Bafin Identifies Issues in Investment Certificates

The German Federal Financial Supervisory Authority (Bafin) has conducted a thorough review of the booming market for investment certificates, revealing some deficiencies in their sale but no evidence of systematic misadvising by banks and savings institutions.

In recent evaluations, Bafin noted that certain providers had inadequately defined the target customer groups and market conditions for Zins- and Express-Zertifikate (interest and express certificates). Furthermore, it was found that approximately 20% of clients did not fully comprehend the functionality and risks associated with Express-Zertifikate.

Bafin's director for securities supervision, Thorsten Pötzsch, indicated that the agency would formally instruct institutions with identified issues to rectify these shortcomings. While consumer advocates criticize these investment products for their complexity and costs, the financial institutions, particularly savings banks and cooperative banks, sold them extensively.

Investment certificates are a type of debt security whose value is dependent on the performance of an underlying asset, which could include stocks, commodities, or currencies. Structured bonds, which emerged as popular investment choices, offer potential returns above the prevailing interest rates and typically guarantee capital repayment at maturity, provided the issuer remains solvent.

In May 2024, Bafin announced plans to scrutinize the burgeoning certificate market more closely. One key finding from the investigation was that there was no substantiated evidence that banks and savings institutions coerced customers interested in traditional deposit products into purchasing certificates instead.

However, concerns were raised regarding Turbo-Zertifikate, which are leveraged instruments amplifying market fluctuations. From 2019 to 2023, more than half a million investors in Germany engaged with these products, with around 75% incurring losses totaling over EUR3.4 billion. Pötzsch emphasized the necessity for product manufacturers and sellers to transparently and prominently convey the risks associated with such investment options.

Bafin's findings highlight a need for improved consumer education and regulatory oversight to ensure that investors are adequately informed about the complexities and risks linked to investment certificates, particularly as the market continues to grow.