Banking and Capital Markets Law

Banking and Capital Markets Law – Banking and capital markets law is much more than just a legal framework for the activities of financial companies. The legal provisions of banking and capital markets law have a great impact on our daily lives. e.g. on:

• cashless payment transactions
• Investments
• retirement provision
• the corporate sector

Topics in our legal advice

Banking law also regulates banking and capital markets and other aspects of financial services law.

However, the extensive interconnections of financial transactions in all aspects of our private and business existence, from consumers to industrial giants, often lead to legal problems that fall within the scope of banking law.

Table of contents

1. Banking and capital market law: the services of the Herfurtner law firm
2. Banking and Capital Market Law – Introduction
3. Laws in banking and capital market law
4. What is loan contract law?
5. The area of loan collateral
6. Banking law and capital market law – difference
7. General banking law
8. Public and private banking law
9. The basics of capital market law
10. Capital Markets in the EU
11. Capital Market Regulation
12. Capital Market Law Lawyer
13. Banking and Capital Markets Law: Compensation for Wrong Advice

Banking and capital market law: the services of the Herfurtner law firm

The Herfurtner law firm has many years of experience in banking and capital market law. With offices in Munich, Frankfurt am Main and Hamburg, Herfurtner Rechtsanwaltsgesellschaft mbH is familiar with the opportunities and dangers in banking law and will provide you with reliable and qualified advice.

Our lawyers are available to you both in person at our offices and via video conference in Berlin, Cologne, Düsseldorf and Stuttgart. The Herfurtner law firm is dedicated to developing and designing legal strategies and structures that are geared to your interests and adapted to your case.

Our advisory services in the area of banking and capital markets law

• Bonds
• Banking supervision
• Loan agreements (revocation etc.)
• False advice
• Financing
• Asset management / asset safekeeping / private banking
• Securities business
• Forward loans
• Banking tax law
• Review of contracts in the event of restructuring or insolvency
• Business relations between bank and client
• The distribution of financial instruments
• The avoidance of personal liability and sanctions/fines
• Money Laundering Act
• Credit cards, foreign payments, SEPA
• Credit protection law
• Swap transactions
• Investment law
• Leasing contract
• Contract law in the banking sector, incl. general terms and conditions (GTC)
• Outsourcing of bank accounts/banking transactions
• Custody and safekeeping transactions, consisting of fund custody/accounts and fund asset management custody/accounts
• Review of loan agreements and security agreements
• Foreign currency loan
• Funds, for example ship funds

Introduction to banking and capital market law

The banking crisis, inadmissible loan provisions, the diesel scandal and Brexit are recent examples of far-reaching developments in economic policy.

Developments whose consequences will continue to have an impact for years to come and with which banking and capital market law is grappling.

On the one hand, these circumstances directly affect the capital markets and thus also the respective credit institutions. On the other hand, they also have legal effects in many cases. These are felt through lawsuits, the exercise of revocation rights and the taking of other legal steps.

Banking and capital market law, which is the focus of the next section, deals with all these diverse topics.

The examples listed so far already show: Banking and capital market law is thematically extremely comprehensive and complex.

Laws in banking and capital market law

The following laws contain important standards in banking and capital market law or include supplementary regulations:

1. Stock Exchange Law
2. New Investment Act – InvG
3. Prospectus regime under the Sales Prospectus Act (VerkaufsprospektG) and the Securities Prospectus Act (WpPG)
4. Law on company takeovers of listed stock corporations
5. German Banking Act – KWG
6. Act on the Tracing of Profits from Serious Crimes (Money Laundering Act – GwG)
7. Stock Corporation Act – AktG
8. Commercial Code – HGB
9. Criminal Code – StGB
10. Small Investor Protection Act

Many ordinances, statutes, guidelines, administrative regulations, notices (e.g. of the Federal Financial Supervisory Authority – BaFin) and general terms and conditions (e.g. special conditions for securities transactions) provide more detailed regulation.

An important area of capital market law is regulated in the Securities Trading Act (WpHG). There are standards on the topics of insider trading, market manipulation, disclosure obligations and special duties of conduct for securities services companies.

Current topics of banking and capital market law include the following directives, laws and regulations:

1. Risk Limitation Act with new regulations on land charges as security
2. MoMiG – Act to Modernise the Law on Private Limited Companies and Combat Abuses
3. Bankaval
4. Amendment of the Law on Debt Securities (SchVGEG)
5. General terms and conditions of banks
6. Implementation of the Single Euro Payments Area (SEPA)
7. Investment Loans (LMA Standards)
8. Financial Markets Directive (MiFID)
9. Payment Services Directive
10. Consumer Credit Directive
11. Market Abuse Directive
12. Transparency Directive

What is Credit Contract Law?

Part of the everyday banking business is the granting of loans and credits. The often extensive regulations are summarised in a loan agreement between the borrower and the bank as creditor.

In banking law, the loan agreement determines in particular the modalities of repayment and seizure of collateral. If there are negative entries in the Schufa, loans can be refused. In some cases, legal action is therefore taken to have the Schufa entry deleted.

Credit contract law, which deals with both the borrower and the lender, is another important topic in banking and capital market law.

When a lawyer represents borrowers who feel they have been wronged, it is often his job to look for errors in the contracts. The aim is usually to ensure that these contracts can be terminated prematurely and without payment of an early repayment penalty.

Credit contract law, as a subfield of banking and capital market law, also deals with disputes in the area of foreign currency loans.

The area of loan collateral in banking and capital markets law

Loan collateral comes in many different forms. Thus, the area of loan collateral is also quite large.

Basic collateral, such as mortgages and land charges, is probably the best known in society. These are regularly used when a loan of a significant amount is needed.

Loan collateral also plays a major role in business transactions and requires a precise knowledge of banking and capital market regulations.

Examples

• Export credit insurance = cover in the event of default on receivables for export goods
• Space insurance contracts = transfer of product inventories to the lender as security

With such a variety of credit insurance options, outstanding knowledge of private international law is often required.

Banking Law and Capital Markets – Law Difference

In contrast to capital market law, banking law regulates the banking transactions that take place between a bank and its customers. Banking law is regulated by many individual laws. Banking contract law describes legal issues relating to the general terms and conditions of German credit institutions as well as the account and its special forms.

The contract with a bank is usually based on the General Terms and Conditions (AGB) for credit institutions (AGB-Banken or AGB-Sparkassen). AGBs prove to be invalid in many cases. For example, some expenses clauses in banks’ GTCs are invalid.

When it comes to expenses on behalf of or in the presumed interest of the customer, a limitation to the actually necessary expenses is necessary, which is missing in the GTC clause.

In the case of clauses on expenses for the provision, realisation and return of loan collateral, the BGH added that these expenses were not incurred in the interest of the customer, but in the interest of the bank.

General banking law as a sub-area of banking and capital market law

The question of what banking law actually is can be answered neither simply nor sweepingly. On the one hand, there is the institutionally understood banking law and, on the other, the functionally interpreted banking law. Banking law deals with legal relationships in the credit system, banking supervision law and banking transactions.

The Federal Financial Supervisory Authority (BaFin), the Federal Cartel Office and the central banks play a particularly important role.

Banking law includes the law governing the lending and deposit business of credit institutions, payment transactions, securities and custody business, as well as the associated liability issues that can arise from faulty advice or information. It also includes cheque and bill of exchange law.

1. the concept of institutional banking law

This concept of banking law refers to banking law as the set of legal provisions governing the legal relationships between banks and credit institutions. In this sense, a “bank” is defined not only by its institutional structure, but also by the business it conducts.

2. Banking law as a functional concept

The functional idea of banking law is based on the focus of economic activity. This is in clear contrast to the sometimes difficult demarcation between banking institutions and companies that only conduct bank-like business. Accordingly, banking law – as part of banking and capital market law – encompasses the entire legal framework which

• the creation of money
• custody
• the circulation
• and the destruction of money.

This refers to any legal matter with a financial component. This also includes all “alternative payment and remittance systems”. Increasingly, large-scale cross-border transactions are being processed via such systems – and without a state licence or supervision. Best known example: Hawala banking. A functioning method outside the normal banking system.

The most concrete practical example is probably payment traffic law. This refers to all business agreements between a customer and his bank as well as third party payment service providers.

For example, disagreements about a client’s bank account fall into this category, especially when:

• bank transfers go wrong or
• debit orders are wrongly debited
• Fees are wrongly charged for account management or other financial transactions

Cross-border difficulties are also taken into account, such as transfers to countries outside the SEPA area.

Public and private banking law

There are two types of banking law: public and private banking law.

Public banking law

The term “public banking law” refers to functions characterised by state involvement and influence.

State supervision law is one of the most important aspects of public banking law.

It is primarily concerned with actively monitoring compliance with the applicable rules and regulations of banking and capital market law.

The defined objectives are:

• structure and regulate the banking industry
• Protect against negative developments in the banking system
• to protect free trade
• to manage market participants in such a way that they act in a manner that is both economically and competitively correct.

The area of monetary law is also an essential aspect of public banking law.

The European Central Bank and the European System of Central Banks (ESCB) also include the Deutsche Bundesbank pursuant to section 3 sentence 1 BBankG. They have essentially taken over the competences in this area within the framework of the Europeanisation of banking law.

Banking law for private individuals

The set of rules that governs the legal relationships under private law between banks and their customers and other banks in their normal business operations is referred to as private banking law.

The German Civil Code (BGB) contains an essential part of private banking law. The special features of the German Commercial Code (HGB) and the basic commercial practices of the banking industry must always be observed in business relationships between banks and corporate clients.

The concept of private banking law can also be applied to securities and capital market law.

The areas of banking activity can thus be divided into three essential groups according to the standards of private banking law: Lending business, account and payment transactions and, last but not least, capital market business.

Cashless payment transactions

Banks also handle cashless and automated payment transactions for their customers. Payments are made via a current account on the basis of transfer, cheque, bill of exchange or direct debit – by debit or direct debit – as well as credit card and ec card.

In recent years, online banking and new payment methods such as PayPal have become increasingly common. Claims for damages in banking law must be examined in cases of card loss, skimming (secret reading of cards at the ATM in the card reader) and phishing (fraud by means of false e-mail, website or SMS).

In which cases is the bank liable if problems occur during transfers, direct debits, credit card transactions or cheque and bill of exchange transactions? It usually depends on the individual case.

Our lawyers will be happy to provide you with a free initial consultation.

The basics of capital market law

Today, capital market law is an independent area of law. It developed from a combination of banking, corporate and stock exchange law. However, there is currently no uniform codification for capital market law.

The term capital market in this context refers to the totality of markets on which capital investments are offered and demanded. This includes all transactions that raise or make available money in the medium or long term to finance the formation of physical capital.

Since banks and savings banks act as providers and intermediaries between capital providers and capital borrowers, there are certain overlaps between capital market law and banking law.

Traditional securities exchanges, commodity and futures exchanges and other trading venues are used to settle transactions. These are sometimes not categorised as stock exchanges despite trading in capital investments.

For private investors, small and medium-sized enterprises, family offices, institutional investors and municipalities, there is an increased need for advice in the following areas of capital market law in particular:

• Investment fraud
• Investor protection
• Bonds
• Shares
• Equity funds
• Container funds
• Energy funds
• Funds
• Factoring
• Aircraft fund
• Foreign currency loan
• Grey capital market
• Profit participation rights
• Closed-end funds
• Hotel and holiday parks
• hedge funds
• Investment law
• Representation of interests
• Real estate funds
• Bearer bonds
• Investment law
• Life insurance funds
• Leasing
• Leasing funds
• Media funds
• Subordinated loan
• open-end fund
• Private equity fund
• Partiar loans
• Ship funds
• Protective association
• Junk real estate
• Tax-saving real estate
• Swap transaction
• Telephone fraud
• Engine fund
• Environmental fund
• Corporate investments
• Asset management and custody
• Securities investments
• Securities business
• Certificates

Important legal aspects in capital market law also arise in connection with commercial and company law.

Capital market law: Definition of the legal field

Capital market law concerns the issue and trading of and with securities. This includes shares, bonds, debentures and mortgage bonds. It also includes promissory notes, derivatives, option rights and other tradable securities acquired for investment purposes.

Various financial instruments can be used for funds. Typical funds include:

• Ship funds
• Real estate funds
• Media funds
• Money market funds
• Fund of funds
• Equity funds
• Bond funds

Investors have the option of acquiring investment certificates in the form of units.

In the event of failed investment transactions and asset management liability risks, small and medium-sized enterprises should also seek specific advice.

The structuring of corporate financing, e.g. mezzanine financing, can raise complex legal and economic issues capital market law.

Capital markets in the EU

The capital market, like the money and foreign exchange markets and the so-called derivatives market, is part of the larger financial market that underlies many banking transactions.

Due to the international orientation of the capital markets, there is a far-reaching, but not exhaustive, need for harmonisation of the relevant legal provisions in order to:

1. To ensure equal opportunities for all market participants.
2. To better exploit the full potential of national financial markets.

About 80 % of the legislation in force in Germany dealing with banking and capital market law is based on this objective.

The Securities Trading Act (WpHG) is the cornerstone of German capital market law. The Stock Exchange Act (BörsG), the Investment Act (InvG), the Securities Prospectus Liability Act (WpPG), the Payment Services Supervision Act (ZAG) and the Securities Acquisition and Takeover Act (WpÜG) are other important laws.

Capital market regulation

Capital market regulation aims at the smooth functioning of the market on the one hand and the protection of investors on the other. The two goals are not mutually exclusive, but complement each other. For without the basis of trust that investor protection creates, the capital market would essentially not function.

In the interest of investor protection, the Herfurtner law firm regularly publishes new warnings for investors.

An abuse of trust or a shaking of trust on the investor side – such as Dieselgate – often leads to immediate and severe negative consequences for the investment and capital markets.

A look at securities and capital market law

Securities and capital markets law covers a broad range of activities in banking and capital markets law.

This includes, for example:

1. The preparation of an Initial Public Offering (IPO).
2. The drafting of bond terms and conditions
3. Representing the interests of aggrieved investors, e.g. in the event of incorrect advice by banks and savings banks.
4. The enforcement of claims in cases of investment fraud

Capital market law – lawyer

Open-ended funds are the classic form of investment funds. The investment company can issue any number of fund units. These can already be purchased at relatively low investment amounts and later sold again at the current redemption price.

This makes it possible to spread investments across different companies and investments with manageable effort. The overall risk can also be limited in this way.

Investors are protected by the Investment Companies Act (KAAG).

A fund management team with experienced specialists must therefore follow firmly defined investment guidelines.

Closed-end funds are set up to raise capital for large-scale projects. Examples are real estate, media or tangible assets. Investors usually have to invest a relatively high amount as a minimum investment.

When the fund is launched, the specific investment goals and the targeted capital gain are set out in detail. Once all units have been sold, the fund is usually closed for a term of ten to 20 years.

The units are redeemed by dissolving the fund, for example by selling the investment property. An earlier redemption is not possible for you or only at considerable loss.

Compensation in case of incorrect advice – lawyer helps with problems with the bank

The excursion through banking and capital market law has shown how extensive this area of law is. It also became clear in what significant way economic policy events affect banking and capital market law.

Money laundering and data protection are also of great importance in banking and capital market law, in addition to the topics already mentioned. A lawyer must also be familiar with the tax regulations applicable to him in order to be able to advise his clients comprehensively. In many cases, this also concerns investment tax law.

Banking law and capital market law: Regulations impose certain obligations on banks and savings banks when advising clients. Investors naturally expose themselves to many risks in their investments. Information about commission payments and refunds must be provided.

In the event of incorrect advice and other violations, investors can sue banking institutions for damages.

Examples of this are claims for damages in the case of incorrect advice with regard to foreign currency loans. In cases of insider trading or price manipulation, banking law provides for not inconsiderable consequences under criminal law.

Another example is claims for damages in the case of incorrect advice with regard to legal violations in the sale of so-called junk real estate.

Banking and capital market law: Investor protection aims to protect investors from these risks or to regulate their right to claim damages. In this context, please also take a look at our current warning list for investors.

Wolfgang Herfurtner | Lawyer | Managing Director | Shareholder

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