1.Context
Following the recent adoption of the law of 20 May 2021 transposing CRD V[1], BRRD II[2] and implementing CRR II[3] into Luxembourg law (the “2021 Law”), the CSSF[4] has published a statement on 18 June 2021 highlighting the main developments resulting from the entry into force of certain provisions of the 2021 Law.
By way of context, the adoption of CRD V and CRR II is part of the implementation of Basel III and aims at strengthening the prudential framework applicable to credit institutions and investment firms.
The 2021 Law notably amends i.a. the law of 5 April 1993 on the financial sector, as amended (the “1993 Law”) as well as the law of 18 December 2015 on the resolution, reorganization and winding up measures of credit institutions and certain investment firms and on deposit guarantee and investor compensation schemes, as amended.
Please find below a summary of key elements under the 2021 Law which impact Luxembourg CRR institutions[5] along with relevant action points.
2. Key points
2.1. Additional own funds requirements and guidance
The 2021 Law amends the 1993 Law[6] in order to specify that the CSSF may, on a case-by-case basis:
- require CRR institutions, under certain conditions, to have additional own funds of an amount and quality superior to the minimum prescribed by the 1993 Law[7]; and
- guide CRR institutions on the level of additional own funds deemed necessary to ensure their ability to cope with future crisis scenarios [8].
Furthermore, the provisions of the SREP[9], applicable to CRR institutions as well as Luxembourg branches of such institutions established in a third country, have been fully included into the 1993 Law.
Action points: CRR institutions must review and, where relevant, amend relevant internal policies and arrangements in light with the aforementioned requirements.
2.2.Remuneration policies
The 2021 Law also amends certain requirements set forth by the 1993 Law in relation to remuneration policies and more specifically, i.a.:
- provides that remuneration requirements do not, in principle, apply on a consolidated basis to subsidiaries established in the EU[10] or in a third country which are subject to a specific remuneration framework (unless otherwise provided for under the 1993 Law)[11];
- specifies the criteria for the identification of material risk takers[12];
- provides that remuneration policies must be gender neutral[13];
- introduces the possibility for smaller and non-complex institutions to waive some requirements relating to variable remuneration[14].
Action points: CRR institutions must thus review and, where relevant, amend their remuneration policies to reflect the above.
2.3.Financial holding companies, mixed or not, included within the scope of supervisory powers
Following amendment to the 1993 Law, certain (mixed) financial holding companies are now included within the scope of the CSSF’s supervisory powers.
In this respect, certain existing[15] and newly established (mixed) financial holding companies are now subject to a specific approval process. Accordingly, a (mixed) financial holding company should seek an approval and submit its file to the relevant competent authority supervising the entire group on a consolidated basis and to the competent authority of the Member State where the (mixed) financial holding company is established[16]. Where the (mixed) financial holding company is part of a significant group subject to the direct supervision the ECB[17], such file should be provided thereto. The relevant authority will then be in charge of the supervision of the relevant (mixed) financial holding company.
However, in some cases, provided that certain conditions set forth by the 1993 Law are met, certain (mixed) financial holding companies may request an exemption from the approval procedure to the relevant competent authority (or, as the case may be, to the ECB)[18].
2.4.Introduction of the requirement to establish an intermediate parent undertaking in the EU
Following the adoption of the 2021 Law, CRR institutions located in the EU which belong to third country groups are required establish an intermediate EU parent undertaking if the third country group has two or more CRR institutions in the EU[19] with a total value of assets[20] in the EU equal or superior to EUR 40 billion[21]. In this context, the EBA[22] is currently drafting Guidelines on the monitoring of the threshold for establishing an intermediate EU parent undertaking which will specify the calculation of the EUR 40 billion threshold.
All third country groups meeting the above-mentioned threshold as of 27 June 2019 must establish an intermediate parent company prior to 30 December 2023.
The intermediate EU parent undertaking must be either a duly authorised credit institution or a (mixed) financial holding company which has been duly approved in line with our above developments under Section 2.3[23], with certain exceptions.
2.5.Reporting
The 2021 Law amends the 1993 Law to introduce an annual reporting obligation applicable to all Luxembourg branches of third country CRR institutions[24].
3.What’s next?
A revision of CRD V and CRR II has already been initiated to reflect the recommendations of the Basel Committee on Banking Supervision from December 2017, which will ultimately lead to the adoption of a new directive (CRD VI) and of a new regulation (CRR III).
It must also be borne in mind that the legal framework applicable to investment firms will change in the near future following the adoption of the bill of law 7723 implementing Directive (EU) 2019/2034 on the prudential supervision of investment firms which aims at creating four classes of investment firms subject to different rules.
Please do not hesitate to contact one of our experts for any questions on the impacts of the 2021 Law on your business.
[1] Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures.
[2] Directive (EU) 2019/879 of the European Parliament and of the Council of 20 May 2019 amending Directive 2014/59/EU as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firms and Directive 98/26/EC.
[3] Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements, and Regulation (EU) No 648/2012.
[4] Commission de Surveillance du Secteur Financier.
[5] CRR institution shall mean an institution as defined under point (3) of Article 4 (1) of Regulation (EU) No. 575/2013 (Article 1 (11a) of the 1993 Law).
[6] Articles 53-2 to 53-4 of the 1993 Law.
[7] Article 53-3 of the 1993 Law.
[8] Article 53-4 of the 1993 Law.
[9] CSSF Regulation N° 15-02 relating to the supervisory review and evaluation process.
[10] European Union
[11] Article 38 (5) of the 1993 Law.
[12] Article 38-5 (2) of the 1993 Law.
[13] Article 38-5 (1), h) of the 1993 Law.
[14] Article 38-6 (2) of the 1993 Law.
[15] (Mixed) financial holding companies already existing as of 27 June 2019 could benefit from a transitional period but were required to apply for approval or exemption of approval prior to 28 June 2021.
[16] Articles 34-2 and 34-3 of the 1993 Law.
[17] European Central Bank.
[18] Article 34-2 (6) of the 1993 Law.
[19] Article 34-4 (1) of the 1993 Law.
[20] The total value of assets in the EU of third country groups must include the assets of their third-country branches authorised in the EU.
[21] Article 34-4 (4) of the 1993 Law.
[22] European Banking Authority.
[23] Article 34-4 (3) of the 1993 Law.
[24] Article 32 (4a) of the 1993 Law.
