Pan-European online trading platform flatexDEGIRO has been fined for operational and managerial shortcomings by the German financial services regulator BaFin, following an audit of the company.
BaFin said last year that it saw deficiencies in the organisation and management of the brokerage and instigated a special audit of the firm.
The regulator provided flatex with a report containing its findings in November.
These included the imposition of increased capital requirements, as , to ensure it has sufficient funds to cover any large market moves or margin calls that may arise.
BaFin made a public statement this week about the other actions it was taking against the broker, the regulator fined flatex and ordered the broker to strengthen its procedures and management controls.
BaFin has taken action against flatex DEGIRO
BaFin has imposed various measures on the broker including a fine of €1.05 million and mandated an increase in the broker’s capital requirements, of €50.0 million. The busier a brokerage becomes the more working capital it requires.
BaFin has forced the broker to expand its capital buffers to what it believes is the correct level for the volume of business that Flatex DEGIRO undertakes.
The enhanced capital requirement of €50.0 million will remain in place until such time as, flatex can demonstrate that the deficiencies, found by BaFin have been remediated.
BaFin said that it found shortcomings in the firm’s risk management and internal control systems, as well as its supervisory reporting and anti-money laundering procedures.
The German regulator will also appoint a special representative to assist with, and closely monitor, the progress of reforms at the brokerage.
Rather than waiting to re-audit the business in one or two years’ time.
flatex will need to make changes to its operational model
flatexDEGIRO is expected to have to take on an additional 100 full-time employees, to meet BaFin’s expectations, at an estimated cost to the firm of between €7.0 and €10.0 million per annum, according to analysts at US investment bank Jefferies.
When flatexDEGIRO announced some of BaFin’s findings in December 2022, the company’s stock price lost -33% of its value.
That was seen by some analysts as an overreaction, and the broker moved quickly to appoint new members to its management board as well as a dedicated Chief Risk Officer.
It’s not thought that the company will need to raise any new cash to comply with the regulator’s stipulations, though they are likely to prevent the broker from paying an inaugural dividend this year.
The problems at flatex have been characterised as “growing pains” by some in the market, yet the broker was falling short in several key areas including risk management and anti-money laundering controls, functions that are at the core of any financial services brokerage.
It appears that flatex is taking corrective action, but how quickly it can recruit suitable new staff and implement improved procedures remains to be seen.
It would have been better all round if the company had recognised its own shortcomings, and had sort to remedy them in-house, without the need for regulatory intervention.