BaFin consultation on proposed product intervention measure on Turbo Certificates

Overview and context

 The proposed product intervention measure is the result of a market survey undertaken by BaFin in 2024. The scope of the market survey were transactions in turbo certificates undertaken by German retail investors in the years 2019 to 2023. The analysis was undertaken on the basis of MiFIR transaction reporting data (the data itself was not made available). It determined that seven out of ten retail investors suffered losses when trading turbo certificate and total losses amounted to EUR 3.4 billion in the time period examined.

As a result of its analysis of the survey, BaFin has determined that the marketing, distribution and sale of turbo certificates raises significant investor protection concerns within the meaning of Art. 42 MiFIR due to the product-inherent features of turbo certificates and the fact that the consequences resulting from the short holding period, the risk of total loss and the distribution and sales practices in connection with turbo certificates are particularly disadvantageous for retail investors. BaFin has determined in this respect, that the existing regulatory frameworks (e.g. MiFID II, Prospectus Regulation, PRIIPs Regulation, WpHG) do not sufficiently mitigate these investor protection concerns and the aim of the proposed product intervention measure is to address these concerns and to impose restrictions rather than an outright ban, balancing investor protection with market access.

Turbo certificates for the purposes of the proposed product intervention measure set out in the proposal of the general decree mean bearer bonds that track the performance of an underlying asset on a leveraged basis and expire immediately upon reaching a specified knock-out barrier. The intended product intervention measure is addressed to issuers, intermediaries and offerors of turbo certificates.

Proposed product intervention measure

In its proposed general decree, BaFin suggests various conditions that must be met in order to market, distribute and sell turbo certificates to retail investors in Germany. The conditions include the following measures:

• Standardised Risk Warning

  All communications (e.g. online/print marketing, brochures, webinars, product pages on websites, order masks etc) from intermediaries, issuers and offerors on the marketing, distribution and sale of turbo certificates to retail investors domiciled in Germany must contain a standardised risk warning that is prescribed in Annex I to the general decree. This risk warning must (i) show that seven out of ten retail investors suffer losses when trading turbo certificates and (ii) clarify that turbo certificates are highly risky product and not suitable for long term investment strategies.

  Annex 1 also contains information on some formal requirements that have to be taken into account in relation to the presentation of the risk warning, e.g. on the permanent visibility of the risk warning, the font size, the layout of the risk warning compared to the other text of the communication and/or potential language requirements.

  In connection with the mandatory standard risk warning, intermediaries, issuers and offers must also ensure that third parties (e.g. finfluencer, affiliate partners) who advertise the trading of turbo certificates on their behalf also indicate the risk warning in their communications regarding turbo certificates.

• Prohibition of Incentives

  Retail investors domiciled in Germany may not be granted any monetary or non-monetary benefits, including volume-based benefits, in connection with the purchase of turbo certificates. This prohibitions means that, for example, order fees may not be reduced or waived, and there may also be no “new customer bonuses” and/or advantages in case of a friend referral. Non-monetary benefits such as preferential customer service or gifts are also not allowed.

  However, the prohibition does not apply to general actions that do not specifically relate to turbo certificates, are not temporary and are not linked to conditions such as a certain transaction volume or a number of transactions. In addition, the prohibition does not apply to information and research tools, such as analysis tools, tutorials, training or the provision of stock market prices, which are made available to retail investors in connection with turbo certificates and can support retail investors in making decisions.

• Extended Appropriateness Assessment

  Investment firms selling turbo certificates must carry out an extended appropriateness test prior to the acquisition of a turbo certificate by a retail investor in Germany. The requirements for the extended appropriateness assessment are set out in Annex II of the general decree. Pursuant to Annex II at least six questions in relation to the mechanism of turbo certificates that are set out in Annex II as well must be asked in multiple-choice format in the course of the test (e.g. questions about the impact of the occurrence of a knock-out event, the holding period, costs of trading turbo certificates, percentage of retail investors lose on average when trading turbo certificates, price quotations and the insolvency of the issuer of turbo certificate).

The extended appropriateness test can be repeated by the retail investor as often as desired.

A passed extended appropriateness test is valid for a maximum of six months. After six months, the extended appropriateness test must be carried out again before purchasing a turbo certificate.

It is not indicated in the general decree that BaFin is currently planning any further product intervention measures with regard to turbo certificates. This said, in its proposal of the general decree BaFin has explicitly pointed out that a fixed leverage restriction pursuant to which a turbo certificate would have to be automatically terminated when the maximum leverage is reached would not be a suitable measure from their perspective as such measure would further increase the complexity of the product.

The product intervention measures only include turbo certificates distributed to retail clients domiciled in Germany, i.e. the distribution of turbo certificates to professional clients and/or to retail clients not domiciled in Germany is not affected by the proposed product intervention measures.

The general decree shall be deemed to have been publicly announced on the day following the announcement. The proposed measures include a three-month implementation period following the publication of the general decree, ensuring adequate time for market participants to adjust their practices accordingly.

Next steps

Stakeholders are invited to submit their comments on BaFin´s proposed product intervention measure by 3 July 2025.

This note is for guidance only and should not be relied on as legal advice in relation to a particular transaction or situation. Please contact your normal contact at Hogan Lovells if you require assistance or advice in connection with any of the above.

Authored by Jochen Seitz and Peter Maier.