German economy and the prosperity of the Federal Republic of Germany. Attempts to manipulate the financial reporting of capital-market companies undermine confidence in and inflict serious damage on the German financial market. Recent events have shown that to ensure the accuracy of corporate accounting documentation, financial statements must be examined much more carefully and external audits regulated more stringently. However, improvements must also be made to the supervisory structures of the Federal Financial Supervisory Authority (BaFIN) and its power to investigate outsourcing by financial services companies. The draft Act aims to implement the urgent measures required to restore and permanently strengthen confidence in the German financial market.”

 The implications of FISG

Initially, the government hopes to achieve this confidence-boosting objective by imposing a legal obligation on listed stock corporations to set up an appropriate and effective internal control system (ICS), accompanied by a matching risk management system (RMS). To be released from personal liability, senior managers must be able to prove that such systems are in place and demonstrate that as far as the company’s business activities and risk situation are concerned, the systems as they have been implemented genuinely comply with the “sound business judgement” rule. Furthermore, once the Act comes into force, companies – even companies that, while unlisted, are nevertheless of public interest – will be required to set up an audit committee. The draft also seeks to make external auditors more independent while at the same time increasing their liability, and to significantly expand BaFIN’s auditing powers. Indeed, BaFIN will be given the power to intervene directly in companies that have outsourced key functions such as banking or IT. The Act goes far beyond the provisions of the EBA Guidelines and Minimum Requirements for Risk Management (MaRisk) regulations. Companies will have to put significantly more time and effort into risk management, and risk management systems as a whole will become much more important.

 The next steps

The draft Act can be downloaded from the Federal Ministry of Finance website. FISG is slated to come into force on 1 July 2021, pending approval by the Bundesrat. If you would like to stay one step ahead of the impending changes, Frankfurt School offers you a wide selection of courses on risk management. The relevant certification programmes, including Market Risk Manager, Credit Risk Manager, Liquidity Risk Management, Risk Manager – Non-Financial Risks, Regulatory Reporting Specialist and Risk Manager for medium-sized credit institutions, will all start on 18 May 2021 (although you can join them at any time). If you’re still looking for the right area to specialise in, we’re always happy to advise!