Mark Branson and State Secretary Dr Jörg Kukies give a progress report in Frankfurt am Main on the joint modernisation project of the BMF and BaFin

Dr Kukies: "Substantial progress already visible"
"The project to modernise BaFin is well on its way", said State Secretary Kukies at the press conference, adding: "We are in the process of setting new standards in financial supervision and have made excellent progress at BaFin: the Focus Units are dealing with complex companies; communication with whistleblowers already meets the standards of the EU Whistleblower Directive; and BaFin is well on its way to performing effective financial reporting enforcement as a one-tier process for all companies listed in Germany, starting in 2022. In the seven-point plan, Minister Scholz has presented a vision for reforming financial supervision. By enacting the FISG, legislators have given us a clear mandate, and this modernisation project will ensure its prompt and effective implementation."

Branson: This is only the beginning of a long-term process of transformation
"I’m impressed by the speed of implementation and the breadth of BaFin’s reform", said Branson, adding: "But for me this is only the beginning of BaFin’s long-term development. The expectations placed on BaFin are clear: decisions of the highest quality, clear, ambitious targets and modern, digital working methods. It will take time before we reach our objectives in all areas. But we are heading in the right direction and motivation is high."

Preliminary assessment: seven months in, two thirds of all identified reform measures already executed, one third about to be implemented
At the end of last year, Federal Minister of Finance Olaf Scholz initiated a thorough investigation of BaFin, followed, in February of this year, by the presentation of a seven-point plan for reforming BaFin. The basis of BaFin’s reform is the German Act to Strengthen Financial Market Integrity (Finanzmarktintegritätsstärkungsgesetz – FISG), which was passed by the Bundestag in June of this year. The aim is to increase BaFin’s effectiveness in supervision and auditing and to ensure more efficient and tighter supervision of the financial market with state-of-the-art technology. A team of about 100 employees from the BMF and BaFin as well as external experts has been working on this for around seven months. So far, just over two thirds of the 40 reform measures identified have been executed, with one third being close to implementation:

1. Focus Units and Task Force to ensure intensified control
The Focus Units and Task Force were launched in the middle of August. They are coordinated by the "Coordination of Focus Units & Task Force" office, which reports directly to BaFin’s President. The Focus Units supervise financial services institutions with complex or innovative business models. In future, BaFin intends to take a more holistic and in-depth approach in this area in order to identify and counteract critical risks. The new processes required for this purpose have been set up and tested in the past few months. The Focus Units are already supervising 17 banks, insurers, securities firms and payment services providers.

With its dedicated Task Force, BaFin can now respond to suspected violations by carrying out investigative audits with its own employees, even at short notice. This gives BaFin a kind of rapid response team, which is ready to be deployed immediately in urgent matters. A group of finance specialists form the core of this Task Force. For this team, BaFin is recruiting highly qualified auditors and financial forensic investigators. Depending on the specific case, the Task Force can also co-opt experts from the various BaFin Sectors.

2. BaFin to intensify the enforcement of companies‘ financial reporting
Under the FISG, from 2022 onwards financial reporting enforcement will be organised as a one-tier process, i.e. in future, BaFin alone will be responsible for both ad hoc and sampling audits. BaFin’s rights to examine the financial statements of companies listed in Germany will thus be significantly strengthened. BaFin has created a tailor-made market monitoring system to identify companies at risk. This prototype is continuously being enhanced. At the same time, BaFin is taking a more proactive approach in its auditing activities, for example by increasing on-site inspections and conducting financial forensic investigations. In September of this year, a newly established group assumed responsibility for financial reporting enforcement at BaFin. At the beginning of next year, the experts at the German Financial Reporting Enforcement Panel (FREP) will join BaFin, and additional auditors and accounting specialists will be recruited. In total, BaFin’s Financial Reporting Enforcement team will be made up of around 60 employees.

3. Contact point for whistleblowers and Market Contact Group to provide fresh impetus
In August of this year, BaFin reorganised its contact point for whistleblowers. A risk-based approach and comprehensive monitoring allow BaFin to gather and analyse valuable information in order to mount a targeted response. On the basis of the BaFin Whistleblower Regulation issued by the BMF on 26 July 2021, the contact point for whistleblowers already acts in accordance with the standards of the EU Whistleblower Directive. The newly created Market Contact Group (MCG), which is also assigned to this unit, receives the corresponding information from the financial sector.

4. Mystery shopping and new dedicated officer to strengthen investor and consumer protection
Starting next year, BaFin will make undercover test purchases, also known as mystery shopping, thus adding another tool to strengthen consumer protection supervision. The plan is to conduct several mystery shopping campaigns per year. Trained test buyers will then act as consumers, receiving advice from financial institutions or acquiring products for test purposes. BaFin will use this as a way to verify whether the service providers meet their legal obligations towards consumers and investors. Initial pilots have already been conducted. The appointment, in July of this year, of a dedicated Investor and Consumer Protection Officer has further strengthened BaFin’s collective consumer and investor protection mandate.

5. BaFin President given greater powers
The modernisation has also resulted in a significant strengthening of the office of the BaFin President. BaFin President Branson is responsible for the budget, determines the allocation of personnel and financial resources and lays down the organisational structure. Accordingly, BaFin amended its Organisational Statute as at 1 July of this year. This will accelerate decision-making at the executive level. In addition, BaFin is planning to introduce a new strategic management system with clear targets by the end of the year.

6. Data Intelligence Unit and IT Supervision: BaFin uses state-of-the-art technology
The central analytics unit, the Data Intelligence Unit (DIU) started its work in August. The DIU is the backbone of data-driven and IT-based supervision. A prototype of the new central tool – the supervisor cockpit – has already been developed. Version 1.0 is expected to go live at the end of the year, followed by regular upgrades. Going forward, this IT solution will make use of the latest technologies to give BaFin’s supervisors all the information they need at a glance in a tool that is tailored to its users and intuitive to operate.

In August of this year, IT Supervision was also strengthened: a new directorate now oversees crypto custody business, e-money institutions and payment institutions. The main focus is on preventing cyber crises and monitoring networked IT companies providing outsourced services. Other IT experts will provide additional support to these areas of supervision in future. Alongside this, BaFin is expanding its training opportunities with the aim of increasing digital know-how and covering supervisory issues relevant to technology, such as cloud computing, cyber security in the financial sector, and distributed ledger technology und blockchain.

About 150 new positions have been created so that the new tasks, responsibilities and powers can be implemented. About 80 per cent of these vacancies have already been filled or the selection process is underway. An equal mix of committed, experienced supervisors and external candidates with new professional skills will combine the experience and expertise of BaFin with fresh insights and new ideas from the market.