Banking regulation Q&A: form and structure of Luxembourg banks
The banking regulation Q&A series provides a comprehensive overview of the rules governing the banking sector in Luxembourg. Today's chapter focuses on the form and structure.
What types of banks are typically found in your jurisdiction?
The Law of 5 April 1993 on the financial sector, as amended ('Banking Act') covers two types of banks: universal banks and banks issuing mortgage bonds.
As of 2 January 2020, the Luxembourg banking sector was composed of 129 banks, including:
- 83 universal banks;
- two banks issuing mortgage bonds;
- 13 branches of third country credit institutions; and
- 31 branches of credit institutions established in the European Union.
Corporate banking, private banking, investment funds servicing and custody are the main business areas for banks in Luxembourg.
How are these banks typically structured?
A Luxembourg credit institution must be a legal entity incorporated under Luxembourg law in the form of a public law institution, a public limited liability company, a corporate partnership limited by shares or a cooperative society.
Are there any restrictions on foreign ownership of banks?
There are no restrictions on the foreign ownership of banks. To the extent that a foreign entity acquires or disposes of a Luxembourg bank, the provisions on acquisitions and disposals of qualifying holdings apply.
Can banks with a foreign headquarters operate in your jurisdiction on the basis of their foreign licence?
It is possible for banks established in a foreign jurisdiction to operate in Luxembourg. However, a distinction is made between banks established in an EU member state and banks established in a jurisdiction outside of the European Union (a third country).
Banks established in an EU member state: Credit institutions established and authorised in another EU member state may operate in Luxembourg via cross-border provision of services, via the establishment of a branch in Luxembourg or via the use of a tied agent, to the extent that the activities to be exercised in Luxembourg are covered by their licence and are listed in Annex I or Sections A or C of Annex II of the Banking Act. In this case no authorisation from the Luxembourg authorities is required and the European passporting regime applies. Financial institutions as defined under Article 4(1)(26) of the Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, as amended may also operate in Luxembourg, subject to a number of specific conditions.
Banks established in a third country: Third country credit institutions that wish to establish a branch in Luxembourg in order to exercise their banking activities are subject to the same licensing requirements as Luxembourg credit institutions. Where the applicant third country credit institution intends to perform activities involving the management of funds of third parties, it must have own funds which are separate and distinct from the assets of its shareholders. The branch must also have at its permanent disposal an endowment capital or capital base equivalent to that required of a person governed by Luxembourg law performing the same activities.
Credit institutions from a third country which are not established in Luxembourg, but which occasionally and temporarily come to Luxembourg in order, among other things, to collect deposits and other repayable funds from the public and to provide any other service subject to the Banking Act, must obtain authorisation. Obtaining authorisation requires that the credit institution from the third country be subject to equivalent authorisation and supervisory rules as those of the Banking Act in its home jurisdiction.
Specific conditions apply where a third country credit institution intends to provide investment services in Luxembourg. If the third country credit institution intends to provide investment services to eligible counterparties and to professional clients within the meaning of Section A of Annex III of the Banking Act (ie, professional clients per se, which are certain types of entities that are considered to be professional clients by virtue of the Banking Act), it may establish a branch in Luxembourg that is subject to the same licensing requirements as Luxembourg law credit institutions and investment firms. However, it may also operate in Luxembourg without establishing a branch if:
- it is authorised in its home jurisdiction to provide the investment services it intends to provide in Luxembourg;
- either the European Commission (under Article 47 of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (MiFIR)) or the Commission de Surveillance du Secteur Financier (CSSF) has adopted an equivalence decision confirming that the legal and supervisory regime of the third country establishes prudential and business conduct rules that are equivalent to those of MiFIR, Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments, Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms or the Banking Act, as applicable; and
- cooperation arrangements have been established between the European Securities and Markets Authority or the CSSF, as applicable, and the relevant competent authority of the third country.
If the third country credit institution intends to provide investment services to retail clients or to professional clients within the meaning of Section B of Annex III of the Banking Act (ie, clients that are not professional clients per se, but that have requested to be treated as professional clients), it must establish a branch in Luxembourg which is subject to the same licensing requirements as Luxembourg law credit institutions and investment firms and to a number of additional conditions.
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.
This article was first published in Mondaq.
Michael SchweigerLocal Partner Attorney at law / Avocat à la Cour / Solicitor
Michael Schweiger, local partner, is a member of the Banking & Finance practice group in our Luxembourg office. He leads the Luxembourg financial regulatory team and regularly advises banks, e-money and payment institutions, insurers, and other clients regarding financial regulation.T: +352 466 230 520 E: [email protected]
Adrien PierreSenior Associate Attorney at law / Avocat à la Cour
Adrien Pierre, senior associate, is a member of the Banking & Finance Practice Group in our Luxembourg office. He advises banks, asset managers, fintechs, payment institutions, insurance companies and other financial institutions on regulatory matters.T: +352 466 230 523 E: [email protected]
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