BaFin concerned about rise in 2023 in number of regulated complaints in respect of German financial services firms

RegCORE – Client Alert | German Regulatory Developments

QuickTake

Regulated complaints, i.e., complaints submitted by clients (mostly consumers) of financial services firms are a fundamental right enshrined in EU law as well as Member States’ financial services and consumer protection laws. During the course of April 2024, the Federal Financial Supervisory Authority (BaFin), the national competent authority (NCA) of Germany, published a press releasePublished 8 April 2024, available here (in German only).Show Footnote and an articlePublished 8 April 2024, available here (in German only).Show Footnote in the monthly BaFin Journal commenting on a 61.8% increase in the amount of regulated complaints received by BaFin. Equally, BaFin on 19 April 2024 updated its public information on how to file complaints.Available here.Show Footnote Things may certainly get more contentious and financial services firms may need to rethink their conduct and strategy both for regulated complaints (including those that concern firms’ standards of dealing with regulated complaints) and court-based disputes.

One of the key supervisory tasks of any NCA, and in particular BaFin, is to ensure “collective consumer protection” across all sectors of financial services subject to its supervisory mandate. BaFin has highlighted that, while it can step in to investigate matters and take action against wrongdoings impacting a large number of consumers, individual consumers must pursue legal actions and recourse through (i) ombudspersons, (ii) arbitration boards or (iii) through the regular courts.

It should come as no surprise that, with the spike in complaints, BaFin will sharpen its supervisory scrutiny of financial services firms both in their compliance across a number of matters but also concentrate on how complaints are handled in accordance with existing standards and requirements. This builds upon a previous step-up in (a) the amount and (b) depth of thematic reviews plus mystery shopping exercises that BaFin has conducted (and which are assessed in various Client Alerts available from our EU RegCORE). In addition to the adverse regulatory and reputational consequences that arise from growing regulated complaints, comes also higher litigation risk, in particular given the EU’s collective action legislation that is now very much in place across EU Member States and thus also Germany.

This Client Alert assesses some of BaFin’s key findings, possible considerations for financial services firms to (1) reduce more intrusive supervisory scrutiny as well as (2) overall litigation risks by improving complaints handling i.e., before it gets to BaFin, an ombudsperson, arbitration boards or the courts. While the BaFin’s statistics do not cover cross-border complaints nor those submitted via the EU’s financial dispute resolution network, FIN-NETSee here.Show Footnote, there are lessons to be learned both for existing financial services providers as well as new entrants.

Making sense of the BaFin’s 2023 complaints statistics

Before delving into the breakdown of BaFin’s customer complaints statistics, it is essential to understand their nature. Complaints in the financial sector can range from dissatisfaction with service delivery to issues with product features, fees, or the handling of personal information. In line with EU and national laws of Member States as well as supervisory expectations of NCAs, each complaint received by a firm must be treated seriously, with an understanding that it represents a genuine concern from the customer's perspective.

The number of consumer complaints filed with BaFin in 2023 rose dramatically compared to 2022.  In 2023 BaFin received 38,233 complaints from consumers that were clients of banks, insurers and investment services firms. This represents a 61.8% increased to the 23,630 complaints received by BaFin. During 2023 BaFin’s consumer hotline also received assistance requests from 28,261 callers, a 26% growth in comparison to the 22,395 callers in 2022. Approximately 68% of calls concerned banks, 15% insurers and 5% investment services firms.

According to BaFin, the main cause for these increases are attributable to errors and omissions in customer service within banks, insurers and investment services firms.  They are also down to a greater awareness of consumers around the actions of BaFin, including BaFin itself being more proactive in publishing informative material and supervisory warnings on social media.

In breaking these statistics down further, BaFin reports that:

• The banking industry bore the brunt of these complaints with 27,536 in 2023 versus 14,760 in 2022 representing a surge of 86.6%. The primary grievances regarding banks and savings banks were related to customer service disruptions, difficulties with account cancellations, delayed issuance of annual tax certificates, and unauthorised fees for house loan and savings contracts. In the BaFin article, which interviewed the Head of the BaFin’s Consumer Protection Department, it was noted that a significant proportion of complaints about disruptions in private customer service at banks were attributable to one financial institution, which had also suffered a considerable IT outage. Other issues included blockages and/or closure of accounts as well as delays in delivering annual tax certificates. Another main driver was the Federal Court of Justice’s ruling concerning illegal fees for home loan and savings contracts.
• The insurance industry’s issues mainly concerned a repeat issue, namely clients’ frustrations notably the delayed handling of claims along with the sluggish disbursement (or lack thereof) of insurance benefits. The most prevalent causes of grievances regarding health insurers were premium adjustments, difficulties in changing tariffs and uncompensated medical expenses. Property and accident insurers were frequently found to be inaccessible via telephone and automobile and house insurers drove up complaints due to rate hikes. BaFin received a total of 7,680 complaints in 2023, a 20.6% increase of the 6,370 complaints received in 2022.
• The investment services firms sector received regular criticism for many reasons. BaFin noted that customers expressed dissatisfaction with lengthy response times, insufficient replies and challenges related to the transfer of securities accounts with over 33% of complaints on that point alone. BaFin noted that it had received 2,835 complaints, a 17.9% increase from 2,404 in 2022. A further 182 complaints were submitted in respect of asset managers versus 96 in 2022. BaFin noted that investors are getting more inclined to use mobile devices and are more sensitive of costs. The traditional concept of maintaining loyalty to a single provider over a long period of time is steadily diminishing. A significant number of individuals are basically seeking a service that offers affordable prices. There is a higher frequency of switching, which consequently raises the probability of encountering issues.

Despite the above, not all of which are purely domestic issues but instead are echoed across other EU Member States, the BaFin did highlight some positive developments. Specifically, throughout the course of BaFin's history, the bulk of complaints that individuals have historically filed have primarily concerned investment services firms and the quality in providing investment advice (see coverage from our EU RegCore on the EU’s clarifications on what constitutes investment advice). Over the course of the last several years, there has been a significant reduction in the fraction of complaints that fall into this category. The reason for this is partly quite simple: fewer customers are seeking investment advice through traditional channels of communication. While that is not necessarily a success, the BaFin notes that it is striking how the market has changed and what that means for its own supervisory focus.

The number of complaints that were lodged in relation to investment advice remained significantly more than ten percent as of 2018. BaFin notes that complaints have reached a stable level of roughly three percent. The conclusion that can be drawn from this is that investors are progressively looking for less investment advice that is provided in a face-to-face setting and thus in physical branches. In contrast, BaFin notes that the number of consumers accessing investment services that do not include investment advice, such as those provided by online retail focused investment firms i.e., so-called “neobrokers”, is consistently growing. As a result of this, BaFin, in following other Member States, is however adjusting its concentration that it places on supervision of such neobrokers.

Considerations for financial services firms

While the EU has come leaps and bounds to create a Single Market for financial services, a uniform chapter on complaints handling has merely (as of the date of this Client Alert) established minimum standards and core principles. Regrettably, these are subject to fragmented and often conceptually diverging (minimum standards of) rules and practice across the EU-27. The same is true in terms of the existing rules, guidance and supervisory expectations on complaints handling, as set by the European Supervisory Authorities (comprised of the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority) (the ESAs). However, both the EU’s co-legislators and the ESAs are looking to close that gap. As explored in a separate Client Alert, the ESAs have published common binding standards on complaints handling applicable to crypto-asset service providers so as to prevent fragmentation from taking hold in that newest chapter of regulated activity across the EU’s Single Market.

In Germany, as in the case in other EU Member States, there are also a host of practical challenges and issues in the financial services sector related to complaints handling. These include:

• Cross-border enforcement: The cross-border nature of financial services can complicate the enforcement of regulations and the resolution of complaints. This applies both to firms and their compliance obligations inasmuch as it applies to eligible complainants and access to out-of-court redress and resolution. In light of that complexity, lack of comparability and ultimately fragmentation, court-based processes are often viewed as a clearer alternative, with established principles of what can be enforced where and how as well as how quickly.
• Digitalisation: The rise of fintech and digital banking presents new challenges in terms of regulation and consumer protection. This is notably the case where what should be simple questions as to the jurisdiction of where a complaint can or should be lodged may often be or become complex in practical reality and cooperation on an intra-state basis – even with FIN-NET (more on that below). Again, court-based processes are often perceived as a clearer alternative, with established principles of what can be pursued where.
• Complexity of financial products: The increasing complexity of financial products can lead to difficulties in understanding and resolving complaints, in particular in deciding which ombudsperson entity may be the primary out-court-redress scheme that is competent to act. This is especially the case where there are multiple ombudsperson entities for different parts of the financial services markets or types of regulated activity or financial product type. More choice of where to complain can confuse matters as opposed to providing clarity and certainty – again where one single competent court may be viewed as a simpler alternative.
• Consumer awareness: There is a continued lack of consumer awareness on rights and the mechanisms available for dispute resolution. Equally, in Germany, 16 ombudsperson entities may be confusing, whereas court-based procedures with one single court may remain less so.

Given the above and notably in the (current) absence at national (including Germany) and EU level of a more uniform chapter in the Single Rulebook that comprehensively deals with complaints handling and out of court redress, financial services firms may be forgiven for not focusing as enthusiastically nor proactively on complaints handling as the ESAs nor NCAs might like them to be. That being said, customer complaints are a critical aspect of customer service in financial services firms. They provide direct feedback from clients regarding their satisfaction with products and services offered. Handling these complaints effectively is not only a regulatory requirement but also an opportunity to improve business practices, enhance customer satisfaction and maintain a firm's reputation.

Tackling complaints both within a firm (and subject to a robust and established process), avoiding it going to an NCA or an ombudsperson let alone court (and curtail associated time and costs that court may mean for consumers) allows for the firm to capitalise on constructive criticism and turn the complaints process into a rich source of strategic insight. In light of a 61.8% increase in regulated complaints, some firms, even those with a low level of complaints received, may want to refocus efforts ahead of BaFin or other NCAs causing them to do so.

Accordingly, across the EU but also notably for German firms, some of that refocusing may mean embracing a more comprehensive approach to adopting or improving their existing “Complaints Management Strategy”. Such a strategy should ideally encompass the following elements:

• Policy development: Establish clear policies for complaints handling that align with regulatory requirements and best practices. These policies should define what constitutes a (regulated v non-regulated) complaint, the process for lodging a complaint and the expected timelines for resolution. It should also state when a complaint should be referred to the NCA and/or ombudsperson, including via FIN-NET. Such policies need to also tie into an overall litigation strategy as well as respective legal risk management policies and chapters on litigation.
• Training and empowerment: Employees should be trained on the policies and procedures for handling complaints. They should also be empowered to resolve issues promptly and effectively, which can often prevent escalation, including to the NCA, ombudsperson, arbitration boards and/or court.
• Communication and transparency: Clear communication and transparency are vital throughout the complaints handling process. Customers should be able to easily find information on how to make a complaint and what to expect once they have done so. Responses should be timely and accurate deadlines communicated clearly and upfront. During the complaints process, regular updates should be provided to the customer, and the final outcome should be communicated clearly and comprehensively. Staff should have access to up-to-date information across all details of the customer journey and be able to provide information to a (complaining) customer in a consistent manner that draws upon a single and current knowledge base as to products, services and processes.
• Recording and tracking: Implement a system for recording and tracking complaints from receipt through to resolution. This system should ensure that no complaint is lost or ignored and that there is accountability for resolution. Being joined up and avoiding a customer having to repeat details or what they are contacting the firm about (including in a cross-channel setting – phone, email, letter) reduces a complaining customer’s frustration.
• Analysis and reporting: Regularly analyse complaint data to identify trends, root causes, and areas for improvement. Reporting should be done at various levels within the organisation, including to senior management and regulatory bodies as required.
• Resolution and follow-up: Aim to resolve complaints in a timely manner, keeping the customer informed throughout the process. After resolution, follow up with the customer to ensure they are satisfied with the outcome.
• Continuous improvement: Use the insights gained from complaint analysis to make continuous improvements to products, services, and processes. This proactive approach can reduce the frequency and severity of complaints over time.
• Technology and innovation: Leveraging technology (even further than to date) can greatly enhance the efficiency and effectiveness of complaints handling and resolution. Automated systems can help in tracking, triaging and tackling complaints. More advanced systems combine workflow management with artificial intelligence (AI) components. Such systems can assign complaints to competent employees, guide them through the process, prepare draft responses and provide useful information for senior executives, including both a dashboard with aggregated information on all complaints that are being handled and predictions of future areas of potential concern. Such automated systems however also unlock additional compliance requirements that firms will need to consider so as to  identify, mitigate and manage further risks that could be introduced by “ghosts in the machine”.  

Litigation risks – despite BaFin and ombudspersons?

Many financial services firms in Germany are members of private consumer dispute resolution entities recognised as ombudspersons by the Federal Office of Justice. Unlike other EU Member States, Germany does not have one uniform all-encompassing entity. Germany has several ombudspersons organised by sector i.e., banks, savings banks, investment firms and insurers. The ombudspersons working at these entities are mainly former judges or certified mediators tasked with making independent and impartial decisions.

As noted by BaFin on its website on how to complain, the BaFin consumer helpline can only answer questions. A complaint to BaFin will only yield action where (i) a firm is operating without authorisation or (ii) BaFin considers that an authorised firm is conducting a collective harm and will take action to protect collective interests of consumers.

The BaFin’s Arbitration Board deals with disputes involving financial services providers for which no private, recognised dispute resolution entity is designated as responsible. It is thus a substitute catch-all that would step in if the 16 ombudspersons do not. The BaFin Arbitration Board along with the Arbitration Board at the Deutsche Bundesbank (equally a substitute for some financial services firms/products) along with the 16 ombudspersons are all members of the EU’s FIN-NET network.

The EU’s FIN-NET is a network of national organisations responsible for settling consumers' complaints out of court in the financial services area. The network covers the European Economic Area, i.e., EU Member States plus Iceland, Liechtenstein and Norway. FIN-NET participant organisations are responsible for settling disputes between consumers and financial services providers such as banks, insurance companies or investment firms. The network was set up on the initiative of the European Commission in 2001. FIN-NET promotes cooperation between the national dispute resolution entities and provides consumers with access to alternative dispute resolution procedures for resolving cross-border disputes out of court.

FIN-NET is in itself an institution that the ESAs have sought to both strengthen and concurrently reform. Such reforms have focused on strengthening the mandate and scope of operations of FIN-NET. In Germany, the multitude of ombudspersons is also an area that the ESAs have expressed views on even if reform on that current set-up remains a strictly domestic competence that is not due to change anytime soon.

The EU has also set up a platform for online dispute resolution (the ODR Platform). While the ODR Platform covers consumer complaints about merchandise or (not just financial) services purchased online, the platform aims to find a neutral dispute resolution entity to find resolution and redress. Eligible users must live in an EU Member State and the providers must be based in the EU. The core advantage of the ODR Platform is that the complaint is translated into the language of the country in question and the parties to the dispute may access details online as to what stage their complaint has reached in a settlement procedure. In some but not all EU Member States, traders may use the ODR Platform to file complaints about consumers.

While the first port of call of a regulated complaint should be to the financial services provider deemed at fault, and if unresolved the NCA or ombudsperson, arbitration board and/or the courts, not all disputes have to end up in court, even if, given the challenges set out above or clarifications provided on the BaFin’s website on how to complain, it may be tempting to do so. BaFin’s website is clear in stating that:

“Only a court of law may issue legally binding decisions on matters of dispute and, for example, hand down judgements ordering companies to make payments. In contrast to this, BaFin may not issue legally binding decisions on disputes in individual cases.

BaFin also does not provide general legal advice. By law, only certain professions, in particular lawyers, are authorised to provide such legal advice. Consumer protection organisations may also provide support in relation to legal matters. BaFin is furthermore not authorised to provide assessments on general legal matters for consumers.”

If all else fails, or otherwise as a parallel process or an alternative to the above, litigation may either be in the lead or a last resort for many consumers seeking redress from financial services firms. In such circumstances, financial services firms need to generally consider (and should do so specifically given the BaFin’s findings during 2023) the following developments:

• Consumer organisations are increasingly making use of the collective redress mechanisms that have been introduced, inter alia, to implement the EU Directive on representative actions for the protection of the collective interests of consumers (i.e., collective action claims). Thus, financial services firms should be aware that, in addition to traditional (individual) lawsuits they may be facing collective actions or representative actions with consumer organisations as claimants.
• Regulated complaints and other consumer complaints can be seen as an early warning system for potentially upcoming litigation. For that reason, financial services firms should consider updating their litigation strategy or developing a tailored strategy, including an analysis where collective actions, representative actions or significant numbers of lawsuits are likely to be filed against them and how they could be dealt with.
• In the case of major collective or representative actions or recurring constellations of individual lawsuits, it may be advisable to adopt a lawyer-led, technology powered approach and applications designed to handle mass claims in a way that is both effective and efficient, by combining workflow management with tailored AI components to analyse claims, prepare responses and produce aggregated information for decision-makers that can be displayed, e.g., in a litigation dashboard.

Outlook

While financial services firms should, in the wake of the BaFin’s findings, focus on doing better in customer service and overall compliance, they also need to improve their complaints handling policies and procedures as well as overall complaints handling and litigation strategy. This is particularly the case as BaFin and in other EU-27 Member States, the NCAs, individually as well as collectively are going to focus their forthcoming thematic reviews as well as on-site inspections in this area in the supervisory cycles ahead. Aside from that, how a firm conducts itself in handling complaints is crucial to reducing reputational risk and preserving customer retention.

Firms should therefore focus on inefficiencies across (but not limited to) business processes, organisation and governance, data, reporting and analytics, tools and systems of records and training not only with a focus on compliance with “run the business” priorities but also with “resolve the regulated complaint and curtail the ombudsperson and/or litigation risk” strategy in mind while extracting lessons learned and applying both preventive and remedial action as a result of the “constructive criticism” they have received.

About us

PwC Legal is assisting a number of financial services firms and market participants in forward planning for changes stemming from relevant related developments. We have assembled a multi-disciplinary and multijurisdictional team of sector experts to support clients navigate challenges and seize opportunities as well as to proactively engage with their market stakeholders and regulators. Specifically, this includes PwC Legal’s Financial Services Sector Group and the German Litigation and Arbitration Practice Group assisting banks and other regulated financial services firms in the defence of collection and mass actions, including using state of the art LegalTech and generative AI solutions for their regulated Complaints Management Strategy.

Moreover, we have developed a number of RegTech and SupTech tools for supervised firms, including PwC Legal’s Rule Scanner tool, backed by a trusted set of managed solutions from PwC Legal Business Solutions, allowing for horizon scanning and risk mapping of all legislative and regulatory developments as well as sanctions and fines from more than 1,500 legislative and regulatory policymakers and other industry voices in over 170 jurisdictions impacting financial services firms and their business.

Equally, in leveraging our Rule Scanner technology, we offer a further solution for clients to digitise financial services firms’ relevant internal policies and procedures, create a comprehensive documentation inventory with an established documentation hierarchy and embedded glossary that has version control over a defined backward plus forward looking timeline to be able to ensure changes in one policy are carried through over to other policy and procedure documents, critical path dependencies are mapped and legislative and regulatory developments are flagged where these may require actions to be taken in such policies and procedures.

The PwC Legal Team behind Rule Scanner are proud recipients of ALM Law.com’s coveted “2024 Disruptive Technology of the Year Award”.

If you would like to discuss any of the developments mentioned above, or how they may affect your business more generally, please contact any of our key contacts or PwC Legal’s RegCORE Team via de_regcore@pwc.com or our website.