Brussels will call for a probe into whether BaFin, Germany’s banking regulator, failed in its supervision of Wirecard, warning that the payment company’s collapse poses a threat to investor trust in the EU.
Valdis Dombrovskis, the EU’s executive vice-president in charge of financial services policy, told the Financial Times that he was writing to the bloc’s top markets supervisor asking it to assess BaFin’s handling of Germany’s fallen fintech champion.
Mr Dombrovskis said the EU should be prepared to pursue a formal investigation into the German regulator for “breach of union law” if the preliminary probe by the European Securities and Markets Authority discovered shortcomings in BaFin’s upholding of EU rules on financial reporting.
“We will be asking Esma to investigate whether there have been supervisory failures and if so to set out a possible course of action,” Mr Dombrovskis told the FT. “We need to clarify what went wrong.” He will set a mid-July deadline for Esma to reply.
The German watchdog supervised Wirecard Bank, a subsidiary of Wirecard.
In February 2019, BaFin imposed a controversial two-months short selling ban on Wirecard shares. Two months later it filed a criminal complaint against two Financial Times journalists who reported on whistleblower allegations of accounting fraud in Wirecard’s subsidiary in Singapore.
BaFin president Felix Hufeld earlier this week acknowledged that “a whole range of private and public entities including my own have not been effective enough” at preventing the “complete disaster” at Wirecard.
The collapse of Wirecard, until recently the standard bearer of Germany’s fintech sector, in a multiyear accounting scandal is the latest financial conduct crisis for European supervisors already grappling with revelations of money-laundering activities in the bloc’s banking industry.
The price of the company’s shares and bonds plummeted in recent days after it admitted that €1.9bn of cash was missing and Markus Braun, its former chief executive was arrested on suspicion of false accounting and market manipulation before being released on bail. He denies wrongdoing.
The company filed for insolvency on Thursday — the first such filing by a member of Germany’s prestigious Dax index since it was founded 32 years ago.
“This is certainly something that requires investigation,” Mr Dombrovskis said. “As we deepen capital markets and we move forward with the next stages of the Capital Markets Union, an important element is investors’ trust investing in publicly listed companies.”
“Investors need to be sure that they are receiving proper and truthful information . . . and that provision of this financial information is properly supervised,” he said.
Mr Dombrovskis’s call on Esma to intervene is an embarrassment for Germany only days before it assumes the rotating presidency of the EU. He told the FT that the question was whether BaFin fulfilled its obligations to enforce an EU law on listed companies’ financial statements, known as the transparency directive.
The law hands clear responsibilities to national supervisors like BaFin to make sure companies fulfil their obligations. Esma, a pan-EU watchdog based in Paris, sets “common enforcement priorities” for national regulators each year.
The commission executive vice-president also called on German audit regulators to thoroughly investigate whether Wirecard’s auditor, EY, “followed all applicable rules set out in EU legislation”.
Mr Dombrovskis said that, depending on Esma’s initial findings, Brussels could seek a full breach of union law investigation, a process that could lead to Esma delivering a written report listing shortcomings and instructing BaFin to introduce reforms to its working methods.
Ultimately, Esma would have the power to start giving direct instructions to BaFin-supervised financial institutions if the regulator did not take action on the EU authority’s findings.
“Given longstanding allegations about Wirecard's financial accounting, we expect the German authorities including BaFin will now thoroughly investigate whether Wirecard accounts correspond to EU legislation,” Mr Dombrovskis said.
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