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Freshfields Risk & Compliance

| 6 minutes read

Too little, too late? – Reforming the German law on general terms and conditions for financial institutions

This post is part of a series on legislative changes proposed by the German Future Investments Act (Zukunftsfinanzierungesetz, ZFG). For further content on the ZFG, please refer to our blogposts on new client asset protection rules for crypto custodians and the upcoming reform of the German Takeover Act.

The German law on General Terms and Conditions (German GTC Law) is rarely newsworthy. Until it is. Last week, the German Banking Industry Committee published its comments on the draft ZFG and the proposal to exclude contracts between financial institutions from being tested under the German GTC Law. Time to take stock of the proposed changes.

Relevance and shortcomings of the German GTC Law in practice

Judicial review of standard terms and conditions is a source of legal uncertainty. Courts may strike down clauses that are widely used and well established based on a substantive review and applying broad principles, such as that a clause “unreasonably disadvantages” the other party or that its “not transparent”. Even careful drafting and legal review cannot exclude legal risks because courts may develop an interpretation of unfairness or transparency that has not been considered before or that, while having been considered, was not deemed likely to be against the body of available case law.

Unlike many other EU jurisdictions, in Germany this uncertainty is not limited to contracts with consumers but also applies to contracts between professional parties. Consumer protection standards are also imposed on contracts among entrepreneurs without necessarily considering their different interests.

This constitutes a significant risk factor for the financial industry. In fact, many banks and financial services providers that have relocated their EU businesses to Germany were confronted with the task of converting their standard contracts, which had been developed under English law, into European law in order to be able to make appropriate offers to their clients. The German GTC Law was a major obstacle to this, and in many cases English law was retained for standardised documentation of the customer relationship, or other European laws were used where possible. But even then, risks remain (e.g., if the relevant agreement was held to relate to a “purely domestic scenario” under the Rome I Regulation, limiting the choice of law between the parties).

What does the draft ZFG propose?

The revised draft of the ZFG provides for an exclusion from the standard terms and conditions test that is specifically tailored to financial services. If passed, the broad criteria of fairness and transparency would no longer apply to certain financial contracts entered into between regulated entities.

Which financial contracts are in scope of the exemption?

The draft law applies to contracts that govern the following activities:

  • Banking services (Sec. 1 para. 1 sent. 2 of the German Banking Act, Kreditwesengesetz, KWG);
  • Financial services (Sec. 1 para. 1a sent. 2 KWG);
  • Investment services (Sec. 2 para. 2 of the German Investment Firm Act; Wertpapierinstituts­gesetz, WpIG); and ancillary services (Sec. 2 para. 3 WpIG);
  • Payment services (Sec. 1 para. 1 sent. 2 of the German Payment Services Act, Zahlungsdienste­aufsichtsgesetz, ZAG);
  • Transactions of Fund Management Companies (Sec. 20 para. 2 and 3 of the German Capital Investment Act, Kapitalanlagegesetzbuch, KAGB);
  • Transactions of stock exchanges and companies operating such stock exchanges (Sec. 2 para. 1 of the German Stock Exchange Act, Börsengesetz, BörsG).

Notably, the draft law does not include contracts of insurance or contracts made by pension funds.

Further, under the current proposal, the exclusion would only apply to contracts that are concluded after the ZFG has entered into force.

Which entities can make use of the exclusion?

The exclusion will not apply to all contracts that govern the regulated financial services set out above.

Rather, the party that provides the regulated service under the agreement must do so lawfully and on a commercial basis (rechtmäßig gewerbsmäßig). The legislative materials state that for contracts where the relevant service is provided by a German entity or a German branch of a non-German entity, this will typically require that the party providing the regulated service is licenced and subject to supervision. Accordingly, the exclusion is generally not available to a non-licenced corporate, irrespective of its size. However, it would seem possible that corporates are able to make use of the exclusion if they provide a regulated financial service set out above under an exemption from the corresponding license requirement and therefore “lawfully” (which may, for example, become relevant where corporate entities trade in commodity derivatives).

For non-German entities the legislative materials indicate that a licence is not necessarily required but that non-German entities must meet all legal requirements in their home state incumbent on a lawfully operating financial institution. It is not quite clear how this requirement should be interpreted in practice. In our view, “lawfully” can hardly mean that the relevant entity would have to meet all requirements applicable to providing the relevant service (including, for example, any conduct-related requirements applicable to the provision of an investment service). Like German entities, it should be sufficient if non-German entities comply with licensing requirements in their home state to provide the relevant service if the service is licensable under the relevant home state rules. The draft law does not address explicitly whether non-German entities would also have to comply with German licencing requirements to make use of the exclusion where they enter into an agreement with a German counterparty.

Which counterparties are in scope of the exclusion?

Regulated entities can make use of the exclusion if they enter into agreements with:

  • Other regulated entities that would be able to provide the relevant regulated service lawfully and that, in fact, provide this type of service on a commercial basis; and
  • Large, regulated entities that are licensed to provide at least one of the regulated services listed above lawfully (but which do not necessarily have to provide the relevant specific service).

Large, regulated entities must meet certain size requirements in order to be a counterparty that is eligible for the purpose of the exclusion. These entities must for each of two calendar years before entering into the agreement fulfil two of the following three conditions:

  • 250 employees (annual average, Sec. 267 para. 5 of the German Commercial Code, Handels­gesetzbuch, HGB);
  • More than EUR 50 million annual revenue; and/or
  • Balance sheet size of more than EUR 43 million (Sec. 267 para. 4a HGB).

In addition to the institutions listed above, other eligible counterparties are the German Central Bank, the Kreditanstalt für Wiederaufbau (KfW), public debt management agencies (Sec. 2 para. 1 no. 3a KWG, resolution agencies (Abwicklunganstalten), the World Bank, the International Monetary Fund, the European Central Bank, the European Investment Bank and similar international organisations. Notably, states, municipalities and other sovereign counterparties are not generally considered eligible counterparties for the purpose of the exclusion.  

Observations and next steps

The draft law is clearly a step in the right direction. However, its current wording (regulated services that are provided “lawfully”) should be tailored further to clarify the applicable test, particularly where non-German contracting parties are concerned. Further, requiring that the counterparty provides the same type of service on a commercial basis (if the counterparty is not a large, regulated entity) will require firms to differentiate on a case-by-case basis depending on the contract and the regulated service that the firm provides under the contract to only select counterparties that provide the same regulated service – a restriction that is unnecessarily complex and restrictive.

Further, the scope of the exclusion would not seem to fully address the practical needs of the financial industry. It is unclear why central banks other than the German Central Bank and the European Central Bank have not been included in the list of eligible counterparties. More fundamentally, the draft law would establish yet another category of clients in addition to existing categories (such as professional clients and eligible counterparties under MiFID) that financial institutions will need to reflect in their onboarding processes to determine whether the exclusion will apply.  Finally, the legislator may want to consider allowing financial institutions to apply the exclusion to existing contracts. Otherwise, the draft law may require firms to engage in a repapering of existing agreement solely to address the risk that individual clauses may be ineffective if German GTC Law continued to apply.

The draft law is expected to make its way to the Parliamentary Financial Committee in mid-October and, pending further changes, is still expected to be adopted by the end of this year. Once adopted, the changes to the German GTC Law will become effective immediately to any in-scope contract that is concluded from this date.  


regulatory, financial institutions, financial services, regulatory framework