It is a well-known fact that the supervisory board of a bank can replace a managing director. Supervisory boards of banks of all sizes regularly utilize this option. Such a step initiated by an entity can have a wide variety of reasons and presents a bank, capital management company or financial service provider with specific challenges in reference to personnel and employment law. However, the matter is even more sensitive when the initiative for a personnel change is not initiated by the entity, but by the Federal Financial Supervisory Authority ("BaFin") because it no longer tolerates a managing director. Even in such circumstances, the reasons can vary.

As regulated in Section 25c (1) of the German Banking Act, "The managing directors of an institution must be professionally suitable and reliable for the management of an institution (fit & proper) and devote sufficient time to the performance of their tasks." What sounds like a given, however, does not appear to be a certainty on closer examination of the banking sector. In 2021, two managing directors were dismissed by BaFin and seven were warned.

Reasons for dismissal by BaFin

If BaFin is no longer satisfied with the suitability or performance of a managing director, there is a risk that measures of varying scope may be taken. If, from BaFin's point of view, a managing director is not (or no longer) qualified or personally not (or no longer) reliable, BaFin may demand from the supervisory board or shareholder/s that the managing director(s) be dismissed and replaced with a special representative. Pursuant to Section 25h (1) of the German Banking Act (KWG), credit institutions must have appropriate risk management as well as procedures and principles in place to avert so-called other criminal acts that may endanger their assets. To this end, they must create and update appropriate business and customer-related security systems and carry out controls.

Other criminal offences include fraud and disloyalty, theft, embezzlement, robbery, and corruption. The term is to be understood in contrast to money laundering and terrorist financing, though is deliberately not conclusively defined by the legislator. The concept of criminal acts that may lead to a significant threat to the assets of an institution pursuant to Section 25h (1) sentence 1 of the German Banking Act must therefore be understood and interpreted in a broad sense.

Lax handling of other criminal acts always has consequences

In the event of a specific request for dismissal, BaFin presents the specific managing director and the bank with a fait accompli. Reasons can be, for example, poor compliance, poor risk management or the lax handling of other criminal acts in the company, if the company-related crime was made possible or was not sufficiently prevented due to a lack of organization and supervision by the managing director/s or if actions of perpetrators in the company were covered up.

However, BaFin's approach is not always as direct as in the case of a specific request for dismissal, which poses considerable challenges from a banking supervisory as well as an administrative law perspective for those affected. If, for example, BaFin announces that it is considering dismissal due to various violations and gives the supervisory board the opportunity to comment, the managing director concerned is usually dismissed by the supervisory board out of anticipatory obedience. After all, a supervisory board does not want to mess with a supervisory authority. This also explains the comparatively low number of explicit requests for dismissal by the federal agency, a number which is regularly published in its annual reports. Anyone who abdicates "voluntarily" does not have to be dismissed by a judicially reviewable administrative act.

Career end is a regular result

Such a "voluntary" step often has negative repercussions for the managing director concerned, as BaFin often will not agree to a new appointment to the board or management of another institution. On the other hand, in the event of actively turning a blind eye to criminal offences in one's own company, there is a risk of investigations against the former managing director(s) and, if applicable, claims for damages under civil law.

From a lawyer's point of view, however, it is always advisable to consult an expert in such a situation. Ideally, when the first signs of an approaching measure by BaFin are noticeable, especially since planned measures may still be completely averted or at least mitigated through early detection and appropriate reaction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.