30 September 2005
A clear strategic vision: Preparing German financial markets for
the European future
In recent years, the German government has taken important steps towards enhancing the
European and international competitiveness of Germany as a financial centre. Both the
German financial sector and our citizens have had to undergo courageous reforms and farreaching changes.

The German government is determined to increase investment savings on the part of
its citizens in a long-term and sustainable manner. The aim is to share more broadly
the benefits of economic success.

In view of an ageing society, the pay-as-you go pension system, as the first pillar of
the pension system, needs to be put on a sustainable basis – this means
strengthening private, fully-funded provision for old age.

The enormous potential of the German financial market as an engine for growth and
employment must be fully utilized.

Generating gross value added of around € 86 bn, the financial services sector in
Germany accounts for roughly 4.6 % of GDP.

What is more, the financial services sector has a well educated and highly skilled
workforce of about 1.4 million, and is thus one of the largest providers of employment
in Germany.

The banking industry is one of the most important sectors of the German economy.

Measured on premium revenue, Germany is the fourth biggest insurance market in the
world and world leader in the reinsurance market.

Germany is home to the world's largest futures and options market – Eurex.

The bond market in Germany is easily the largest in Europe.
I. Important steps on our way:
With its Agenda 2010, the German government has launched a comprehensive reform
programme in all policy areas. This reform agenda also comprises measures to further
develop financial markets including, among others, the 2006 Financial Market promotion plan,
which was presented by Minister Eichel in March 2003, and a 10-point programme to
strengthen corporate integrity and investor protection. Some further measures are:

Takeover law
The Law on securities acquisitions and takeovers (Wertpapiererwerbs- und
Übernahmegesetz), which provides in statute for the first time in Germany a binding
legal framework for the takeover of companies quoted on the stock exchange, entered
into force at the beginning of 2002.

Reform of the structure of the Bundesbank/creation of the German Financial
Supervisory Authority
The subsequent reform of the structure of the Bundesbank and the creation of the
Federal Financial Supervisory Authority (the former federal supervisory offices for
banking, insurance and securities) entailed structural and permanent improvements
for institutional investors. The task of supervising virtually the entire financial sector
has been assigned in Germany to BaFin, the Federal Financial Supervisory Authority.
BaFin is responsible for ensuring the proper functioning, stability and integrity of the
entire financial system in Germany.

Creation of the Bundesrepublik Deutschland-Finanzagentur GmbH
By creating the Federal Financing Agency (Bundesrepublik Deutschland-Finanzagentur
GmbH), federal debt management has been significantly improved with the aim of
cutting costs and optimising the risk structure. The Federal Financing Agency is a
private-law entity under the jurisdiction of the Federal Ministry of Finance; it is
responsible for managing federal debt, ensuring the liquidity of the federal
government and its special funds, and for providing certain services (such as market
analyses and models for managing the credit portfolio, strategic advice on emissions
policy, risk management, advertising and communication with regard to government
securities).

Corporate Governance Code (2002)
With the entry into force of the Law on Transparency and Disclosure Requirements, an
internationally accepted Corporate Governance Code was implemented. It provided for
the – voluntary - disclosure of the remuneration of board members of listed
enterprises.

Fourth Financial Market Promotion Act (2002)
The Fourth Financial Market Promotion Act contains provisions on investor protection,
such as damages in case of erroneous ad hoc disclosures, directors' dealings, code of
conduct for financial analysts, etc., and has made stock exchange law more flexible,
thus significantly improving the framework conditions for Germany as a financial
centre.
II. The building blocks of success: The implementation of the Financial Market
Promotion Plan 2006, the 10-point programme and other measures

Investment Modernisation Act
The Investment Modernisation Act incorporated into national law new EU provisions on
investment funds and adapted German investment law to the conditions of the 21st
century. It established the basis for the introduction of hedge funds in Germany, thus
affording German investors direct access to this innovative product.
In doing so, Germany has taken a liberal approach, while ensuring comprehensive and
effective investor protection.

Investor Protection Improvement Act
Strengthening Germany as a financial centre also implies enhancing investor
confidence. Investor protection and functioning capital markets are inextricably linked.
Thus the Investor Protection Improvement Act was enacted in October 2004. In
pursuing its objective to step up investor protection, the Act enhances transparency in
the provision of capital market information and protection against inadmissible market
practices by implementing the EU Market Abuse Directive and creating a new
prospectus obligation.
The German government has also established a new legal framework to ensure the
requisite transparency in the so-called grey capital market, where an estimated € 30
bn are lost each year. The publication of an issuing prospectus was made obligatory
for unsecuritised corporate investments and shares in closed end funds – this is a key
milestone.

Securities Prospectus Act
The Securities Prospectus Act, which entered into force at the beginning of July 2005
as part of the Law implementing the Prospectus Directive, paves the way for securities
issued in Germany to be sold within the entire European Union (European passport).

Financial conglomerates
The Law implementing the Directive on financial conglomerates entered into force at
the beginning of 2005. With this law, the European standards on the supervision of
complex financial conglomerates comprising banking, securities and insurance entities
were translated into national law in Germany. This law served to close the remaining
gaps in supervision and enhance supervisory competences.

Enforcement
An effective enforcement procedure was introduced into the German corporate
accounting system in the Balance Sheet Control Act. In future, the annual accounts of
listed companies will be reviewed as part of a two-tier procedure, either by way of
random sample or because of specific suspicion.

Asset-backed securities
The German government has made it easier for credit institutions to securitize claims.
Special-purpose vehicles, which assume and securitize credit institutions' claims, are
treated in the same way for trade tax purposes as banks. The relevant legislative
provisions entered into force in August 2003 with retroactive effect from 1 January
2003 as part of the Law to promote small undertakings and to improve corporate
financing.

Mortgage Bond Act
The Law to restructure mortgage bond legislation, which entered into force on 19 July
2005, represents a notable addition to the projects of the German government. This
law will preserve and foster the high quality of mortgage bonds. In addition, the power
to issue mortgage bonds will be extended to all credit institutions which comply with
specific minimum requirements to safeguard mortgage bond business and have been
granted the necessary licence by the supervisory authorities in accordance with the
Banking Act.

Seventh Law amending the Law on the supervision of insurance companies
The law was approved by the Bundesrat on 8 July 2005; it contains provisions
incorporating the EU Pension Fund Directive (2003/41/EC) into national law, and it
bolsters the insurance sector and retirement saving. Fully-funded occupational pension
schemes can now enjoy the benefits of the free movement of capital and services. The
single European financial market for occupational pension schemes will become larger,
more lucrative and safe. The German government will continue their efforts to
preserve and strengthen the sustainability of the three pillar pension system
(statutory, occupational and private pension). The main focus is on protecting current
and future pensioners. The Directive does not affect national social, labour and tax
law.

Amendment to the Law on the supervision of insurance companies (2004)
With the adoption of this law, the German government achieved a significant and
lasting improvement in the international competitiveness of the German insurance
sector and the protection of policy-holders. Key elements are the improved
supervision of reinsurers and new rules for the guarantee fund for life and health
insurance in case of corporate bankruptcies (future guarantee funds Protektor AG and
Medicator AG).

Reform of the accounting and reporting law
This law aims at refining accounting and reporting rules and making them
internationally compatible; it also strengthens the independence of auditors. In
particular, the law creates the framework for companies to use the International
Accounting Standards (IAS) for their annual accounts and to exclude auditors on
account of bias.

Law to strengthen corporate integrity and to modernise the right to challenge
contracts (UMAG), Law on test case litigation for investors (KapMuG)
The KapMuG, which will come into operation on the date of its promulgation, and the
UMAG, which will enter info force on 1 November 2005, entail the following
improvements: The UMAG affords minority shareholders better opportunities to force a
company to sue its members of management or supervisory board for damages. The
KapMuG introduces the possibility of test case litigation to establish whether market
information were falsely given or suppressed.

True Sale Initiative
The German government has actively supported the True Sale Initiative of the KfW
and 13 other credit institutions because this allows credit institutions to improve their
equity base through securitisation and – in terms of Basel II – gives them greater
scope to provide adequate liquidity to the markets. At the end of 2004, the credit
claims of the VW Bank were securitized in the first True Sales securitisation.

European dimension / Financial Services Action Plan
There is a wealth of links between the German government’s financial market promotion plan and the creation of a single European financial market by way of the Financial Services Action Plan of the EU. This is hardly surprising when one recalls that
more than 80% of the capital market regulations owe their origins to decisions of the
European legislators.