ESMA Published Results of Peer Review of BaFin and FREP

In response to a request inviting ESMA to conduct a fact-finding analysis of the events leading up to the collapse of Wirecard AG received from the European Commission, the EU’s securities markets regulator has published the results of its Fast Track Peer Review (Peer Review).

In particular, the Peer Review identifies a number of deficiencies of the supervisory response by BaFin and the Financial Reporting Enforcement Panel (FREP), including the independence of BaFin from issuers and government, market monitoring by both BaFin and FREP, examination procedures of FREP, and the effectiveness of the supervisory system in the area of financial reporting.

According to ESMA, the deficiencies identified by the Peer Review include:

Independence of BaFin from issuers and government:

• Lack of information about its employees'shareholdings.

• A heightened risk of influence by the Ministry of Finance given the frequency and detail of reporting by BaFin, sometimes before actions were taken.

Market monitoring by both BaFin and FREP:

• Non-selection (or non-timely selection) of Wirecard’s financial reports for examination based on risks in the period between 2016 and 2018.

FREP’s examination procedures of Wirecard financial reports:

• ​The scope of the examinations did not appropriately address areas material to the business of Wirecard, nor the media and whistle-blowing allegations against Wirecard; 

• The analyses performed (level of professional scepticism, timeliness of examination procedures, assessment of disclosures) and their documentation were insufficient.

Effectiveness of the supervisory system in the area of financial reporting:

• ​Regarding the respective roles of BaFin and FREP in the case of (indications of) fraud in financial reporting, BaFin and FREP are not aligned in the perception of each other’s role and the limitations and possibilities that both have in the context of the two-tier system;

• ​BaFin was not put in the position to thoroughly assess FREP’s examinations of Wirecard, which would have enabled BaFin to determine whether it should take over the examinations from FREP;

• ​The strong confidentiality regime, by which both institutions are bound, may have hindered the exchange of relevant information between them and with other relevant bodies; 

• ​Instances of lack of coordination and inefficiency in exchange of information between relevant teams in BaFin.