Luxembourg - Financial Services - CRD6 – Restricted Access To EU Financial Markets For Third-Country Firms (2024)

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New CRD regime for third-country firms providing core bankingservices in Luxembourg on a cross-border basis1

The European Commission introduced its new Banking Package in2021 in order to strengthen banks' resilience, therebyfinalising the implementation of the Basel III agreement in the EU,and to further improve the prudential supervision of creditinstitutions across the EU.

The 2021 Banking Package consists of a legislative proposal toamend the fourth Capital Requirements Directive (Directive2013/36/EU (“CRD4”)) and the CapitalRequirements Regulation (Regulation 2013/575/EU(“CRR”)).

This note will discuss at a high level the proposed changes tothe existing EU market access rules, to be introduced by theforthcoming sixth Capital Requirement Directive(“CRD6”)2throughamendments of CRD4, for third-country firms(“TCFs”) providing core bankingservices, on a cross-border basis, in the EU. The impact of CRD6 onthe cross border provision by TCFs of investment services will alsobe assessed.

What is the current state of play for TCFs providing bankingservices and investment services in Luxembourg?

Provision of banking services by TCFs

The regulatory landscape for TCFs providing banking services andaiming to operate in the EU (including on a cross-border basis) iscurrently mostly governed by national law, with minimalharmonisation at EU level.

The national rules applying to the provision of banking servicesby TCFs in Luxembourg are set out in Article 32 of the Law of 5April 1993 on the financial sector, as amended(“LFS”).

Under the current regime, TCFs that wish to provide bankingservices in Luxembourg on a permanent basis must be authorised bythe Luxembourg financial sector regulator (the Commission desurveillance du secteur financier – the“CSSF”) based on the authorisationrules applicable to Luxembourg credit institutions and establish abranch in Luxembourg.

Alternatively, Article 32(5) LFS provides that a TCF which isnot established in Luxembourg can occasionally and temporarily cometo Luxembourg to provide banking services on a cross-border basis,subject to written authorisation from the CSSF, without the need toestablish a branch in Luxembourg. In this regard, Circular CSSF11/515 provides details on the requirements to be fulfilled by TCFsto benefit from the “light-touch regulation” regimecontemplated by Article 32(5) LFS.

Provision of investment services by TCFs

The rules and restrictions applicable to TCFs when providinginvestment services to Luxembourg clients are, in contrast tobanking services, largely harmonised at EU level by the Markets inFinancial Instruments Regulation (Regulation (EU) 600/2014(“MiFIR”)) and the national provisionstransposing the second Markets in Financial Instruments Directive(Directive 2014/65/EU (“MiFID II”)).In Luxembourg, these provisions are enshrined in Article 32-1LFS.

Essentially, the rules applicable to TCFs wishing to provideinvestment services in Luxembourg depend on the type of clients towhom the services are provided. Thus, TCFs providing investmentservices to eligible counterparties and professionalsclientsper semay either establish a branch inLuxembourg, in which case they have to hold written authorisationfrom the CSSF, or provide their services on a cross-border basiswithout establishing a branch, in which case they have to complywith certain requirements set out, inter alia, in MiFIR and in theLFS (as further specified in Circular CSSF 19/716) under a national(based on third-country equivalence) regime granted by the CSSFupon application3. TCFs that intend to provideinvestment services to retail clients or professional clients onrequest must establish a branch in Luxembourg, in which case theyhave to hold written authorisation from the CSSF.

It is important to note that the MiFID II/MiFIR regime expresslyprovides for an exemption from the above requirements where aclient initiates, on its own exclusive initiative, the provision ofinvestment services by TCFs. However, this “reversesolicitation” exemption is interpreted restrictively by thecompetent authorities.

What will change for TCFs providing core banking services andinvestment services in Luxembourg under CRD6?

Consequences on the provision of core banking servicesby TCFs

CRD6 introduces (in CRD4) a ban on the provision, in the EU, byTCFs of cross-border core banking services (namelylending,guarantee-granting, and deposit-taking) subject to certain limitedexemptions.

Article 21(c)(1) CRD4 will require TCFs to establish a branch inthe Member State where they intend to provide core banking servicesto EU-domiciled persons and therefore (unless an exemption isavailable) obtain authorisation from the competent authority (forLuxembourg, this will be the CSSF). It is important to underlinethat this authorisation will be limited to the territory of theMember State in which the request has been made and that there willbe no passporting rights.

The scope of the ban will depend on the nature of the service(s)rendered by the TCF and on the status of the TCF itself. The newregime will apply to the following TCFs:

  • all TCFs, with respect to the provision of deposit-takingservices; and/or
  • the TCFs that would qualify as credit institutions or certaininvestment firms (i.e. those dealing on own account and/orunderwriting financial instruments and/or placing financialinstruments on a firm commitment basis, provided certain thresholdsare reached or exceeded) within the meaning of CRR, if they wereestablished in the EU, with respect to the provision of lending andguarantee-granting services.

TCFs that are commodity and emission allowance dealers,collective investment undertakings, insurance undertakings orinvestment firms for which the authorisation as a creditinstitution is waived in accordance with Article 8a CRD4, are outof scope.

Article 21(c) CRD4 will provide for certain exemptions from theabove requirement, which will not apply, when:

  • a client approaches a TCF on its own exclusive initiative forthe provision of core banking services. This “reversesolicitation” exemption is aligned with that set out in MiFIDII, and is likely to be interpreted restrictively by the competentauthorities;
  • a TCF provides core banking services to EU credit institutions(i.e. interbank services); and
  • a TCF provides core banking services to undertakings of thesame group (i.e. intragroup services).

To date, it is unclear to what extent the regime set out inArticle 32(5) LFS, which currently allows TCFs to provide bankingservices in Luxembourg without establishing a branch in thecountry, would continue to apply to the provision of core bankingservices by TCFs under the new CRD6 regime (where the TCF will fallunder the scope of the ban). It is likely thatTCFs will needto establish a branch in Luxembourg (as per Article 32 LFS) andtherefore be subject to national provisions transposing CRD6 on theprudential supervision of third-country branches (unless the TCFbenefits from one of the above exemptions).

Services provided “in”Luxembourg

CRD6 does not specify what the provision of a service“in” a Member State means and it is unclear how thenational competent authority will treat the issue of localisationof a core banking service. It is to be hoped that Luxembourg willcontinue to apply its current interpretation of this concept andallow for some flexibility (by applying the characteristicperformance test and guardrails outlined in Circular CSSF 11/515,which is currently being modified by the CSSF).

Consequences on the provision of investment services byTCFs

Importantly, the provision of investment services in the EU (andin Luxembourg) will not be affected by CRD6. The current state ofplay for the provision by TCFs of investment services in Luxembourgwill thus continue to apply.

Nonetheless, TCFs providing combined services (that is, CRD6core banking services and MiFID II investment services) would be inscope of both MiFID II and CRD6 (and corresponding nationaltransposing provisions), which may require certain TCFs toestablish a branch in the EU in order to provide core bankingservices under CRD6, even if they were not required to under MiFIDII.

What is the timeline for the forthcoming changes?

This note is based on the final compromise text, which reflectsthe outcome of the negotiations on the amendments of CRD4 and issubject to a final vote by the European Parliament beforepublication in the Official Journal of the European Union, which isexpected mid-2024.

Luxembourg will then have 18 months to implement CRD6 intonational law. Following national transposition, there will be a12-month transitional period that will allow TCFs to assess thestate of their affairs in the EU, before any restrictionsapply.

The effects of CRD6 and the ban on the provision of cross-bordercore banking services in the EU should come into play during2026.

Footnotes

1. This note is for information purposes only. It is notintended to provide legal advice and it does not cover the regimeof authorisation requirements of TCFs in Luxembourg underCRD6.

2. The analysis is based on the final compromise textagreed upon between the Council and the European Parliament on 4December 2023.

3. In the absence of an equivalence decision from theEuropean Commission, which may determine that the regulatory orsupervisory regime of a non-EU country is equivalent to thecorresponding EU framework.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.

Luxembourg - Financial Services - CRD6 – Restricted Access To EU Financial Markets For Third-Country Firms (2024)
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