Banking regulation Q&A: what are the required authorisations when providing banking services?
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 necessary requirements to obtain a licence.
No person established under Luxembourg law can carry out the business of a credit institution without holding a written authorisation from the minister of finance. Entities authorised as a credit institution in Luxembourg hold a so-called 'universal banking licence'.
Credit institutions are authorised to:
- perform the following banking activities:
- acceptance of deposits and other repayable funds;
- financial leasing;
- provision of payment services;
- provision of guarantees and commitments;
- trading for own account or for account of customers in money market instruments, foreign exchange, financial futures and options, exchange and interest-rate instruments and transferable securities;
- participation in securities issues and provision of services related to such issues;
- advice to undertakings on capital structure, industrial strategy and related questions and advice, as well as services relating to mergers and acquisitions;
- money broking;
- portfolio management and advice;
- safekeeping and administration of securities;
- credit reference services;
- safe-custody services; and
- issuance of electronic money;
- provide the following investment services and perform the following investment activities:
- receipt and transmission of orders in relation to financial instruments;
- execution of orders on behalf of clients;
- dealing on own account;
- portfolio management;
- investment advice;
- underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis;
- placing of financial instruments without a firm commitment basis;
- operation of multilateral trading facilities; and
- operation of organised trading facilities;
- provide ancillary services such as:
- safekeeping and administration of financial instruments for the account of clients;
- the granting of credits or loans to investors to allow them to carry out a transaction in one or more financial instruments;
- advice to undertakings on capital structure, industrial strategy and related matters;
- foreign exchange services, where they are connected to the provision of investment services;
- investment research and financial analysis or other forms of recommendation relating to transactions in financial instruments; and
- services related to underwriting; and
- perform any other activity falling under the scope of the Law of 5 April 1993 on the financial sector, as amended ('Banking Act') (including activities as registrar agent, professional depositary of financial instruments, professional depositary of assets other than financial instruments, operator of a regulated market authorised in Luxembourg, currency exchange dealer, debt recovery, professional performing lending operations, professionals performing securities lending, family office, mutual savings fund administrator, domiciliation agent, professional providing company incorporation and management services, client communication agent, administrative agent of the financial sector, primary IT systems operator of the financial sector, secondary IT systems and communication networks operator of the financial sector, dematerialisation service provider of the financial sector, conservation service provider of the financial sector).
What requirements must be satisfied to obtain a licence?
The Banking Act sets out a number of base requirements that an institution must comply with in order to obtain authorisation as a credit institution. The proposed credit institution must be established in one of the legal forms.
The applicant must evidence the existence in Luxembourg of the central administration (meaning both the decision-making centre and the administrative centre) and the registered office of the proposed credit institution. Certain administrative aspects may be outsourced or performed abroad by affiliates if the applicant is in a group context. The credit institution must have robust internal governance arrangements, including:
- a clear organisational structure with well-defined, transparent and consistent lines of responsibility
- effective processes to identify, manage, monitor and report the risks they are or might be exposed to; and
- adequate internal control mechanisms, including sound administrative and accounting procedures and remuneration policies and practices allowing and promoting a sound and effective risk management, as well as control and security arrangements for information processing systems.
Specific organisational requirements must be met if the credit institution provides investment services and/or performs investment activities.
The applicant must provide the Commission de Surveillance du Secteur Financier (CSSF) with the identity of its shareholders, whether direct or indirect and whether natural or legal persons, that have qualifying holdings in the institution to be authorised or, where there are no qualifying holdings, of the 20 largest shareholders. The CSSF assesses the shareholding of the institution to be authorised and verifies whether:
- the sound and prudent management of the credit institution can be ensured;
- the shareholders are of good professional repute and have sufficient knowledge, skills and experience;
- the prudential supervision can be exercised without hindrance and the supervision on a consolidated basis is ensured;
- the shareholding structure is transparent and well organised;
- the shareholders are financially sound; and
- there are reasonable grounds to suspect that money laundering or terrorist financing activities are being undertaken or have been undertaken, or there is an increased risk of such activities.
The members of the management body must at all times be of sufficiently good repute and possess sufficient knowledge, skills and experience to perform their duties.
The applicant must have a share capital of at least €8.7 million.
The institution must have its annual accounts audited by one or more approved statutory auditors. Typically, one of the 'Big Four' is appointed for this purpose.
The authorisation is also subject to the proposed credit institution's membership in the Luxembourg deposit guarantee scheme (Fonds de Garantie des Dépôts Luxembourg) and the Luxembourg investor protection scheme (Système d'Indemnisation des Dépôts Luxembourg).
What is the procedure for obtaining a licence? How long does this typically take?
The authorisation procedure typically starts with a meeting between the applicant and the CSSF to discuss the request for authorisation as a credit institution. The CSSF recommends that such preliminary discussions take place prior to the official submission of the application file.
The official request for authorisation is introduced via a written application to be submitted to the CSSF, both electronically and in paper format. The application must be accompanied by all information required for the assessment thereof and by a programme of operations indicating the type and volume of business envisaged and the administrative and accounting structure of the institution. The minimum content of the application file, as well as the list of documents to be provided with the banking licence application file, is available on the CSSF's website.
The European Central Bank (ECB) is competent to authorise all credit institutions established in the EU member states participating in the Single Supervisory Mechanism (including Luxembourg). The CSSF notifies the receipt of an application file to the ECB, and the application file is assessed by both the CSSF and the ECB. If the CSSF considers the application file to be satisfactory, it will make a proposal to the ECB to authorise the credit institution and the ECB will then grant the authorisation and notify the CSSF thereof.
The CSSF must notify its decision within six months of receipt of the application or, if the application is incomplete, within six months of receipt of the information needed for the adoption of the decision. The absence of a decision within six months shall be deemed to be a refusal. In any event, a decision shall be adopted within 12 months of receipt of the application, and the absence of a decision is deemed to be a notification of refusal.
The authorisation is granted for an unlimited period.
The application is subject to an initial fee of €15,000. Annual licensing fees apply depending on the size of the credit institution's balance sheet. An annual lump sum is also payable for the participation in the Luxembourg deposit guarantee scheme (Fonds de Garantie des Dépôts Luxembourg), depending on the amount of covered deposits.
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 / 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: firstname.lastname@example.org