Outsourcing in Germany and changes to the role of the receiving agent

In this article we examine the impact that new measures in Germany will have for third country outsourcing service providers

The Financial Market Integrity Strengthening Act (Finanzmarktintegritätsstärkungsgesetz, "FISG") introduced significant changes to the existing outsourcing regime. In addition to extended supervisory powers for the German regulator, BaFin, and new disclosure requirements for regulated institutions and asset managers, third country outsourcing service providers must now appoint a domestic receiving agent.

With the requirement to appoint a domestic receiving agent, BaFin intends to ensure that its administrative decisions are deemed to have been properly received where the service provider is located in a third country, i.e. outside the EU. In the past, the statutorily prescribed way of delivering such decisions has led to substantial delays or, in some cases, to failed delivery, in particular in relation to third countries. This made it difficult or even impossible for BaFin to exercise its supervisory powers. Sometimes the result was that BaFin delivered a decision and the third party's right to appeal was time barred as receipt was deemed, rather than actual. BaFin has tried to correct this unsatisfying situation, with the new requirement to appoint a domestic receiving agent.

Obviously, the new obligation is less costly and less time-consuming from BaFin's perspective. However, one must also consider the German Act on Service in Administrative Procedure (Verwaltungszustellungsgesetz, "VwZG"). The VwZG includes detailed rules regarding the provision of administrative decisions  - in particular, under the '3-Day-Fiction' rule, a letter from an authority will be deemed to have been served on the third day after it was posted, unless it can be shown that it has not been received or has been received at a later date. If the recipient is located in Germany, BaFin can rely on the service rules set out under the VwZG, which makes it easier for the regulator to determine delivery and hence continue with any enforcement.

Institutions wishing to outsource a function must contractually ensure that the outsourcing service provider appoints a domestic receiving agent. This applies to sub-outsourcing service providers as well, provided they carry out material services.

An outsourcing service provider can, for example, appoint lawyers or notaries located in Germany. It is also possible to appoint the institution that outsourced its functions. Indeed, we have seen this approach being discussed on the market. However, the outsourcing service provider should consider whether it would end up in a conflict of interest should a critical situation arise. If BaFin were to contact the receiving agent regarding identified deficits, there may be a conflict between the interests of the outsourcing entity and those of the service provider. This would obviously be different in a group structure, where the interests of the parties should be fully aligned.

We would be happy to provide you with practical assistance including offering our services as your domestic receiving agent.