Executive Summary
On 22 July 2026, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungaufsicht, “BaFin”) published a Supervisory Communication regarding the Payment for Order Flow (PFOF) ban under Article 39a MiFIR, which is applicable since 1 July 2026. The communication provides the first detailed indication of which business models BaFin generally considers to be compliant with the PFOF prohibition and which arrangements it regards as constituting an impermissible circumvention of the prohibition.
Of particular significance is BaFin's express emphasis on an assessment based on the economic substance of an arrangement.
For supervisory purposes, BaFin makes clear that the assessment should not be determined solely by the legal or contractual form of a business model. Rather, the relevant consideration is whether payments linked to the transmission of client orders to particular execution venues continue to be received in substance, or whether equivalent economic incentives remain in place.
The communication therefore provides investment firms with additional guidance when designing alternative remuneration and execution models. At the same time, BaFin signals that it will take a critical approach to structures that seek to circumvent the objectives of the PFOF prohibition.
What has happened?
Article 39a MiFIR prohibits investment firms from accepting fees, commissions or any monetary or non-monetary benefits from third parties in relation to the forwarding of client orders to trading venues. While the PFOF ban has already applied to cross-border business since 28 March 2024, Germany made use of the temporary exemption under Article 39a(2) MiFIR for domestic business until 30 June 2026. Following the expiry of the German transitional regime on 30 June 2026, the prohibition has applied in full to German investment firms in respect of their retail clients.
With its Supervisory Communication, BaFin explains for the first time its supervisory assessment of specific business models and provides an initial assessment of selected market practices.
BaFin notes that its supervisory approach may evolve in light of further European-level clarification or additional supervisory experience. BaFin also expressly expects investment firms to take into account the European Commission's Q&As on Article 39a MiFIR.
Why does it matter?
Following the expiry of the German transitional period, many market participants were faced with the question of which alternative revenue and execution models could be compatible with Article 39a MiFIR. The communication illustrates that BaFin intends to interpret the PFOF ban in a very wide way. In BaFin's view, PFOF arrangements give rise to inherent conflicts of interest which, according to the European legislator, are incompatible with an investment firm's obligation to achieve the best possible result for its clients when executing orders.
Against this backdrop, particular importance should be attached to BaFin's express reliance on an assessment based on economic substance rather than solely on the legal or contractual structure of a given arrangement.
Practical implications for firms
Business models regarded as compliant
BaFin expressly confirms that certain business models may, in principle, be compatible with the PFOF prohibition.
This includes, in particular, the execution of client orders on own account, for example by a systematic internaliser or a market maker. The key distinction from traditional PFOF arrangements is that the investment firm does not receive a third-party payment for routing order flow to a particular execution venue, but generates its remuneration through its own trading activity and assumes the associated trading risk. BaFin emphasises that firms operating such models must continue to comply fully with their best execution obligations. This includes regularly reviewing the effectiveness of their execution arrangements and, where execution is concentrated on a single execution venue, being able to demonstrate separately that the relevant arrangements are capable of delivering the best possible result for clients.
The beneficiaries of this interpretation are larger neo-brokers and operators of MTF platforms as they can continue to operate without any substantial changes. Smaller market participants will, however, have substantial problems to adjust their trading models to the PFOF requirement.
The authority also refers to ongoing European regulatory work aimed at further specifying the requirements applicable to order execution policies and the review of their effectiveness.
In addition, certain product-specific distribution payments relating to primary market products may fall outside the scope of the PFOF prohibition, provided that such remuneration is not dependent on the execution route chosen and does not give rise to conflicts of interest in connection with order execution. This is particularly relevant for primary market products for which, apart from the manufacturer's price quotes, there is no liquid secondary market.
BaFin also clarifies that rebates or discounts on transaction fees may fall outside the prohibition only within the narrow limits of Article 39a(1) subparagraph 2 MiFIR. In particular, such rebates or discounts must be provided under the public and approved tariff structure of the relevant trading venue, must exclusively benefit the client and must not result in any monetary benefit for the investment firm. BaFin further clarifies that retroactive volume rebates applying to orders already executed and arrangements resulting in payments exceeding the originally paid transaction fees do not fall within this exception.
Business models regarded as non-compliant
At the same time, BaFin identifies a number of arrangements which it considers incompatible with the PFOF ban.
These include, in particular:
- arrangements under which PFOF is first paid to the client and subsequently transferred to the investment firm ("payment of PFOF on behalf of the client");
- intermediary broker structures designed to disregard the original retail nature of the order flow; and
- structures involving group-owned trading venues where inflated fees effectively recreate PFOF-like payment streams.
In relation to intermediary broker structures, BaFin makes clear that an executing firm cannot avoid the PFOF ban merely by arguing that it receives the order from another investment firm rather than directly from the retail client, where it is aware that it is acting in an intermediate or sub-commission structure and is executing retail order flow.
BaFin further clarifies that the prohibition also applies to client orders where the client specifies the execution venue, as well as to OTC transactions.
Our observations
The Supervisory Communication goes considerably beyond a restatement of the legislative framework. For the first time, BaFin has published concrete examples of business models which it considers to be either compliant or non-compliant with the PFOF prohibition. This provides market participants with additional guidance when assessing existing arrangements and developing alternative business models.
One notable aspect of the communication is BaFin's consistent emphasis on economic substance. The examples provided suggest that the authority will focus increasingly on whether a particular structure preserves, in substance, the same economic incentives that were inherent in traditional PFOF arrangements.
Equally noteworthy is BaFin's clear distinction between the PFOF prohibition and the MiFID II inducements regime. BaFin makes clear that the PFOF ban constitutes an autonomous regulatory requirement and that exceptions available under the inducements framework cannot automatically be relied upon in the context of Article 39a MiFIR. This is particularly relevant for arrangements involving payments made "on behalf of the client" or structures whereby PFOF is first rebated to clients.
BaFin's observations also underline the close link between the PFOF prohibition and best execution requirements. Firms relying on internal execution arrangements or a limited number of execution venues will continue to need to demonstrate that their execution arrangements are capable of delivering the best possible result for clients on a consistent basis.
The clarification on transaction fee rebates is also important. It shows that BaFin does not treat all fee discounts as problematic, but confines the permitted exception to arrangements that are transparent, reflected in the public and approved fee schedule of the trading venue, and economically passed on to the client without creating a monetary benefit for the investment firm.
Finally, the communication suggests that the supervisory debate surrounding the PFOF prohibition has not yet reached its final stage. Given the ongoing dialogue between BaFin, ESMA and other European competent authorities, as well as the possibility of further clarification at EU level, it remains to be seen whether additional guidance or supervisory expectations will emerge in due course.
Conclusion
Through its Supervisory Communication, BaFin has provided its first detailed supervisory assessment of selected business models following the full application of the PFOF prohibition in Germany. While the authority confirms that certain alternative models may, in principle, remain permissible, it also makes clear that structures will be assessed by reference to their economic substance and practical effect rather than their formal legal design.
For investment firms, the communication provides important guidance for the review of existing order routing, execution and remuneration arrangements. Going forward, particular emphasis is likely to be placed on the economic substance of a business model, the management of potential conflicts of interest and continued compliance with execution requirements.
