The imminent arrival of a new regulation in Luxembourg will impact third-country undertakings (TCUs) providing core banking services, signaling an upcoming shift in the regulatory landscape for these entities. Indeed, with the publication on October 28^th, 2021, of the European Commission’s proposal to amend Directive 2013/36/EU and Directive 2014/59/EU (CRDVI), the European legislator aims to include more services in the scope of prudential regulation and supervision to ensure the financial stability of the Union and its Member States.

Background

Similar to the changes already implemented for TCUs offering investment services under MiFID, core banking services are now in the sights of European regulators. For TCUs conducting temporarily core banking services in Luxembourg, under the law on the financial sector, they will need the authorisation from the Commission de surveillance du secteur financier and to establish a branch in Luxembourg.

Since the publication of the proposal, the European Central Bank rendered on June 30^th, 2022, an opinion in favor of the proposal but underlined that the scope of core banking services needed to be clarified. On February 15^th, 2023, the European Parliament and Council entered into interinstitutional negotiations and agreed on a provisional agreement published on December 6^th, 2023.

Regulatory framework

This provisional agreement, if adopted, will regulate the branch requirement for TCUs conducting core banking services.

Under the new framework, the TCUs will have to establish a branch and request the authorisation in the Member States in which they will conduct core banking activities only if the TCUs:

• conduct a deposit-taking activity; or
• would qualify as a credit institution or certain investment firms that conduct a lending or a guarantees and commitments activity.

However, the provisional agreement exempts certain TCUs from the branch requirements when:

• the client solicits the service by the TCU;
• the client is a credit institution;
• the client is an undertaking of the same group; or
• TCU provides investment services and activities and any accommodating ancillary services.

TCUs also need to note that they cannot avoid the branch requirement by conducting a core banking service through another entity. In addition, if the TCU is solicited for a core banking service by a client, it cannot offer other services unless it is an ancillary service or subsequent service to the service initiated.

What does it mean for TCUs in Luxembourg?

For TCUs in Luxembourg falling under the scope of the branch requirement, two aspects will mainly change. First, in case of temporary services, they will be forced to establish a branch in Luxembourg. Second, the TCUs will only be allowed to conduct core banking services in Luxembourg. Cross-border services will not be allowed.

This agreement is pending the vote in plenary session by the European Parliament and Council to be adopted. Therefore, the text may undergo modifications in the future, as the European Banking Authority has the potential to include other financial sector entities in exemptions to the branch requirement as outlined in the provisional agreement.

TCUs should get ready to apply the rules in the provisional agreement since they have an impact on the activities in Luxembourg. The European Parliament and Council aim to finalize adoption of the text before year-end, after which a transitional period of 12 months will ensue for implementing the provisions related to branch requirements.

For more information or assistance on this topic, you may reach out to our banking team at welcome@brouxelrabia.lu