The current Luxembourg framework

Pursuant to the Law of 5 April 1993 on the financial sector, as amended (LFS), third-country credit institutions and professional of the financial sector (other than investment firm) (PFS) incorporated under foreign law (other than investment firms) may provide services in Luxembourg either:

  1. via the establishment of a TCB; or
  2. without permanent presence in Luxembourg, on a cross-border basis.
Branch establishment in Luxembourg

The establishment of a Luxembourg branch is subject to the prior written authorisation by the Commission de Surveillance du Secteur Financier (CSSF), as the competent supervisory authority, subject to the fulfilment of broadly the same authorisation requirements provided for under the LFS for the establishment of a Luxembourg credit institution and PFS (other than investment firms); such requirements are assessed in relation to the foreign institution and include, but are not limited to:

  1. corporate governance arrangements (i.e., appointment of at least two persons as responsible for the management of the branch, subject to the fulfilment of an adequate fit & proper assessment of their professional standing and experience); and
  2. the existence of satisfactory administrative infrastructure in Luxembourg (i.e., competent and sufficient executing personnel, execution systems, documentation relating to transactions, other support functions, etc.).
Cross-border provision of services in Luxembourg

Alternatively, third-country credit institutions and foreign PFS may provide any service within the ambit of the LFS (other than investment and/or ancillary services and activities) to Luxembourg-based clients, on a cross-border basis, upon obtention of a prior CSSF authorisation.

Such authorisation would only be granted to a third-country undertaking subject to rules of approval and supervision deemed equivalent to those of the LFS in its home state and upon fulfilment of the following requirements, and in particular:

  1. the undertaking originating from a third country (outside the EU/EEA);
  2. the undertaking not having an establishment in Luxembourg;
  3. the undertaking performing banking and/or professional activities in the financial sector in its home country;
  4. one or more of the undertaking’s employees or agents physically travelling, occasionally and temporarily, to Luxembourg, to provide banking and/or other services in the financial sector covered by the LFS (i.e., deposit taking, lending activities, etc.);
  5. the good reputation of the undertaking’s directors; and
  6. the existence of adequate administrative organisation and rules of conduct, sufficient financial bases and deposit protection schemes in the undertaking.

Where there is no physical travel to Luxembourg, a third-country entity may also provide its service without a Luxembourg authorisation (subject to a case-by-case analysis).

The new CRD VI regime

CRD VI (further amending Directive 2013/36/EU (CRD)) introduces a new harmonized regime for the provision of certain banking services (deemed as in-scope) in the EU by third-country undertakings.

The key points of the proposed framework may be summarized as follows:

  1. taking of deposits and other repayable funds;
  2. lending, including consumer credit, credit agreements relating to immovable property, factoring with or without recourse, financing of commercial transactions, including forfeiting, etc.; and
  3. granting of guarantees and commitments.

Third-country entities intending to provide these services in an EU Member State (such as Luxembourg) will be required to establish a branch subject to the licensing requirements described below.

Several activities are explicitly carved-out from the above branch licensing requirement, such as the provision of investment and/or other ancillary services and activities within the scope of Directive 2014/65/EU, as amended (MiFID II), services provided on a ‘reverse solicitation’ basis (i.e., upon the exclusive initiative of the client, irrespective of its classification as retail, professional and/or eligible counterparty), and/or interbank/intragroup activities.

Branch classification

Under the CRD VI regime, TCBs may be classified as either class 1 or class 2 and will be subject to varying regulatory requirements, depending on such classification.

Class 1 branches include TCBs:

  1. whose total value of assets booked or originated in the relevant Member State of establishment is equal or higher than EUR 5 billion (as reported for the immediately preceding annual reporting period); or
  2. whose authorised activities include taking deposits and/or other repayable funds from retail customers, provided that the amount of such deposits / repayable funds is equal to or higher than 5% of their total liabilities or exceeds EUR 50 million; or
  3. not deemed as qualifying TCBs. Qualifying TCBs are branches whose head undertaking is established in a third-country that applies prudential standards and supervisory oversight rules that are at least equivalent to those applied in the EU, whose supervisory authorities are subject to confidentiality requirements that are at least equivalent to those applied in the EU and whose country of establishement is not listed as a high-risk third-country with strategic deficiencies in terms of anti-money laundering/counter-terrorist financing obligations.

Class 2 branches comprise smaller and less complex TCBs, not qualifying as a Class 1, as per the above.

Minimum licensing requirements

Authorisation for the establishment of a branch is subject to the fulfilment of minimum regulatory requirements, often varying depending on the classification of the TCB seeking authorisation.

Capital requirements: 

CRD VI imposes a minimum capital endowment requirement for TBC authorisation ranging from 0.5% (for Class 2 branches) up to 2.5% (for Class 1 branches) of the branch’s average liabilities (as reported for the three (3) immediately preceding financial years) or actual liabilities at the time of authorisation (for newly authorised branches), subject to a minimum of EUR 5 million (for Class 2 branches) or EUR 10 million (for Class 1 branches).

Liquidity requirements:

TBC authorisation is subject to the maintenance of adequate liquidity coverage, equal to a volume of unencumbered and liquid assets sufficient to cover liquidity outflows over a minimum period of thirty (30) days. Class 1 branches must additionally maintain a liquidity buffer and stable funding for long-term obligations, in accordance with the provisions of Regulation (EU) No 575/2013, as amended. Qualifying branches may be exempted from the above liquidity obligations.

Internal governance and controls:

Robust corporate governance arrangements must be implemented by the TBC seeking authorisation, and in particular:

  1. appointment of at least two directors located in the Member State where authorisation is sought, subject to a fit & proper assessment of their professional standing, experience and time commitment for their role;
  2. appointment of a local management committee in the Member State where authorisation is sought for the purpose of ensuring adequate governance of the TCB;
  3. compliance with the CRD’s requirements regarding sound remuneration, internal control and risk management;
  4. clear reporting lines;
  5. monitoring and management procedures for outsourcing agreements (if any);
  6. robust risk management framework;
  7. internal/intragroup arrangements where critical functions are to be carried out by the head undertaking of the branch; and
  8. independent ongoing assessment of the branch’s ongoing compliance with the CRD regulatory requirements.
Booking requirements:

TCBs must maintain a registry book (containing records of all assets and liabilities booked or originated by the branch, all relevant risks and the way they are managed) and a documented and approved policy on booking arrangements.

Reporting obligations:

Authorisation entails extensive disclosure obligations for TCBs vis-à-vis the national competent authorities (NCAs), pertaining to:

  1. the operations of the TCB: total value of assets/liabilities held, compliance with CRD regulatory requirements, deposit protection schemes (if any), etc.; and
  2. the head undertaking of the TCB: total value of assets/liabilities held by other subsidiaries/TCBs of the same, compliance with prudential requirements, business strategy applicable to TCBs, services provided on a ‘reverse solicitation’ basis, etc.
Obligation to establish a subsidiary

NCAs will have the power to require, on an ad hoc basis, the conversion of an authorised TCB into a subsidiary (i.e., a separate legal entity), at least in the following cases:

  1. where the TCB has engaged or is currently engaged in the provision of In-Scope Services to customers or counterparties located in other Member States; and/or
  2. where the TCB is assessed as systemically important by the NCAs and poses significant financial stability risks in the EU or the Member State of establishment; and/or
  3. where the aggregate amount of the assets of all TCBs in the EU, belonging to the same third-country group, is equal to or higher than EUR 40 billion or the amount of the TCB’s assets on its books in the Member State of establishment is equal to or higher than EUR 10 billion; for this purpose, the NCAs should also take into account the potential systemic importance of said TCBs.

Considerations regarding the implementation of the proposed CRD VI regime in Luxembourg

Limitations to the provision of services on a cross-border basis

The CRD VI branch licensing requirement is anticipated to leave no room for the provision of the In-Scope Services in Luxembourg without establishment, on a cross-border basis, pursuant to Article 32(5) LFS, which will inevitably have to be amended so as to comply with the CRD VI regime (once officially adopted). In effect, third-country undertakings operating in Luxembourg on the basis of this national provision would be required to obtain a branch license, subject to the satisfaction of the CRD VI minimum regulatory requirements for authorisation, in order to continue providing their services in Luxembourg.

Extended regulatory requirements for branch authorisation

Under the currently applicable Luxembourg framework, TCB authorisation is not a straightforward procedure and is subject to licensing requirements closely resembling the ones required for the establishment of a credit institution and/or PFS (other than an investment firm).

Nonetheless, the minimum regulatory requirements for third-country establishment under the proposed CRD VI regime entail stricter capital endowment and liquidity obligations (particularly for Class 1 branches), as well as rigid reporting obligations, which extend beyond the branch-related disclosures towards the CSSF pursuant to Article 32(4a) LFS and also capture information relating to the head undertaking of the TCB seeking authorisation.

No passporting rights to authorised TCBs  

The currently applicable LFS provisions do not grant a European passport to any third-country undertakings that have established a Luxembourg branch and/or provide services in Luxembourg on a cross-border level, i.e., services for which CSSF authorisation is obtained on the basis of Article 32 LFS, may only be provided in Luxembourg. In a similar vein, the EU legislator, in pursuit of higher regulatory harmonisation among Member States rather than easier EU market access for foreign institutions, has opted not to provide EU passporting rights to CRD VI authorised TCBs, who shall be required to establish a branch in each Member State where they wish to provide In-Scope Services.  

Considering, though, that the CRD VI proposed framework would not affect any third-country undertakings providing financial services other than the In-Scope Services (who may continue to operate on a cross-border level without establishment in Luxembourg, pursuant to Article 32(5) LFS) nor any investment firms providing investment and/or other ancillary services/activities to professional clients and eligible counterparties in Luxembourg (who may continue to operate on the basis of the cross-border national regime provided for under Article 32-1(1) al. 2 LFS), national discretion shall continue to apply and access to the Luxembourg market by third-country institutions without permanent establishment shall still be possible (although more limited).