The Bundesanstalt für Finanzdienstleistungsaufsicht supervises Germany's banks, financial services institutions, insurers and securities markets. Its licensing perimeter is defined by activities listed in German law, and BaFin decides whether a business falls inside it by looking at substance. That is the whole story for prop firms, and it is why the German answer is more uncomfortable than the answer in most offshore jurisdictions.
The perimeter question, stated properly
The classic prop firm model sells an evaluation, gives the candidate a simulated account, applies rules on drawdown and consistency, and pays a share of simulated profit to those who pass. Nobody's money is invested. On that description, the firm is selling an assessment service and paying prize money, and it sits outside investment services regulation.
The description stops holding when the design drifts. If successful traders' orders reach the market, if client funds are held and returned according to trading outcomes, if the payout is presented as a return on the fee, or if the arrangement in substance passes the economic result of trading to the customer, a supervisor can look at it as something else entirely: portfolio management, investment brokerage, proprietary business conducted for others, or a payment or deposit taking activity depending on how the money moves. Several European supervisors have said publicly that the model needs assessing case by case rather than by label, and the MiFID question for prop firms sets out the same analysis at EU level.
What tends to pull a German facing firm inside the perimeter
Four design choices come up repeatedly.
- Routing evaluated traders' orders to a live venue while describing the account as simulated, which makes the simulation claim untestable and changes what the customer is actually buying.
- Holding customer money in a way that resembles a deposit or an account balance the customer can direct, rather than a fee paid for a service.
- Marketing that frames the fee as capital at work and the payout as investment return, because supervisors read the marketing as evidence of the real product.
- Adding features that only make sense if the customer is trading for their own economic account, such as scaling contributions or loss sharing.
None of these is automatically a licensed activity. Each of them makes the case harder to argue. The firms that stay clearly outside are the ones whose product is genuinely an assessment with a performance based prize, documented that way in the terms, the marketing and the ledger. Prop firm legal setup goes through how the documents have to line up.
This describes how the perimeter analysis works. It is not legal advice, and no article can tell you whether your specific model needs a German licence. That answer comes from German counsel looking at your terms, your money flows and your marketing.
Germany is not a jurisdiction to guess in
BaFin publishes warnings and can order an unauthorised business to cease and unwind. Conducting a licensable activity without permission is not a fine and a correction, it is a shutdown with personal consequences for the people running it. Compared with jurisdictions where the practical downside of a perimeter mistake is a letter, that is a different risk category, and it should change how much you spend on the analysis before launch rather than after.
The broader European direction is toward more scrutiny, not less, and where prop firm regulation is heading covers the pattern. For general BaFin supervision of brokers rather than prop firms, the BaFin overview is the companion piece.
Payments are where the perimeter shows up first
Prop firms rarely get a regulatory letter before they get a payments problem, because payment providers do their own perimeter analysis and act faster than supervisors.
Acquirers underwrite the merchant category and the product description. A challenge fee that looks like an assessment purchase underwrites differently from one that looks like a deposit into a trading account, and the difference is visible in the checkout copy, the terms and the refund policy. Firms that describe the fee one way to customers and another way to the acquirer create exactly the mismatch that surfaces at periodic review. Payout rails matter too: paying a performance prize to thousands of individuals across many countries is a mass payout problem with its own know your customer, tax reporting and sanctions screening obligations, which is why mass payouts is a live topic for every firm at scale.
Banks assess prop firms on the same know your business chain as brokers: ownership, source of funds, customer geography and whether the activity requires a licence anywhere it is being sold. That last question is asked directly on many onboarding forms, and answering it loosely is worse than answering it carefully. Ad platforms and app stores apply financial services policies market by market, and a product that reads as a trading account to their reviewers gets treated as one regardless of internal terminology.
The practical position
For a firm serving German customers, build the model to sit clearly on one side of the line and get that confirmed in writing by German counsel before you take the first fee. Keep the simulated environment genuinely simulated, keep the money flows consistent with a service fee, and keep the marketing honest about what is being sold. The rules engine that enforces drawdown, consistency and payout eligibility is also your evidence that the product is what you say it is, which is one reason our prop firm CRM logs every rule evaluation rather than just the outcome. Trading is high risk, most challenge candidates do not pass, and any marketing that implies otherwise is the fastest route to the attention you do not want.
"Supervisors read your checkout page, not your legal opinion. If the page sells a trading account, that is the product you are selling."
— Roman Onta, Executive Director, SINGUARD
Key Takeaways
- BaFin assesses activities by substance, so a prop firm's regulatory position depends on money flows and order handling rather than on product naming.
- Routing evaluated orders to a live venue, holding customer balances or marketing the fee as invested capital all weaken the assessment service argument.
- Operating a licensable activity without permission in Germany risks a cease and unwind order, not a correction letter.
- Payment providers run their own perimeter analysis at underwriting and periodic review, so payments usually break before regulators make contact.
Frequently Asked Questions
Do prop firms need a licence in Germany?
There is no single answer. BaFin looks at the activity in substance, so the analysis turns on whether customer money is held, whether orders reach a venue, and whether the arrangement passes the economic result of trading to the customer. Firms serving German customers should get that assessed by German counsel before launch.
Does calling accounts simulated settle the question?
Not by itself. The label has to match the mechanics. If evaluated orders reach a live venue, or if balances behave like customer funds, the simulation description is contradicted by the system's own records and the assessment goes the other way.
Why do prop firms lose payment processing before they hear from a regulator?
Acquirers and banks run their own reviews of what the product is and whether it needs a licence where it is sold. A mismatch between the checkout description, the terms and the underwriting file surfaces at periodic review, and the account is closed or reserved long before a supervisor writes.
About the Author
Roman Onta is an Executive Director at SINGUARD. He builds the Prop Firm CRM, the Broker CRM, Scalegram and CopySignals side by side with his brother Alex Onta, and he helped on the design of eTrader, the division Alex built and leads. His ground is worldwide payment processing, AML compliance and the corporate structures brokers are built on, work the two of them carry together, shaped by executive roles in the UAE and international corporates. He lives and works in Dubai for most of the year. Meet the executive duo leading Singuard's five divisions.