CRD6 – Restricted access to EU financial markets for third-country firms

New CRD regime for third-country firms providing core banking services in Luxembourg on a cross-border basis ¹

The European Commission introduced its new Banking Package in 2021 in order to strengthen banks’ resilience, thereby finalising the implementation of the Basel III agreement in the EU, and to further improve the prudential supervision of credit institutions across the EU. 

The 2021 Banking Package consists of a legislative proposal to amend the fourth Capital Requirements Directive (Directive 2013/36/EU (“CRD4”)) and the Capital Requirements Regulation (Regulation 2013/575/EU (“CRR”)).

This note will discuss at a high level the proposed changes to the existing EU market access rules, to be introduced by the forthcoming sixth Capital Requirement Directive (“CRD6”) ² through amendments of CRD4, for third-country firms (“TCFs”) providing core banking services, on a cross-border basis, in the EU. The impact of CRD6 on the cross border provision by TCFs of investment services will also be assessed. 

What is the current state of play for TCFs providing banking services and investment services in Luxembourg? 

Provision of banking services by TCFs

The regulatory landscape for TCFs providing banking services and aiming to operate in the EU (including on a cross-border basis) is currently mostly governed by national law, with minimal harmonisation at EU level. 

The national rules applying to the provision of banking services by TCFs in Luxembourg are set out in Article 32 of the Law of 5 April 1993 on the financial sector, as amended (“LFS”). 

Under the current regime, TCFs that wish to provide banking services in Luxembourg on a permanent basis must be authorised by the Luxembourg financial sector regulator (the Commission de surveillance du secteur financier – the “CSSF”) based on the authorisation rules applicable to Luxembourg credit institutions and establish a branch in Luxembourg. 

Alternatively, Article 32(5) LFS provides that a TCF which is not established in Luxembourg can occasionally and temporarily come to Luxembourg to provide banking services on a cross-border basis, subject to written authorisation from the CSSF, without the need to establish a branch in Luxembourg. In this regard, Circular CSSF 11/515 provides details on the requirements to be fulfilled by TCFs to benefit from the “light-touch regulation” regime contemplated by Article 32(5) LFS.

Provision of investment services by TCFs

The rules and restrictions applicable to TCFs when providing investment services to Luxembourg clients are, in contrast to banking services, largely harmonised at EU level by the Markets in Financial Instruments Regulation (Regulation (EU) 600/2014 (“MiFIR”)) and the national provisions transposing the second Markets in Financial Instruments Directive (Directive 2014/65/EU (“MiFID II”)). In Luxembourg, these provisions are enshrined in Article 32-1 LFS. 

Essentially, the rules applicable to TCFs wishing to provide investment services in Luxembourg depend on the type of clients to whom the services are provided. Thus, TCFs providing investment services to eligible counterparties and professionals clients per se may either establish a branch in Luxembourg, in which case they have to hold written authorisation from the CSSF, or provide their services on a cross-border basis without establishing a branch, in which case they have to comply with certain requirements set out, inter alia, in MiFIR and in the LFS (as further specified in Circular CSSF 19/716) under a national (based on third-country equivalence) regime granted by the CSSF upon application ³. TCFs that intend to provide investment services to retail clients or professional clients on request must establish a branch in Luxembourg, in which case they have to hold written authorisation from the CSSF.

It is important to note that the MiFID II/MiFIR regime expressly provides for an exemption from the above requirements where a client initiates, on its own exclusive initiative, the provision of investment services by TCFs. However, this “reverse solicitation” exemption is interpreted restrictively by the competent authorities. 

What will change for TCFs providing core banking services and investment services in Luxembourg under CRD6? 

Consequences on the provision of core banking services by TCFs

CRD6 introduces (in CRD4) a ban on the provision, in the EU, by TCFs of cross-border core banking services (namely lending, guarantee-granting, and deposit-taking) subject to certain limited exemptions.

Article 21(c)(1) CRD4 will require TCFs to establish a branch in the Member State where they intend to provide core banking services to EU-domiciled persons and therefore (unless an exemption is available) obtain authorisation from the competent authority (for Luxembourg, this will be the CSSF). It is important to underline that this authorisation will be limited to the territory of the Member State in which the request has been made and that there will be no passporting rights.

The scope of the ban will depend on the nature of the service(s) rendered by the TCF and on the status of the TCF itself. The new regime will apply to the following TCFs:

• all TCFs, with respect to the provision of deposit-taking services; and/or 
• the TCFs that would qualify as credit institutions or certain investment firms (i.e. those dealing on own account and/or underwriting financial instruments and/or placing financial instruments on a firm commitment basis, provided certain thresholds are reached or exceeded) within the meaning of CRR, if they were established in the EU, with respect to the provision of lending and guarantee-granting services.

TCFs that are commodity and emission allowance dealers, collective investment undertakings, insurance undertakings or investment firms for which the authorisation as a credit institution is waived in accordance with Article 8a CRD4, are out of scope. 

Article 21(c) CRD4 will provide for certain exemptions from the above requirement, which will not apply, when: 

• a client approaches a TCF on its own exclusive initiative for the provision of core banking services. This “reverse solicitation” exemption is aligned with that set out in MiFID II, and is likely to be interpreted restrictively by the competent authorities;
• a TCF provides core banking services to EU credit institutions (i.e. interbank services); and 
• a TCF provides core banking services to undertakings of the same group (i.e. intragroup services). 

To date, it is unclear to what extent the regime set out in Article 32(5) LFS, which currently allows TCFs to provide banking services in Luxembourg without establishing a branch in the country, would continue to apply to the provision of core banking services by TCFs under the new CRD6 regime (where the TCF will fall under the scope of the ban). It is likely that TCFs will need to establish a branch in Luxembourg (as per Article 32 LFS) and therefore be subject to national provisions transposing CRD6 on the prudential supervision of third-country branches (unless the TCF benefits from one of the above exemptions).

Services provided “in” Luxembourg

CRD6 does not specify what the provision of a service “in” a Member State means and it is unclear how the national competent authority will treat the issue of localisation of a core banking service. It is to be hoped that Luxembourg will continue to apply its current interpretation of this concept and allow for some flexibility (by applying the characteristic performance test and guardrails outlined in Circular CSSF 11/515, which is currently being modified by the CSSF).

Consequences on the provision of investment services by TCFs

Importantly, the provision of investment services in the EU (and in Luxembourg) will not be affected by CRD6. The current state of play for the provision by TCFs of investment services in Luxembourg will thus continue to apply. 

Nonetheless, TCFs providing combined services (that is, CRD6 core banking services and MiFID II investment services) would be in scope of both MiFID II and CRD6 (and corresponding national transposing provisions), which may require certain TCFs to establish a branch in the EU in order to provide core banking services under CRD6, even if they were not required to under MiFID II. 

What is the timeline for the forthcoming changes?

This note is based on the final compromise text, which reflects the outcome of the negotiations on the amendments of CRD4 and is subject to a final vote by the European Parliament before publication in the Official Journal of the European Union, which is expected mid-2024. 

Luxembourg will then have 18 months to implement CRD6 into national law. Following national transposition, there will be a 12-month transitional period that will allow TCFs to assess the state of their affairs in the EU, before any restrictions apply. 

The effects of CRD6 and the ban on the provision of cross-border core banking services in the EU should come into play during 2026.