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 it found deficiencies and require them to make corrections. The regulator will also define new supervisory priorities and assess whether the same issues exist at firms not included in the review.

Source: Finance Magnates