In principle, the German Banking Act (KWG) makes the lending business a banking business and thus a regulated activity subject to authorization. This applies in any case if the business is conducted in Germany on a commercial basis or to an extent that requires a commercially organized business operation. The lending business concerns the granting of money loans and acceptance credits. The provision of such services therefore requires prior authorization from BaFin, which also exercises ongoing supervision over companies that engage in this activity. It is a criminal offense to conduct banking business, including lending business, without prior authorization if it exceeds the aforementioned scope. In particular, business models that initially intend to raise money by means of subordinated products in order to then in turn lend this money to other companies by means of loans should check whether they fall under the aforementioned authorization requirement. In this context, the question arises as to whether these transactions are generally prohibited if there is no BaFin license?

Exception Based on Agreement of a Subordination Clause

According to BaFin’s guidance note on the lending business, the general obligation to obtain prior permission to operate a lending business does not apply in cases where subordination clauses or loss-sharing agreements on the part of an entrepreneurial borrower mean that taking out a loan does not qualify as a deposit-taking business within the meaning of the KWG. In these cases, it should be possible to grant loans to companies without a license, even on a commercial basis or to an extent that requires a commercially organized business operation. Lending to private individuals on this scale, on the other hand, qualifies as a credit transaction requiring a permit despite the agreed subordination or agreed loss participation. In this respect, the regulation mirrors the assessment made by BaFin as part of its interpretation of the deposit business. According to this, funds received from third parties with a qualified subordination clause are not unconditionally repayable and are therefore not considered deposits within the meaning of the deposit business.

Exception for Appearing on the Market like a Credit Institution

However, the exception described above should not apply if the loan is granted by a market participant that acts like a credit institution on the market or in public. Such an appearance should be given in particular if the granting of the loan and the refinancing of the lender result in the overall image of a credit institution. In a case decided by the Administrative Court of Frankfurt, the plaintiff planned to raise investor funds via profit participation rights and also by issuing bearer bonds under the business model it had in mind. Here, the court found that there was no legal scope for a restrictive interpretation of the definition of a lending business analogous to the definition of a deposit-taking business if the company that intends to grant such loans refinances itself by accepting repayable funds from the public – even if this is by issuing bearer bonds. In this respect, in this constellation, loans to companies with qualified subordination also fall under the definition of lending business. It must therefore be decided on a case-by-case basis, taking into account the overall business model, whether the intended transaction of the company granting the loan may fall under this exemption.

Attorney Dr. Konrad Uhink

I.  https://fin-law.de

E. info@fin-law.de

The lawyer responsible for providing advice on business models involving financing in our law firm is attorney Dr. Konrad Uhink.