Anyone who has spent the past two years on the provider side will recognise the structures described in the notice without difficulty. They had been circulating as design options across the market for some time. Bafin did not invent them; it observed them. That is the real information content of this document.
The starting point
The prohibition on receiving fees, commissions or non-monetary benefits from third parties for forwarding client orders to trading venues follows from Article 39a(1) MiFIR. It has applied to cross-border distribution since 28 March 2024. Germany made use of the national transitional option, so the last day on which domestic investment firms could receive PFOF in relation to domestic clients was 30 June 2026. Since 1 July 2026, the ban has applied in full.
The addressees are investment firms within the meaning of Article 4(1)(1) of Directive 2014/65/EU (MiFID II), which in Germany means essentially all securities services enterprises under section 2(10) of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG). The European legislator's reasoning is doctrinally straightforward and supervisorily powerful. Third-party payments for order routing create a conflict of interest that arises as early as the decision to connect to an execution venue, and that conflict cannot be reconciled with the duty to obtain the best possible result for the client. It is therefore not a conflict that can be neutralised through disclosure or organisational arrangements. This is why the new administrative practice is strict, and why Bafin states expressly that there are no unwritten exemptions.
The chosen instrument is itself worth noting. A supervisory notice is not a legal norm; it binds the authority rather than the market, and it is easier to revise than a circular. This one is limited in time until 30 June 2029 and is intended to be converted into a circular once administrative practice has settled. Bafin is thereby saying openly that its own position is still forming. Two consequences follow. The catalogue of examples is not exhaustive, and a structure that does not appear in it is not for that reason safe.
What the supervisor accepts
Bafin permits the following structures:
Dealing on own account as a systematic internaliser or market maker.
Bafin accepts that an investment firm may execute client orders against its own book. The reasoning is economic rather than formal: a firm that provides liquidity bears market risk, and the resulting revenue therefore stems from its own risk-taking rather than from a third-party payment. What matters is the economic substance, not the contractual label.
Product-related distribution remuneration.
Payments from issuers for primary market products for which no liquid secondary market exists, apart from the manufacturer's own quotes, fall outside the ban. The issuer must grant the remuneration irrespective of the order routing path, and it must not create a conflict of interest in order execution. Product governance and the inducements regime continue to apply alongside.
The narrow rebate exemption.
Article 39a(1) subparagraph 2 MiFIR permits rebates and reimbursements of transaction fees under a trading venue's published and authorised fee structure. Bafin reads the provision strictly against its wording. The benefit must accrue exclusively to the client, must not be granted retroactively to orders already executed once volume thresholds are reached, and must not exceed the transaction fees originally paid. Net payments to the order flow provider are therefore excluded.
What the supervisor rejects
Bafin sets out three structures it regards as impermissible.
PFOF paid on the client's behalf.
The market maker first credits the payment to the client's cash account, from where it is passed on to the investment firm, which then discounts its order fee accordingly. This is impermissible: payment flows and revenues remain economically unchanged and the conflict of interest persists. Article 39a(1) MiFIR contains no exemption for payments made on the client's behalf comparable to section 70(1) sentence 1 WpHG.
Intermediate commission agent.
The retail-facing firm forwards orders to an executing investment firm, which formally receives them from an eligible counterparty and collects PFOF. This is impermissible: the nature and origin of the underlying order do not change through the interposition of an eligible counterparty.
Group-owned multilateral trading facility with excessive fees.
The payment flow is recharacterised as a settlement fee payable to a group-owned trading venue and returns to the order flow provider through profit distribution. This is impermissible where the fee is materially above market levels and substantially exceeds the operating costs of the venue.
Bafin further clarifies that the ban applies to instructed orders, where the client specifies the execution venue, and to over-the-counter execution against a dealer. The exemptions available under the inducements regime in Article 24(9) MiFID II cannot be read across to Article 39a(1) MiFIR. Receiving PFOF and passing it on to the client in full likewise remains prohibited.
Why this matters more in Germany than elsewhere
Germany is the European market in which PFOF mattered most, for reasons of market structure rather than regulatory permissiveness. Three features combined:
- First, retail execution here has moved, to a substantial degree, away from the regulated markets, with specialist off-exchange venues and dealer platforms competing for retail flow on price and reach. That competition needed a currency, and PFOF became it.
- Second, the zero-commission proposition that reshaped German retail investing over the past decade was built on the assumption that the execution side would fund the distribution side. Where the headline order fee is nominal, the economics have to sit somewhere, and they sat in the routing.
- Third, and least discussed, the German market unbundled itself. Custody, execution and settlement are increasingly delivered as licensed infrastructure to a customer-facing brand that may hold no securities authorisation of its own. That layering multiplied the number of points in the chain at which a payment can enter and made the question of who is receiving what from whom genuinely difficult to answer from the outside.
The impact of the PFOF rules is accordingly uneven. For institutions with broad, diversified income and conventional order pricing the loss is one earnings item among many. For firms whose distribution proposition depended on execution-side income, it goes to the viability of the model itself. By Bafin’s own account, the number of firms in serious difficulty is small but compliance work was still incomplete at some of them well after the cut-off date, which is a striking finding for a deadline known years in advance.
Four response patterns are visible in the market. Firms have moved into dealing on own account, whether as systematic internalisers or as market makers on a venue; some have gone further and secured venue authorisation within their own group; others have raised or restructured client-facing fees; and a further group has recharacterised existing flows in ways that are precisely what the notice now addresses. The first two are the routes Bafin endorses, subject to conditions that are considerably more onerous than the endorsement suggests.
The point that is missing from the public debate
Commentary treats own-account dealing as the way out. It is one, but it is not an exchange of one revenue source for another. It is an exchange of one risk profile for another, and it is expensive.
First, the conflict of interest moves; it does not disappear. A firm that previously had a conflict in routing will have one in pricing. Regulatorily the new conflict is treated differently, as manageable rather than irreconcilable, but it must actually be reflected in the conflicts of interest policy, in spread governance and in compliance monitoring. A conflicts policy that does not address dealing against the firm's own client base is simply incomplete from a compliance perspective.
Second, best execution becomes considerably more demanding. Bafin refers expressly to the forthcoming Delegated Regulation on order execution policies. A firm that routes all client orders to a single execution venue, which is what a broker executing against its own book does, must set out in its execution policy why that venue delivers the best possible result, and must, in its annual review, examine whether it consistently does so and compare it against available alternatives. This is not a documentation exercise but a data exercise. It requires reference prices of a quality that will withstand an audit, across the full trading day, and particularly in illiquid instruments and outside core hours, which is exactly where a single-venue model is most exposed. The robust design builds the best execution evidence into the execution logic itself rather than reconstructing it afterwards in compliance reporting.
Third, and this is the point most often overlooked, the change alters own funds requirements. A firm that forwarded orders becomes a firm that holds position risk. Under Regulation (EU) 2019/2033 (IFR) and Directive (EU) 2019/2034 (IFD) this feeds directly into the K-factors, in particular net position risk and daily trading flow, and therefore into capital planning, the internal capital adequacy assessment and, depending on the starting position, the scope of authorisation itself. A conversion set up purely as a distribution and technology project, with treasury, risk control and regulatory reporting brought in late, will generate the next issue rather than resolve the present one.
There is also a timing point that the market has learned the hard way. Neither an authorisation procedure nor a trading risk infrastructure can be built in a quarter. Firms that began this work eighteen months or more before the deadline had the own-account route genuinely available to them. Firms that began in the final months did not, and the circumvention structures Bafin now names are, for the most part, not an expression of bad faith but the product of a conversion started too late.
The real force of the notice lies in the intermediate commission agent
Publicly the notice is being read as a matter for zero-commission brokers. That is too narrow. The doctrinally furthest-reaching passage is section 3.2.2, and it reaches the infrastructure layer of German retail brokerage.
The temptation in a layered chain is to neutralise the ban through role allocation. The executing entity receives the order not from a retail client but from an eligible counterparty, and argues that the prohibition, which is aimed at the retail relationship, does not apply to it.
Bafin rejects this by looking through to the origin of the order. A firm that knows it is acting in intermediate or sub-commission and bringing retail order flow to execution must observe the ban, because interposing an eligible counterparty changes neither the nature nor the origin of the underlying order. The consequence in practice is that brokerage-as-a-service providers, intermediate commission agents and white-label structures need to review their contractual chains for any payment from a market maker or trading venue that is economically attributable to the forwarded retail flow. The client classification of the immediate contractual counterparty is irrelevant for this purpose. Where revenue models in partner agreements have not been rebuilt on that basis, the risk generally sits where the authorisation sits, and that is with the infrastructure provider rather than with the front end. That is an uncomfortable allocation, because the infrastructure provider is frequently not the party that designed the commercial model.
The open flank: trail commissions on ETFs
The notice confines permissible product-related remuneration expressly to primary market products without a liquid secondary market. Exchange Traded Funds (ETFs) have a liquid secondary market. On the increasingly discussed question of whether ETF providers may pay trail commissions to distributing brokers, Bafin says nothing.
No prohibition follows from that silence. But neither does any permission follow from the delimitation, and the interpretation is subtle enough that any revenue plan built on this source should be treated as uncertain. In addition, even if such a payment fell outside Article 39a(1) MiFIR, it would still have to be measured against the inducements regime in section 70 WpHG, including the evidence of quality enhancement. A structure of this kind should be clarified in advance rather than implemented in hope. The notice, after all, tells us what the supervisor has already seen; it does not tell us what it will make of what it sees next.
What to do now
- Analyse payment flows, not contracts. Bafin reasons economically throughout. What matters is where money comes from and what it is for, not what the contract calls it. Every inbound payment from market makers, trading venues and issuers should be documented against that question.
- Review contractual chains in partner business. For intermediate commission agents and infrastructure providers, section 3.2.2 is the central test. The client classification of the immediate counterparty offers no protection.
- Rebuild execution policies and best execution evidence. A firm executing through a single venue needs the written justification and the annual comparison against alternatives, supported by reference price data that will survive review.
- Build a cost basis for group-owned venues. "Materially above market levels" is an indeterminate legal concept that Bafin deliberately does not quantify. Where the venue and the order flow provider sit in the same group, a defensible cost calculation for the fees is required, comparable in character to transfer pricing documentation.
- Update the conflicts policy and capital planning. The conversion is not a distribution project. Risk control, treasury and regulatory reporting belong in the project structure from the outset.
- Use the channel that has been offered. Bafin has expressly made itself available at pfof@bafin.de. Documented pre-clearance is as a rule considerably cheaper than a subsequent finding, and while administrative practice is still forming it is also substantively valuable.
Conclusion
The Supervisory Notice closes the question whether PFOF can be continued through skilful contractual design. It does not close the question of what a viable replacement model looks like. The own-account route Bafin endorses is workable, but it is capital-intensive, data-intensive and governance-heavy, and it is therefore in practice only partly available to smaller providers. The regime was designed to improve execution quality for retail investors. Whether it also ends in a market with fewer providers is a separate question, and the two outcomes are not mutually exclusive. It remains to be seen which of them the next three years produce.
For questions on the classification of your business model, on revising execution policies, or on reviewing existing partner and commission agreements, please get in touch.
