German court finds investor protection scheme non-binding | Practical Law

German court finds investor protection scheme non-binding | Practical Law

This article is part of the PLC Global Finance December 2010 e-mail update for Germany.

German court finds investor protection scheme non-binding

Practical Law UK Legal Update 6-504-2940 (Approx. 2 pages)

German court finds investor protection scheme non-binding

by Reinhard Bunjes, Simmons & Simmons

Speedread

The Berlin district court (Landgericht) has ruled that payments from the investor protection funds set up by German banks to extend investor protection in addition to the statutory minimum protection are at the sole discretion of the funds and are not judicially enforceable.
Following the Lehman insolvency and other banks entering rough seas, more emphasis has been placed on investor protection. On the one hand, statutory requirements have been increased in many countries including Germany, where the statutory limit of indemnity is now €50,000. However, on the other hand, both German private banks and their public law competitors have for a long time pointed to additional investor protection schemes that would allegedly protect investments by individual private investors to up to several billion euros, per investor.
In a law suit brought by a private investor, who had suffered losses exceeding the statutory limit when Lehman Brothers became insolvent, against the investment protection fund of the Federal Association of German Banks (Bundesverband deutscher Banken), the Berlin district court found that this promise could not be enforced in court but that the protection fund's articles set out that there is no legal for any compensation payment. While this sentence does not come as a surprise for legal experts, there had not been a court decision to this point.
The decision is relevant for both private banks and public law savings banks (Sparkassen) because the articles of all relevant protection schemes include a provision expressly excluding any legal claim for protection or compensation. While German banks advertise their protection schemes to support investor trust, this decision may harm that trust.