Planned short-term amendment to the EdW Contribution Regulation - Draft bill of the Federal Ministry of Finance

At a glance:

• The Contribution Regulation of the Compensation Scheme of Securities Trading Companies (Entschädigungseinrichtung der Wertpapierhandelsunternehmen - EdW) is to be amended on the initiative of the Federal Ministry of Finance (BMF).
• The draft bill envisages halving the percentage contribution rates.
• However, the minimum and maximum annual contributions remain unchanged.
• The amendment is to come into force shortly and will already apply to the accounting year ending 30 September 2024.

The EdW is a compensation scheme that affords retail investors in particular a minimum level of protection for their claims arising from securities transactions against the institutions assigned to the EdW in accordance with the Investor Compensation Act (Anlegerentschädigungsgesetz - AnlEntG)¹. The AnlEntG implemented the European Investor Compensation Directive². The EdW covers institutions within the meaning of Section 1(1) AnlEntG, i.e. investment institutions, certain credit institutions or financial services institutions as well as external asset management companies (Kapitalverwaltungsgesellschaften - KVGs) that are authorised to provide other services or ancillary services³ in addition to the collective asset management of investment funds. The EdW compensates investors for up to 90% of the claims against institutions for which the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) has established a compensation event in accordance with Section 1(4) AnlEntG. The claim is limited to EUR 20,000 per investor. The EdW is financed by annual contributions, special contributions and special payments from the institutions assigned to it. These contributions are calculated in accordance with a regulation issued by the BMF on the basis of Section 7(1) AnlEntG, the EdW Contribution Regulation (EdW-Beitragsverordnung - EdWBeitrV)⁴ .

In recent years, the EdW has been able to conserve its financial resources and build up reserves thanks to the absence of major compensation events and the settlement of the "Phoenix" major loss event. As of 31 December 2022, the EdW's assets amounted to EUR 93.9 million according to the BMF. The six compensation events established since 2005 were fully compensated from existing funds.

The BMF has taken this as an opportunity to amend the annual contribution rates and submitted a draft bill⁵ to amend the EdW Contribution Regulation on 26 April 2024. The draft of a Ninth Regulation amending the EdW Contribution Regulation provides for the individual contribution rates for calculating the EdW annual contributions to be reduced by 50 percent in each case. This should lead to financial relief for the institutions liable to pay contributions as a result of the reduced annual contributions. However, the minimum annual contribution and the maximum annual contribution (so-called upper limit) remain unchanged.
The BMF assumes an average reduction in annual contributions to 57.17 percent as an arithmetic mean compared with the contributions of the last five years. The total annual contribution volume will be around EUR 9.4 million as a result of these changes.

On the one hand, the planned change in contributions is aimed at ensuring the EdW has sufficient funds and, on the other, at exempting those liable to pay contributions from unnecessary burdens. This should enable the EdW to plan and implement an adjusted and moderate build-up in assets. This in turn enables the institutions subject to contributions to utilise the freed-up funds for their business development.

The draft is currently in the consultation phase. Relevant bodies are invited to submit comments on the draft by 24 May 2024. The BMF has set a tight schedule, as the planned Regulation is due to come into force on 1 July 2024. The changes are therefore to apply to the current contribution year ending on 30 September 2024.

_{1 Investor Compensation Act of 16 July 1998 (Federal Law Gazette I p. 1842), which was last amended by Article 7 (11) of the Act of 12 May 2021 (Federal Law Gazette I p. 990).
2 Directive 97/9/EC of the European Parliament and of the Council of 3 March 1997 on investor-compensation schemes.
3 This relates to financial portfolio management, investment advice, custody and management of shares in investment funds and investment brokerage.
4 EdW Contribution Regulation of 19 August 1999 (Federal Law Gazette I p. 1891), last amended by Article 7 (12) of the Act of 12 May 2021 (Federal Law Gazette I p. 990).
5 BMF, Draft bill for a Ninth Regulation amending the EdW Contribution Regulation, available at: https://www.bundesfinanzministerium.de/Content/DE/Gesetzestexte/Gesetze_Gesetzesvorhaben/Abteilungen/Abteilung_VII/20_Legislaturperiode/2024-04-26-EdW-BeitrV/0-Gesetz.html}