Financial market participants eagerly anticipate the Future Financing Act
With the Future Financing Act, the federal government aims to strengthen Germany's capital market in international competition. Time is ticking: the key points from the Ministry of Justice and the Ministry of Finance of the federal government have been on the table since mid-2022. According to the initial plans, the law should have been in effect by now. However, it took a year for the proposals from the two ministries led by the members of the Free Democratic Party (FDP) Christian Lindner and Marco Buschmann to pass through the cabinet this summer. Finally, parliamentary deliberations have begun. 'We understand that Germany needs a new impetus,' confessed State Secretary for Finance Florian Toncar (FDP) recently at an event organized by the Fund Association BVI in Berlin. The government aims to lay the foundation for new prosperity with the Future Financing Act, which is urgently needed given the weak economy, strained public finances, and challenges posed by climate change, labor shortages, and an aging society.
German companies turning their backs
'We want ideas to be realized in our country,' said Toncar. Successful German companies have opted for IPOs in the US – Biontech, Curevac, Atotech, and Birkenstock – or, like Linde, have turned their backs on the German market. The Future Financing Act aims to facilitate capital procurement through the financial market for private investors in Germany. Around 90% of investments come from this sector.
After its first reading in the Bundestag at the end of September, the draft bill has been referred to the committees. Last Friday, the Bundesrat passed its opinion on the Future Financing Act in the plenary. The Bundestag can now incorporate the wishes and demands of the federal states into its deliberations. The members of parliament have until mid-November to do so. With the required approval from the Bundesrat, the law could come into effect in early 2024 if everything goes smoothly.
Shift in momentum in Berlin
For the financial industry, the Future Financing Act signifies a positive development after difficult years. It's no wonder that, with few exceptions, financial market players eagerly anticipate these modernizations. From 1990 to 2002, various federal governments deregulated the capital market with four Financial Market Promotion Acts, making Germany's financial center fit and internationally attractive. However, after the shock of the 2008 financial crisis, the momentum changed. Financial market reforms meant more regulation, stricter requirements, immense bureaucracy, and business-inhibiting regulations.
The Wirecard case further worsened the situation. Thomas Richter, Managing Director of BVI, recently called to mind in Berlin that complaints from the industry about insufficient financial market initiatives in politicians' election programs or coalition agreements were long met with an ironic 'Be glad about that!'. With the Future Financing Act, this federal government is now initiating a comprehensive legislative reform aimed at easing the burden on the financial market.
Hope for the capital market
The financial industry is hopeful about the law. Their requests mainly focus on specific detailed regulations. For instance, the German Banking Industry Committee (DK) stated in its opinion that the law would advance the EU Commission's intention to deepen the European capital market. They welcome the easier access to capital markets and reduced follow-up obligations for authorized companies. By reducing bureaucratic hurdles, the capital market in Germany becomes more attractive and sustainable for small and medium-sized enterprises.
The DK is particularly pleased with the planned exception from general terms and conditions (AGB) content control for professional capital market transactions. This new regulation aims to ensure a legally secure contract design under German law. Currently, capital market professionals often resort to foreign law to conclude contracts according to international standards. The DK insists on expanding the circle of professional capital market participants exempted from content control, beyond what is planned in the government's draft. While capital management companies and major players like KfW, clearing houses, and public debt management agencies have already been included compared to the preliminary draft, the DK believes that professionals such as insurance companies and pension funds are missing. According to the DK, even large, internationally non-active companies should be included in the regulation.
Discord on exceptions
The Bundesrat also misses major insurance companies and pension funds in the planned exception. In its opinion on the draft bill, the Bundesrat insists on aligning the exception with the circle of professional market participants specified in the Securities Trading Act (WpHG). The WpHG specifically refers to large companies subject to the Insurance Supervision Act. Contracts of smaller insurance companies and pension funds would thus remain subject to AGB control, wrote the Bundesrat.
The planned exception from AGB control is already unpopular among smaller market participants. The Federal Association of Securities Trading Firms on the German Exchanges criticizes that the legislative proposal follows an 'ideal image' that does not exist in reality. Small and medium-sized financial market participants, especially securities and financial service providers, are in need of protection compared to powerful large institutions, argues Hans Mewes, legal counsel for the association. It is completely inaccurate to claim that parties of equal standing face each other at the financial market. Standardizing the planned sectoral exception would contradict the protection of the weaker contracting party. Securities firms hope that the exception will be overturned during the parliamentary process.
Controversy on multiple voting rights
One of the few highly contested points is the introduction of multiple voting rights in public companies. Investors, including the Fund Association BVI, strongly oppose it. They see their rights and control options as owners being diminished. The federal government aims to boost IPOs by reintroducing multiple voting rights, which were abolished in Germany in 1998. The government refers to international standards. Founders and company owners often shy away from raising capital through the stock exchange if it means losing influence in the company. Investors point to their legal control obligations within companies. They would not be able to exercise these in the case of unequal distribution of voting rights.
The new regulation is likely to curb investors. The Federal Ministry of Justice justifies the imbalance in voting rights with a strict catalog of requirements, including unanimous approval from the shareholders' meeting for the introduction of multiple voting rights, expiration after a maximum of 20 years, or a ban on transferring multiple voting rights to third parties after an IPO. The Bundesrat considers the differential treatment of companies with and without an IPO regarding multiple voting rights wrong. The list of requirements could deter companies from going public and lead them to raise capital through other means for decades, the Bundesrat noted. Therefore, the Bundesrat insists on deciding in the further legislative process to either completely waive the restrictions or introduce them for all companies' multiple voting rights shares.
Intensive need for consultation
Due to the variety of changes introduced by the Future Financing Act, seven Bundestag committees are dealing with the bill. Apart from the Finance Committee, which is in the lead, these include the committees for Law, Economy, Environment, Digitalization, Energy, and the Budget. This complexity makes deliberations more challenging. The members of the coalition are showing a constructive attitude in the parliament. Even the largest opposition faction, CDU/CSU, barely raised sharp criticisms. However, the Bundesrat must approve the project and could delay the law if the states' wishes are not taken into account. The intervention of the state finance ministers, attempting to overturn the VAT exemption for all alternative investment funds, has already been rejected by the Bundesrat plenary. But time is of the essence if the law is to overcome all parliamentary hurdles by the end of the year.