Financial Supervision After 2020: What Has Changed in Germany

Why financial supervision came under fire in 2020

In June 2020, a DAX company collapsed within a week because 1.9 billion euros in trust accounts most likely did not exist. Chronicle of an accounting scandal recounts the sequence. Attention quickly turned to the Federal Financial Supervisory Authority, BaFin for short. For years it had done little in response to critical reports and in 2019 had imposed a short-selling ban on the stock.

This article asks: What has actually changed in German financial supervision since 2020, and is it enough to detect comparable cases earlier? To answer it, we first clarify how supervision was organized before, then introduce a thinking model, go through the changes and their first results, weigh two readings, and transfer the result to control in your own business.

How financial reporting enforcement was organized until 2021

Financial reporting enforcement checks whether capital-market-oriented companies prepare their published financial statements according to the rules. It differs from the statutory audit: the auditor works on behalf of the company, enforcement in the public interest.

Since 2005, Germany had a two-tier procedure for this. First, the Financial Reporting Enforcement Panel (DPR), a private association, examined the accounts. Only if a company did not cooperate or did not accept the result could BaFin intervene with sovereign powers. The main sanction was publishing an identified error. Berninger (2024) examined 213 such error announcements from 2006 to 2019 and found that the share price fell significantly around the announcement throughout the period. Publication therefore had an effect.

The weaknesses lay elsewhere. The DPR had little staff and no power to obtain documents against a company's will. BaFin, in turn, supervised only the group's own bank in the 2020 case, not the group, which counted as a technology company. Fintechs and supervision describes this gap in detail.

The thinking model: when a supervisor loses its distance

In 1971, the economist George Stigler formulated capture theory. It holds that regulators tend over time to represent the interests of the industry they are supposed to supervise. The reason is not ill will but an imbalance: the supervised have much to gain and invest in contacts, knowledge, and staff, while the public is dispersed and hardly organized. Those who talk daily with the supervised, and may later work for them, easily adopt their view.

An analogy from sport makes this tangible. A referee who works for one of the two clubs during the week may want to officiate honestly on Saturday. Whether he will rule against his employer in a close call, nobody knows, not even he for certain. That is why such ties are banned rather than relying on character.

There is a remarkable finding on this for Germany. Heese (2022) examined 697 listed companies from 2004 to 2019. DPR executives were allowed to sit on the supervisory boards of listed companies during their tenure. They did so at 28 companies, totaling 137 board-years. After such a company brought an active DPR executive onto its board, the estimated likelihood of an enforcement action fell practically to zero. At the same time, signs of aggressive accounting rose, such as qualified audit opinions and conspicuous accruals that increase earnings.

Heese names the limits himself: the matching of regulators to companies is not random, and a few individuals drive the result. The study is not causal proof. But it shows a pattern that capture theory would predict.

A supervisor that stands too close to the supervised does not see less; it asks less.

What the Financial Market Integrity Strengthening Act changed

The legislative response was the Financial Market Integrity Strengthening Act, FISG for short, of June 2021. It addressed several areas at once: financial reporting enforcement, statutory auditors, and the governance of listed companies.

Leadership changed too. President Felix Hufeld and his deputy resigned in early 2021. Since August 2021, Mark Branson, previously head of the Swiss financial market supervisor, has led the authority. According to press reports, his mandate was extended early to mid-2029. BaFin also tightened the rules on its employees' private securities trading after it emerged that staff had traded shares in the group concerned.

For statutory auditors, the rules explained in detail in How independent are auditors? apply. In 2023, the auditor oversight body APAS imposed a fine of 500,000 euros on the audit firm involved and a two-year ban on new engagements at public-interest entities.

What the first figures show

Whether a reform works is shown not in the statute book but in the work. According to its activity report for 2025, BaFin completed 50 enforcement procedures, 42 as sample-based reviews and 8 for specific cause. In 14 cases it found errors in financial reporting. In 2020, the DPR had still reviewed nearly 90 companies.

The figures can be read two ways. Arithmetically, more than one in four procedures ended with an error, which suggests targeted selection. The errors, however, were often classic ones: omitted impairments, overly optimistic plans, weaknesses in the management report. Expert critics doubt that 50 procedures suffice to deter among more than 500 companies subject to enforcement.

The European Securities and Markets Authority (ESMA) has also followed developments. In its 2020 review, it criticized among other things that BaFin had informed the finance ministry very closely and sometimes before taking its own steps, which increased the risk of political influence. In a later follow-up, it welcomed the formalization of this relationship but still saw areas vulnerable to influence.

Two readings: a real turnaround or a new facade?

Both readings carry weight. The reform fixed the two weaknesses that can be clearly named: split responsibility and missing powers. The third weakness, closeness to politics and to the supervised, can only be limited by law. Buttigieg, Witzel, and Zimmermann (2023) speak here of soft capture, which can arise from legal dependence on the ministry.

I consider the reform a real improvement in tools and an open question of attitude. Whether the supervisor will pursue critics in a future case rather than fend them off will only be shown by that case. Short sellers as watchdogs? discusses the role such critics play.

What this means for your business: authority, distance, consequences

Financial reporting enforcement directly affects only capital-market-oriented companies. Indirectly, BaFin affects every business: as supervisor of its bank, payment provider, insurer, and crypto service providers under MiCA. Moreover, the lessons of the reform apply on a small scale. I summarize them in a test with three questions you can ask of every control in your business.

1. Authority: may the checker see everything?

   A check that only examines what is presented to it is a confirmation. Agree that your tax advisor, advisory board, or internal review may inspect documents directly, for example with their own read access to bank accounts.

2. Distance: does the checker not profit from the result?

   Whoever produces a figure should not sign it off themselves. Corporate governance for small businesses describes how to separate roles without building a corporate apparatus.

3. Consequences: what happens after a finding?

   A check without consequences quickly loses its effect. Record who decides what after a finding, and by when.

Supervision has also gained new neighbors. Since July 2025, the European Anti-Money Laundering Authority, AMLA, has been operating in Frankfurt and is to supervise selected financial companies directly from 2028. The Money Laundering Act for small businesses discusses which obligations also affect small businesses.

Conclusion: better tools, an open test

To the guiding question: much has changed in German financial supervision since 2020. Enforcement lies with one body that has coercive powers, the rules for auditors and control systems are stricter, and BaFin has units for complex cases and new leadership. Capture theory and the finding on the former review body show why these changes start in the right place. Whether they suffice is open: the number of reviews is small, and closeness to politics can only be limited, not eliminated.

A supervisor is measured not by its laws but by the case in which it follows an uncomfortable tip. The same holds for a business.

• Test every control in the business against the three questions of authority, distance, and consequences.
• Ensure your own read access to all business accounts, independent of the provider.
• Look up the authorization of payment and crypto service providers in BaFin's database.
• Record who decides after a finding and within what deadline.