The main law governing credit institutions in Luxembourg is the Law of 5 April 1993 on the financial sector, as amended ('Banking Act'), which covers:
- access to professional activities in the financial sector (including the authorisation of credit institutions established under Luxembourg law, and the authorisation for the establishment of branches and freedom to provide services in Luxembourg by credit institutions governed by foreign law);
- professional obligations, prudential rules and rules of conduct in the financial sector;
- prudential supervision of the financial sector;
- prudential rules and obligations in relation to recovery planning, intra-group financial support and early intervention; and
As Luxembourg is an EU member state, European banking regulations are also applicable to Luxembourg credit institutions - in particular, 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 (CRR). The Banking Act implements into Luxembourg law, among others, 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 (CRD IV).
Many specific laws and regulations (at both a European and Luxembourg level) also apply, depending on the activities pursued by Luxembourg credit institutions (eg, investment services, securitisation, over-the-counter derivative transactions, securities financing transactions, regulation of benchmarks).
Luxembourg credit institutions are also subject to the Law of 18 December 2015 on the resolution, reorganisation and winding up measures of credit institutions and certain investment firms and on deposit guarantee and investor compensation schemes ('BRR Law'), which implements Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms (BRRD); and to the Law of 17 June 1992 relating to the annual and consolidated accounts of credit institutions governed by the laws of Luxembourg ('Accounts Law').
The legal framework is completed by grand-ducal regulations, Commission de Surveillance du Secteur Financier (CSSF) regulations and CSSF circulars on a variety of specific topics. One of the most important circulars is CSSF Circular 12/552 on the central administration, internal governance and risk management of credit institutions, investment firms and professionals performing lending operations, as amended. At the date of publication, an update to CSSF Circular 12/552 is imminent.
The words 'credit institution' and 'bank' are used interchangeably throughout this Q&A.
Which bilateral and multilateral instruments on banking have effect in your jurisdiction? How is regulatory cooperation and consolidated supervision assured?
A number of international organisations are working on topics that are of relevance to the financial sector as a whole, and to credit institutions in particular.
Luxembourg is a member state of the Organisation for Economic Cooperation and Development (OECD), which works on establishing norms and better policies for a wide range of subjects, such as corruption and tax avoidance. Luxembourg is also a member of the Financial Action Task Force (FATF), which sets standards, makes recommendations and promotes effective implementation of legal, regulatory and operational measures for the fight against money laundering and terrorist financing.
The CSSF is one of the bank supervisors that are members of the Basel Committee on Banking Supervision, which is the primary global standard-setter for the prudential regulation of banks.
The European Commission, the European Central Bank (ECB) and the OECD are members of the Financial Stability Board (FSB), which is an international organisation that monitors and makes recommendations for the global financial system.
The work performed by these organisations typically influences European legislation, which is applicable to credit institutions in Luxembourg. For instance, the Basel Framework is transposed via CRD IV and CRR; and the FATF Recommendations are implemented at the European level via Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, as amended.
The EU financial system is supervised via the European System of Financial Supervision (ESFS). The ESFS consists of:
- the European Systemic Risk Board, which is responsible for the macro-prudential oversight of the EU financial system and the prevention and mitigation of systemic risk;
- the three European Supervisory Authorities - the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority; and
- national supervisory authorities.
Banking supervision is further ensured via the Single Supervisory Mechanism (SSM), which comprises the ECB and the national supervisory authorities and which, together with the Single Resolution Mechanism, form the EU Banking Union.
The different authorities forming part of the ESFS are required under their respective regulations to cooperate with each other and to ensure the flow of appropriate and reliable information between them. Similarly, the regulations establishing the SSM require cooperation between the ECB and the ESFS, as well as cooperation within the SSM between the ECB and the national supervisory authorities.
Finally, specific EU directives and regulations, such as CRD IV and CRR, include specific provisions on cooperation between authorities and consolidated supervision. The Banking Act (which implements CRD IV in Luxembourg) includes a number of provisions with respect to cooperation, coordination and exchange of information between competent authorities.
Which bodies are responsible for enforcing the applicable laws and regulations? What powers (including sanctions) do they have?
CSSF: The Luxembourg regulator for the financial sector is the CSSF, which falls under the authority of the Luxembourg Ministry of Finance.
The powers of the CSSF include the right to:
- have access to any document in any form whatsoever and receive a copy of it;
- request information from any person and, where necessary, summon any such person in order to obtain information;
- carry on on-site inspections or investigations with respect to persons subject to its prudential supervision;
- require existing telephone records or other existing electronic communication or data traffic records;
- require the cessation of any practice that is contrary to the provisions of the CRR, the Banking Act and their implementing measures, and take measures to prevent the repetition of such practices;
- request the freezing and/or sequestration of assets with the district court of Luxembourg;
- impose a temporary prohibition of professional activity with respect to persons subject to its prudential supervision, as well as members of the management body, employees and tied agents linked to these persons;
- require approved statutory auditors of the persons subject to its prudential supervision to provide information;
- adopt any type of measure necessary to ensure that the persons subject to its prudential supervision continue to comply with the requirements of the CRR, Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments, the Banking Act and their implementing measures;
- refer information to the state prosecutor for criminal prosecution;
- require approved statutory auditors or experts to carry out on-site verifications or investigations of persons subject to its prudential supervision, at the expense of the person concerned;
- issue a communication to the public;
- suspend the marketing or sale of financial instruments or of structured deposits in certain specific cases;
- require the removal of a natural person from the board of a credit institution;
- subject to certain conditions, require electronic communication and communications network providers to hand over records of electronic communications; and
- generally require from any person subject to its supervision any information that may be useful to the pursuit of its supervisory mission.
The CSSF also has powers of injunction and suspension, whereby it may enjoin a person subject to its supervision, within a specific timeframe, to remedy any situation or cease any practice that is contrary to legal, regulatory or statutory provisions, or to cease any conduct and refrain from repeating any conduct that would be contrary to such provisions. Where the situation in question has not been remedied within the timeframe imposed, the CSSF may:
- suspend the members of the management body or any other persons;
- suspend the exercise of voting rights attached to shares held by shareholders or members in the supervised entity; or
- suspend the supervised entity's business or a particular area of such business.
The CSSF may issue circulars and regulations on specific topics relating to its supervisory powers.
The CSSF may impose administrative penalties on legal persons subject to its supervision and the members of the management body, the effective managers or the persons responsible for a breach of these legal persons if:
- they fail to comply with applicable laws, regulations, statutory provisions or instructions;
- they refuse to provide accounting documents or other requested information;
- they have provided documentation or other information that proves to be incomplete, incorrect or false;
- they preclude the performance of the powers of supervision, inspection and investigation of the CSSF;
- they contravene the rules governing the publication of balance sheets and accounts;
- they fail to act in response to injunctions from the CSSF; or
- they act such as to jeopardise the sound and prudent management of the relevant supervised entity.
In such cases, the CSSF may impose the following penalties:
- a warning;
- a reprimand;
- a fine of between €250 and €250,000;
- a temporary or permanent prohibition on the execution of any number of operations or activities, as well as any other restrictions on the activities of the person or entity; and/or
- a temporary or permanent prohibition on participation in the profession by the directors or senior managers of persons or entities subject to the CSSF's supervision.
These sanctions may be published.
The Banking Act further contains a number of specific sanctions that may be imposed for:
- specific breaches of the Banking Act;
- specific breaches committed by CRR institutions; or
- specific breaches relating to the provision of investment services, the performance of investment activities or the provision of data reporting services.
Such sanctions include:
- administrative pecuniary penalties of up to 10% of the total annual net turnover;
- administrative pecuniary penalties of up to €5 million; or
- administrative pecuniary penalties of up to twice the amount of the benefit derived from the breach.
Other sanctions may be set out in specific laws.
ECB: The ECB plays a central role in the supervision of credit institutions within the framework of the SSM.
The ECB is, in particular, responsible for:
- granting and withdrawing credit institution licences;
- assessing acquisitions and disposals of qualifying holdings;
- ensuring compliance with EU prudential requirements;
- ensuring compliance with EU governance requirements; and
- conducting supervisory reviews, on-site inspections and investigations.
The ECB is also responsible for the effective and consistent functioning of the SSM. The ECB directly supervises a number of 'significant' credit institutions; whereas 'less significant' credit institutions are supervised by their national supervisory authorities in cooperation with the ECB.
The ECB may adopt regulations. The ECB has the power to impose sanctions in case of failure by institutions to comply with obligations arising from ECB decisions or regulations, as set out in Council Regulation (EC) No 2532/98 of 23 November 1998 concerning the powers of the European Central Bank to impose sanctions. Such sanctions include fines and periodic penalty payments.
Banque Centrale du Luxembourg (BCL): The BCL is the Luxembourg central bank and forms part of the European System of Central Banks.
The BCL implements the decisions taken by the ECB in Luxembourg and is competent for monetary policy operations in favour of Luxembourg credit institutions.
The BCL is also responsible for:
- supervising the general liquidity situation on the markets and of market operators;
- ensuring the efficiency and safety of payment systems and securities settlement systems, as well as the safety of payment instruments; the BCL may ask payment systems and securities settlement systems to provide information and may also perform on-site visits in this respect;
- contributing to ensuring financial stability by cooperating with prudential supervision authorities; and
- collecting statistical information from the competent national authorities or directly from economic agents, including credit institutions; the BCL may perform spot checks on the information provided.
The BCL has regulatory power and may issue regulations and circulars on subject matters relating to its tasks. It also enforces ECB decisions and implements the sanctions imposed by the ECB.
Commissariat aux Assurances (CAA): The CAA is the Luxembourg regulator responsible for the insurance sector. Credit institutions that provide insurance-related services may be subject to the CAA's supervision for those services.
What are the current priorities of regulators and how does the regulator engage with the banking sector?
The CSSF's current priorities are as follows:
- The upcoming visit of the FATF to Luxembourg: The CSSF has organised conferences, together with the Luxembourg Bankers' Association, in order to raise awareness within the financial sector about the upcoming visit and explain the methodology which is used by the FATF.
- Brexit: The Luxembourg legislature passed two laws on 8 April 2019 regarding measures to be taken in relation to the financial sector in the event of a withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union ('Brexit Laws'). The purpose of the Brexit Laws was to anticipate the loss by firms established and authorised in the United Kingdom, including credit institutions, of the benefit of their passporting rights in case of a 'hard' Brexit (as they will be considered 'third country firms' following Brexit), and to ensure the continuity of existing contracts and the orderly functioning and the stability of the financial markets by allowing UK firms to continue their activities in Luxembourg during a transitional period. The CSSF issued two press releases on 15 July 2019 (as well as follow-up press releases) providing details on the transitional period and how to file a request to be able to benefit from such transitional period. As Brexit took place on 31 January 2020 and the Brexit agreement was approved, the 'hard' Brexit which the Brexit Laws anticipated did not happen. The CSSF issued a press release on 31 January 2020 stating that the individual decisions taken under the Brexit Laws to grant UK entities the benefit of a transitional period would now lapse, and that the transitional period under the Brexit agreement applies instead. The Luxembourg financial sector is therefore now in a waiting period until 31 December 2020; and there has been no confirmation yet from the CSSF that a process similar to that set out under the Brexit Laws will be applied after that date.
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.