The opportunity for investment platforms: A conversation with Effecta
April 27th, 2020
Tobias Hirsch is managing director of Effecta GmbH, a service provider for the financial industry. As liability umbrella for financial brokers, industrial issuers, investment platforms and second brokers, Effecta offers numerous solutions in terms of investment brokerage and investment advice. Anyone who uses Effecta does not require their own KWG license and still acts in compliance with the law. In conversation with Managing Director Tobias Hirsch, we identified the opportunities offered by digital securities for investment platforms and took an extensive look at regulatory pitfalls.
Cashlink: Dear Mr. Hirsch, we are very pleased that you are answering our questions today as an interview partner. Why not introduce yourself and your company Effecta briefly?
Tobias Hirsch: Effecta GmbH is a financial services institution pursuant to § 32 KWG. We are licensed to provide investment advice and investment brokering. We are not ourselves active in the brokerage and consulting of securities, but we make the permissions available to other companies. This is made possible by a sector exception in the German Banking Act (KWG). The so-called contractually bound brokers then act in the name and on behalf of Effecta GmbH in accordance with § 2 (10) KWG. In this form of service, Effecta concentrates on the good conduct of the liable parties in the sales process, i.e. we monitor compliance with the regulatory and money laundering requirements of the legislator, among others. Since we have been working with crowd investing platforms since 2015 and have organized online process flows with no media discontinuity, we have been able to further develop these processes with a wide variety of platforms in recent years. Today, we are probably the market leader in this segment with about 15 crowd investing platforms.
Cashlink: Through blockchain technology, the so-called “fractional ownership” has gained much attention. In particular, it makes new forms of investment attractive, whose coverage was previously economically unattractive. As a result, numerous investment platforms have sprung up, offering end users simple and promising investments in real estate shares, start-up and SME investments. Why do such investment platforms need a liability umbrella?
Tobias Hirsch: The sale of financial instruments is regulated in Germany. No one may sell financial instruments on a commercial basis or provide advice on them without official approval. For the sale of a number of financial instruments, the so-called investments, a license under the German Trade Regulation Act is sufficient. Under Section 34f GewO subordinated loans, for example, may be brokered and advised. The existing crowd investing platforms predominantly use this permission. However, if they also want to sell securities, the license under the German Trade and Industry Regulation Act is no longer sufficient. In 2019, the BaFin classified new types of financial products created with the help of the blockchain as securities if they are tradable, transferable and have securities-like characteristics. Thus, as a rule, all security tokens fall under the definition of securities. Securities may only be distributed by companies that have a license under the German Banking Act. This license places higher demands on the qualification of the management and also on the organization itself. Many platforms therefore make use of a “liability umbrella” that quasi “awards” the license under quite strict conditions.
Cashlink: What role does a liability umbrella play?
Tobias Hirsch: The platform makes use of a financial services institution that monitors the legal requirements. At Effecta, we have solved this with the platforms in the form of a network. The processes on the platforms are transferred to us, controlled and returned to the platforms. Subscriptions are then accepted by the issuing company. The process architecture is not entirely trivial, yet it requires a joint effort in development. This is where the advantages of IT companies like Cashlink come into play. With Cashlink, we defined and set up standard processes intensively over months. Investment platforms that have not yet implemented these processes themselves can very easily make use of the technology of a company that offers white labeling. In this way, companies have – almost “plug and play” – a sales process coordinated with Effecta.
Cashlink: What should such investment platforms urgently consider?
Tobias Hirsch: One thing is quite important to me. In today’s world, UX, user-friendliness, is more and more important. Sometimes the factual view of the product to be distributed fades into the background. But this is extremely important when buying financial products. Investors should always have the opportunity to objectively and factually evaluate the investment, regardless of how user-friendly it is. If they understand the investment and can assess the associated risks, this generally also increases the quality of the platform. Good investment products will prevail and satisfied investors will remain loyal to the platform in the long run.
Cashlink: And what should investors who want to use such an investment platform keep in mind?
Tobias Hirsch:Some process flows may seem a bit cumbersome and one wonders why this or that query or confirmation is necessary. However, these are the legal requirements, which can sometimes be discussed, but in principle they are quite justified. Investors should always take the time to gather as much information as possible about the financial product on offer and evaluate it themselves. Not to forget: high returns are paid with high risk. Nearly all offered investments have a total loss risk. Do I understand the investment and is the return worth the risk? This is a question that investors must ask themselves and answer for themselves. Don’t let yourself be rushed!
Cashlink:How do you assess the regulatory situation in the field of investment platforms? Are there too many hurdles or are laws too loose?
Tobias Hirsch: All in all, it fits. The current regulation has already achieved a lot. I assume, that the blockchain technology will play an increasingly important role in the development of capital investments as the transaction costs of the financial instrument are significantly reduced. Consequently, the sale of investments will essentially fall under the German Banking Act. This will ensure a uniform level of quality in the sale of investments. In my opinion, there will always be changes in regulation. This is an ongoing process.