In response to the financial crisis and the realisation that investors were not sufficiently informed by their banks about the risks involved in investments in Lehman certificates, the German Parliament (Bundestag) passed a new act in early July 2009 aimed, among other things, at improving the enforceability of investor claims arising from misleading or incomplete investment advice (Act) (as defined in Directive 2004/39/EU (MiFID)). In passing the Act, Germany has responded directly to weaknesses identified as one source of investment losses to German customers.

The key change implemented by the Act requires institutions to prepare a detailed written report of the investment advice provided to clients. Before entering into any business trade based on the advice, the report must be signed by the person providing the advice and sent to the client on paper or another durable medium (such as fax or e-mail). In the case of investment advice provided by telephone, the client can waive its right to receive the report before entering into the trade, provided that both:

In cases where the institution challenges the client's right to revoke the trade, it carries the burden of proof in respect of the correctness and the completeness of the report.

The revocation right entails significant risks for institutions when providing investment advice, in particular, over the telephone. Banks and financial services providers have now started an initiative to reduce their risk by developing a joint report format.

(The initial draft of the Act had, in fact, required a recording of investment advice provided on the telephone. Following criticism that implementation costs of such a system would be extremely high, this approach has been replaced by the revocation right of the client.)

The required contents of the reports are set out in a separate ordinance and include:

The new rules will only apply to retail clients as defined in MiFID and, consequently, will not impact on investment advice provided to professional clients.

The rules are also limited to German banks and financial services providers, as well as subsidiaries and branches of foreign regulated institutions operating in Germany on the basis of the EU passport under MiFID. Institutions operating in Germany on a cross-border basis without a physical presence in Germany will not be caught by the new rules.

The Act will most likely come into force on 1 January 2010.

Institutions should adapt their internal procedures to comply with the new rules. Managers of German banks have already complained that this will require drastic changes to their systems and high costs for clients.