1

Implementation in Luxembourg of the Capital Requirements Directive IV (CRD IV)

Major amendments to Luxembourg banking law in respect of corporate governance, remuneration rules and prudential rules for banks

9 July 2015

Newsflash

2

Table of contents

Introduction ......................................................................................................................................... 02

Context ................................................................................................................................................. 03

Access to financial sector activities ................................................................................................. 04

Timing for processing a banking licence application ............................................................................ 04

Shareholding ......................................................................................................................................... 04

Fit and proper test ................................................................................................................................. 04

Capital base .......................................................................................................................................... 05

Banking licence withdrawal ................................................................................................................... 05

Corporate governance and remuneration ........................................................................................ 05

Enhanced corporate governance .......................................................................................................... 05

What is a “Significant Entity”? ......................................................................................................... 06

Corporate governance requirements for all institutions concerned ................................................ 07

Additional requirements for “Significant Entities” ............................................................................ 08

New rules on remuneration ................................................................................................................... 10

Enhanced transparency ........................................................................................................................ 12

New prudential rules ........................................................................................................................... 13

Liquidity supervision .............................................................................................................................. 13

Group exemption from large exposures regime.................................................................................... 13

Capital buffers ..................................................................................................................................... 14

Administrative penalties ..................................................................................................................... 15

Key items ............................................................................................................................................. 16

3

This newsflash considers the main provisions of the law voted on 2 July 2015 (“2015 Law”) implementing the Capital Requirements Directive IV (“CRD IV”) in the amended law of 5 April 1993 on the financial sector (“New FSL”). The 2015 Law will enter into force three days after its publication in the Luxembourg Official Gazette (Mémorial A, Recueil de Legislation), except for certain provisions.

The main changes brought about by the CRD IV and now reflected in the New FSL relate to the access to financial sector activities, corporate governance and remuneration, prudential rules, capital buffers and administrative penalties, as outlined below.

4

Context The CRD IV

1 and Regulation (EU) 575/2013 (CRR)

2 recast and replace the Capital

Requirements Directives (i.e. the Banking Consolidation Directive3 and Capital Adequacy

Directive4) (CRD).

The ECB and the national competent authorities will rely on the CRD VI and CRR to monitor the European banking system within the framework of the Single Supervisory Mechanism (SSM).

While the CRD IV and CRR primarily represent the European Commission’s implementation of the revisions to the Basel Accord known as Basel III, they also introduce a number of important changes to the banking regulatory framework that were not provided for under the Basel proposals.

These measures have been adopted in order to strengthen the resilience of the EU banking sector so that it is better placed to absorb economic shocks while ensuring that banks continue to finance economic activity and growth.

The new provisions of the 20155 Law will apply in particular to “CRR institutions” which are

defined in the New FSL as “institutions within the meaning of article 4 (1) (3) of the CRR”, i.e. credit institutions or investment firms within the meaning of the CRR (CRR institutions).

The CRR defines credit institutions as undertakings the business of which is to take deposits or other repayable funds from the public and to grant credits for their own account.

An investment firm means in the CRR a person as defined in point (1) of article 4(1) of Directive 2004/39/EC, which is subject to the requirements imposed by that Directive, excluding the following:

(a) credit institutions;

(b) local firms;

(c) firms which are not authorised to provide the ancillary service referred to in point (1) of Section B of Annex I to Directive 2004/39/EC, which provide only one or more of the investment services and activities listed in points 1, 2, 4 and 5 of Section A of Annex I to that Directive, and which are not permitted to hold money or securities belonging to their clients and which for that reason may not at any time place themselves in debt with those clients.

The 2015 Law repeals Luxembourg law provisions which implemented the CRD provisions, save for those which have been taken over by the CRD IV. In addition, the 2015 Law removes from the New FSL those provisions which are now included in the CRR.

The 2015 Law also amends certain aspects of the law of 23 December 1998 establishing a commission for the supervision of the financial sector (CSSF) and of the law of 12 July 2013 on alternative investment fund managers. Moreover, the 2015 Law implements certain provisions of directive 2011/89/EU regarding the supplementary supervision of financial entities in a financial conglomerate

6.

5

Notes

1 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, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (CRD IV).

2 Regulation (EU) 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (CRR).

3 Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions.

4 Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of

investment firms and credit institutions.

5 Law voted on 2 July 2015 (draft law N° 6660) – the date of the law will be the date of signature of the said law by the Grand Duke of Luxembourg which is not yet scheduled:

implementing directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013;

implementing articles 2 and 3 of directive 2011/89/EU of the European Parliament and of the Council of 16 November 2011;

implementing article 6, paragraph 6 of directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011;

amending:

- the amended law of 5 April 1993 on the financial sector;

- the amended law of 23 December 1998 establishing a commission for the supervision of the financial sector;

- the law of 12 July 2013 on alternative investment fund managers.

6 Directive 2011/89/EU of the European Parliament and of the Council of 16 November 2011 amending Directives

98/78/EC, 2002/87/EC, 2006/48/EC and 2009/138/EC as regards the supplementary supervision of financial entities in a financial conglomerate.

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Access to financial sector activities

Timing for processing a banking licence application

The 2015 Law amends the timing required by the CSSF to process a banking licence

application. Previously, the absence of a decision by the CSSF within twelve months of receipt

of the application was deemed equivalent to a refusal, whether the application was complete

or not. With the New FSL, if the application is complete, the CSSF must take a decision within

six months of receiving it, failing which the absence of a decision will be deemed equivalent to

a refusal7.

If the application is incomplete, the CSSF will in any event have to adopt a decision within

twelve months of receiving it (as this was already the case up until now), failing which the

absence of a decision will be deemed equivalent to a refusal.

Shareholding

Before the 2015 Law, an authorisation to carry out a banking activity was subject in particular

to providing the CSSF with the identity of shareholders (or partners) with a qualifying holding8

in the applicant. To avoid an automatic rejection of the application in the absence of a

qualifying holding, the CSSF may now nevertheless proceed with the approval process if the

applicant has communicated the identity of its twenty largest shareholders (or members)9.

Fit and proper test

The 2015 Law extends the powers of the CSSF regarding its assessment of the healthy and

prudent management of a credit institution which is subject to a potential acquisition10

or a

CRR investment firm11

which has submitted a licence request12

.

Indeed, in such cases the CSSF should not only asses the professional reputation and

experience of any potential member of the management body13

who will direct the business of

the regulated entity, but must also check whether that person has sufficient knowledge and

competence for this purpose.

This is line with the regulatory changes introduced by CSSF Circular 12/55214

as well as with

current CSSF practice.

7 Article 3 (6), New FSL.

8 As defined in Article 1 (25), New FSL (i.e. at least 10 % of the capital or voting rights).

9 Article 6 (1), New FSL.

10 Article 6 (9) (b), New FSL.

11 Article 1 (9bis), New FSL. For more information, see Circular CSSF 15/606 (only in French) of 23 February 2015 regarding

clarifications for investment firms in the framework of the transposition into Luxembourg law of Directive 2013/36/EU and the entry into force of Regulation (EU) 575/2013. The new definition of “CRR investment firm” is more restrictive than the one contained in the MiFID Directive (as noted in the parliamentary works – see in particular rapport de la Commission des Finances et Budget of 22 June 2015, page 5)

12 Article 19 (1bis), New FSL.

13 The management body (organe de direction) encompasses in the New FSL the administration, management and supervisory

bodies of the institution (i.e. organe d’administration, de gestion et de surveillance) (Article 1 (23bis), New FSL). 14

Circular CSSF 12/552 (as amended) of 1 December 2012 on central administration, internal governance and risk management.

7

Capital base

A banking licence is now conditional upon the production of evidence showing the existence

of a minimum share capital of EUR 8,700,000 which must be fully paid up. Until the 2015 Law,

the share capital only had to be paid up to at least EUR 6,200,00015

.

Banking licence withdrawal

The 2015 Law broadens the circumstances that may result in the withdrawal of a banking

licence, in particular if the credit institution does not comply with own funds, large exposure or

liquidity requirements16

.

A banking licence may also be withdrawn if for instance the credit institution commits certain

offences detailed in the New FSL (for example, failure to implement corporate governance

arrangements required by the CSSF or to report information on large exposures, liquidity or

leverage ratio).

Corporate governance and remuneration

The 2015 Law introduces a number of core European corporate governance and

remuneration principles detailed in the CRD IV. These new rules apply in principle to both

Luxembourg CRR institutions17

and Luxembourg branches of non-EEA institutions. They

apply to CRR institutions across their group operations, including to non-EEA based

subsidiaries (in principle)18

.

Enhanced corporate governance

The corporate governance provisions found in CRD IV are designed to further reduce excess

risks taken by institutions, as weaknesses in corporate governance is believed to have

contributed to the financial crisis.

The perceived failure by boards to exercise sufficient supervision of risks was of particular

concern. In order to combat these concerns, the CRD IV introduces new requirements in

relation to management bodies, some of which affect all CRR institutions and others only

“Significant Entities”.

15

Article 8 (1), New FSL. 16

Article 11 (4) and (4bis), New FSL. 17

Article 1 (11bis), New FSL. 18 Article 38 (1), (2) and (3), New FSL.

8

What is a “Significant Entity”?

The New FSL provides for a list of criteria to be considered by the CSSF in order to determine

whether a CRR institution is a “Significant Entity” (“établissement CRR ayant une importance

significative”) or not19

.

A Significant Entity is a CRR institution that fulfils at least two of the following criteria:

the CRR institution is a systemically important institution in accordance with article

59-3 of the New FSL;

the total value of the assets of the CRR institution exceeds 30 billion euros or the

ratio between its total assets and Luxembourg’s GDP is above 20%, unless the total

value of its assets is less than EUR 5 billion;

the CRR institution is the highest level of consolidation of the group of institutions

supervised in the Eurozone and appears as such on the "list of important entities

subject to prudential supervision" established by the European Central Bank20

;

the CRR institution is the ultimate parent company of the group of supervised

institutions to which it belongs;

the CRR institution is the parent company of a large number of subsidiaries

established in other countries;

the shares of the CRR institution are admitted to trading on a regulated market.

The purpose of this framework is to guide and enable the CSSF to identify Significant Entities

and not to automatically consider any entity meeting two of these criteria as a Significant

Entity. To date, we would expect fifteen to twenty entities to be identified as Significant

Entities. It is difficult however to have a clear view of the impact of the above criteria before

the CSSF releases the list of Significant Entities because of the level of appreciation granted

to the CSSF by the 2015 Law in this respect.

19

Article 38-2 (3), New FSL. 20

https://www.bankingsupervision.europa.eu/banking/list/who/html/index.en.html

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Corporate governance requirements for all CRR institutions concerned

(a) Collective fitness test

The management body must reflect a broad range of abilities and possess adequate

collective knowledge, skills and experience to understand the institution’s activities

(and inherent risks)21

.

In addition, each member of the management body must act with honesty, integrity

and independence of mind, in order to effectively assess and constructively

challenge and oversee the management’s decisions22

.

(b) Time commitment

Members of the management body must devote sufficient time to performing their

functions within the institution. To this end, the number of directorships which

members of the management body may hold at the same time must take into

account individual circumstances, as well as the nature, scale and complexity of the

institution’s activities.

The time commitment obligation is not entirely new (it was introduced via the CSSF

Circulate 12/55223

) as it is required to be assessed and communicated to the CSSF

for each new mandate. The CSSF seems to place a particular focus on time

investment (also in relation to existing mandates and the nature thereof) when

assessing fitness. To date, the assessment does not however take into

consideration whether a board member exercises his/her mandates professionally or

as part of, or next to, another professional activity. It is also unclear whether this will

change in the near future.

(c) Separation of chair and CEO

The chairman of the management body acting in its supervisory function may not

simultaneously exercise the functions of chief executive officer (CEO) within the

same CRR institution, unless this is justified by the institution and authorised by the

CSSF24

.

(d) Ongoing training

As already required in the CSSF Circular 12/552, CRR institutions must devote

adequate human and financial resources to the induction and training of the

members of the management body25

.

21

Article 38-2 (1) (a) and (c), New FSL. Both Circular CSSF 12/552 and the CSSF Guidelines on the “Prudential approval process for holders of key functions in credit institutions and investment firms” previously required that institutions comply with these requirements.

22 Article 38-2 (1) (d), New FSL. Both Circular CSSF 12/552 and the CSSF Guidelines on the “Prudential approval process for

holders of key functions in credit institutions and investment firms” previously required that institutions comply with these requirements.

23 And already required by the CSSF Guidelines on the “Prudential approval process for holders of key functions in credit institutions

and investment firms”. 24

Article 38-1 (e), New FSL. 25

Article 38-2 (7), New FSL.

10

While many large Luxembourg credit institutions now have their own internal training

programs for board members, it is not yet common practice to set any minimum

requirements on individuals. It is also more and more common practice to have

trainings or information sessions organised during board meetings. This practice is

particularly important in Luxembourg where most boards of credit institutions are

composed of a significant number of group representatives who do not necessarily

have extended knowledge of the Luxembourg regulatory framework.

It is to be expected that the CSSF will place more and more importance on evidence

that relevant trainings have been attended by the relevant individuals. For now, we

have only seen requests as regards evidence to be provided by the relevant entity of

available trainings and information thereof (whether internally organised trainings or

external trainings).

(e) Diversity

A CRR institution (and as the case may be its nomination committee) must ensure

that the management body covers a wide range of qualities and competences and

sets up policies encouraging diversity, in particular regarding gender balance26

.

Many Luxembourg financial actors have recognised that opening up the board to

non-traditional profiles is inevitable and will have a positive effect on governance.

They have started considering recruiting accordingly. It is however still unclear

whether in practice the diversity criteria will have a real and general impact on board

composition and in terms of the CSSF’s actions in the future.

Additional corporate governance requirements for Significant Entities

A number of CRD IV requirements implemented in the New FSL only apply to Significant

Entities. They include in particular:

(a) Cap on the number of directorships

The key element added by CRD IV (and hence by the 2015 Law) relates to the

maximum number of directorships which may be held by a member of the

management body of a Significant Entity27

.

The reason for the directorship cap is twofold: firstly, to counter the substantial

accumulation of mandates by some directors, leaving them insufficient time to be

dedicated to each function; and, secondly, to allow for diversity. Both of these

problems are often alleged to be at the roots of unfit or unhealthy governance

structures.

According to these new provisions, members of the management body of a

Significant Entity will only be entitled to exercise the following number of

26

Articles 38-2 (8) and 38-8 (2) (b), New FSL. 27

Article 38-2 (2), New FSL. The CSSF Guidelines on the “Prudential approval process for holders of key functions in credit institutions and investment firms” already advised the institutions to take these requirements in account for future appointments.

11

directorships at the same time (in aggregate, and whether or not in Significant

Entities):

one executive directorship and two non-executive directorships; or

four non-executive directorships.

The following will count as a single directorship28

:

executive or non-executive directorships held within the same group29

;

executive or non-executive directorships held within CRR institutions which are

members of the same institutional protection scheme (under certain conditions);

or

executive or non-executive directorships held within undertakings (including non-

financial entities) in which the CRR institution holds a qualifying holding.

Upon request, the CSSF may allow an additional non-executive directorship to be

exercised30

.

Mandates in organisations which do not pursue predominantly commercial

objectives (i.e. charities) or in the context of the representation of the Luxembourg

state are not taken into account31

.

This means that all other board mandates or other management body roles (outside

of the group sphere as provided above) such as corporate or investment funds

mandates/roles will be taken into account when assessing the number of mandates

relevant in respect of the cap.

(b) Nomination committee

Significant Entities must establish a nomination committee composed of members of

the management body who do not perform any executive function in the institution

concerned32

.

It is probable that the majority of “significant” institutions already have a nomination

committee but changes will be required if the committee is not solely composed of

non-executive directors.

(c) Remuneration committee

Significant entities must also establish a remuneration committee which will be

responsible for preparing decisions regarding remuneration, including those which

have implications for the risk management of the institution concerned33

.

28

Article 38-2 (5) New FSL. 29

The difficulty of the criteria being that the 2015 Law does not introduce a definition of group into the New FSL, which may lead to interpretation issues when considering mandates in the context of joint ventures or investment funds managed by banks but not owned by them.

30 Article 38-2 (4), New FSL.

31 Articles 38-2 (2) and 38-2 (6), New FSL.

32 Article 38-8, New FSL.

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New rules on remuneration

In order to tackle excessive risk-taking, the remuneration framework has been further

strengthened by the 2015 Law implementing the CRD IV. On 4 March 2015, the European

Banking Authority (EBA) published a consultation paper on the draft guidelines on sound

remuneration policies34

.

These draft guidelines set out the governance process for implementing sound remuneration

policies across the EU and provide guidance on all other remuneration principles set out in the

CRD IV.

(a) Identified Staff

The new rules on remuneration apply to staff members who have a material impact

on an institution’s risk profile, so-called “Identified Staff”35

.

Commission Delegated Regulation 604/201436

sets out qualitative and quantitative

criteria that should be used by financial institutions when defining the categories of

staff whose professional activities have a material impact on an institution’s risk

profiles37

.

(b) Fixed / variable remuneration

The 2015 Law adds a clear distinction between fixed and variable remuneration38

:

the basic fixed remuneration (salary) must reflect relevant professional

experience and organisational responsibility as set out in an employee’s job

description as part of the terms of employment; and

variable remuneration (bonus) must reflect a sustainable and risk- adjusted

performance as well as performance in excess of that required to fulfil the

employee’s job description as part of the terms of employment.

(c) Bonus cap

For variable remuneration, the following two principles now apply39

:

the variable component may not exceed 100% of the fixed component of each

individual’s total remuneration;

33

Article 38-9, New FSL. 34

As mandated by articles 74 and 75 of the CRD IV. These guidelines are meant to replace the so-called “CEBS Guidelines on Remuneration Policies and Practices” published by the Committee of European Banking Supervisors (CEBS), the EBA’s predecessor, in December 2010 in the context of CRD III (http://www.eba.europa.eu/regulation-and-policy/remuneration/guidelines-on-sound-remuneration-policies).

35 i.e. members of the authorised management, risk-takers, staff engaged in control functions and employees receiving a total

remuneration that takes them into the same remuneration bracket as authorised management (Article 38-5, New FSL). 36

Commission Delegated Regulation (EU) No 604/2014 of 4 March 2014 supplementing Directive 2013/36/EU of the European Parliament and of the Council with regard to regulatory technical standards with respect to qualitative and appropriate quantitative criteria to identify categories of staff whose professional activities have a material impact on an institution's risk.

37 It should be noted that the ESMA’s Guidelines on remuneration policies and practices (MiFID) of 1 October 2013 implemented by

CSSF Circular 14/585 relate to a different group of staff from the “Identified Staff”. Indeed, these Guidelines essentially cover employees who are involved, directly or indirectly, with a firm’s clients.

38 Article 38-5 (g), New FSL.

39 Article 38-6 (g), New FSL.

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the shareholders (or owners or members) of the institution (excluding staff

concerned by the ratio) may approve a higher maximum level of the ratio

between the fixed and variable components of remuneration provided the overall

level of the variable component does not exceed 200 % of the fixed component

of the total remuneration for each individual. The New FSL describes this specific

approval procedure40 which the CSSF Circular 15/60141 already aimed to

formalise prior to these new provisions.

In this context42

, for the purposes of calculating the maximum ratio, CRR institutions

may apply a discount rate of up to 25% of the total variable remuneration, provided it

is paid in instruments which are deferred for more than five years.43

In practice, remuneration rules are problematic since Luxembourg banks which are

subsidiaries of an EU parent will have a tendency to apply the remuneration policy of

their parent entity in accordance with the parent’s local legislation remuneration

requirements. This is likely to create discrepancies between the remuneration

packages offered within Luxembourg CRR institutions.

(d) Malus and clawback

Up to 100 % of the total variable remuneration must be subject to malus or clawback

arrangements44

. Institutions must set specific criteria for the application of malus and

clawback which may apply in particular situations where the staff member fails to

meet appropriate standards of reputation and experience, or was responsible for

conduct which has resulted in significant losses.

(e) Deferral

The New FSL now expressly states that at least 50 % of the variable remuneration

must consist of a balance between (i) shares (or equivalent equity interests), and (ii)

instruments which reflect the credit quality of the institution as a going concern (for

example, instruments that can be written down or converted to equity)45

. Regulatory

Technical Standards (RTS) on classes of instruments whose use for the purposes of

variable remuneration is appropriate were published on 12 March 201446

.

Furthermore, the New FSL now expressly states that at least 40% of the variable

remuneration must be deferred over a period of not less than three to five years.

40

In particular, a quorum of shareholders representing at least 50% of the shares must participate in the vote and a 66% majority of them must support the measure. If the quorum cannot be reached, the measure may also be approved if it is supported by 75% of shareholders present (Article 38-6 (g) (ii), second indent, New FSL).

41 CSSF Circular 15/601 (only in French) of 13 January 2015 on the higher ratio notification procedure applicable to the

remuneration policy according to Article 94(1)(g)(ii) of Directive 2013/36/EU (CRD IV). 42

Article 38-6 (g) (iii), New FSL. 43

On 27 March 2014, the EBA published Guidelines for calculating the discount rate for variable remuneration http://www.eba.europa.eu/regulation-and-policy/remuneration/guidelines-on-discount-rate-for-variable-remuneration

44 Article 38-6 (n), New FSL.

45 Article 38-6 (l), New FSL. As already provided by the CRD and reflected in Circular CSSF 06/273 of 22 December 2006 (as

amended) on the definition of capital ratios pursuant to article 56 of the amended law of 5 April 1993 on the financial sector (application to credit institutions).

46 Commission Delegated Regulation (EU) No 527/2014 of 12 March 2014 supplementing Directive (EU) No 2013/36/EU of the

European Parliament and of the Council with regard to regulatory technical standards specifying the classes of instruments that adequately reflect the credit quality of an institution as a going concern and are appropriate to be used for the purposes of variable remuneration.

14

When the amount of the variable remuneration component is particularly high at

least 60% must be deferred47

.

(f) Anti-avoidance

Staff members are required to undertake not to use personal hedging strategies or

remuneration and liability-related insurance to undermine the risk alignment effects

incorporated in their remuneration arrangements48

.

Furthermore, the payment of variable remuneration through instruments or methods

that facilitate non-compliance with the New FLS or the CRR is now also expressly

prohibited. This is likely to affect the effectiveness of structures that were designed

to give banks additional flexibility regarding remuneration49

.

(g) Timing

The rules regarding the fixed to variable ratio will apply to remunerations awarded

for services provided or work performed regardless of the date of entry into force of

the contracts on the basis of which these remunerations are due50

.

Enhanced transparency

(a) Country by country reporting

Enhanced transparency regarding the activities of CRR institutions which operate on

a multinational basis is essential for regaining the trust of EU citizens in the financial

sector.

Under the New FSL, CRR institutions will have to disclose various items of

information to the public on an annual basis (in particular their profits, taxes and

subsidiaries), specified by Member State and by third country in which they

operate51

.

(b) Return on assets

In their annual report CRR institutions must now disclose among their key indicators

their return on assets, calculated as their net profit divided by their total balance

sheet52

.

(c) Supervision of remuneration policies

To improve the quality of the data collected and increase transparency regarding

remuneration paid to high earners, the New FSL now expressly provides that the

CSSF must collect information on the number of individuals in each CRR institution

47

Article 38-6 (m), New FSL. 48

Article 38-6 (p). This was already provided by the CRD and reflected in the CSSF Circular 06/273. 49

Article 38-6 (q), New FSL. 50

Article 38-6, 2nd indent, New FSL. 51

Article 38-3, New FSL. 52

Article 38-4, New FSL.

15

whose remuneration totals EUR 1 million or more per financial year, in tranches of

EUR 1 million, including their professional responsibilities, the business line involved

and including the main elements of salary, bonus, long-term award and pension

contribution53

. On 16 July 2014, EBA published revised Guidelines on data collection

and remuneration benchmarking relating to high earners54

.

New prudential rules

Liquidity supervision

The New FSL amends the liquidity supervisory regime for Luxembourg branches of CRR

institutions established in another EU Member State.

Supervision of liquidity was previously carried out by the competent authority of the host

Member State in cooperation with the competent authority of the home Member State.

The New FSL shifts this power from the competent authority of the host Member State to the

competent authority of the home Member State, while providing for cooperation with the

competent authority of the branch’s host Member State55

.

These changes will however only enter into force when the liquidity coverage requirement

becomes applicable in accordance with Delegated Regulation 2015/6156

.

This Regulation which applies to credit institutions supervised under the CRD IV will enter into

force on 1 October 2015 (with certain transitional provisions).

Group exemption from large exposures regime

The large exposures regime under the CRR aims to protect against systemic risks by

requiring institutions to avoid undue concentration of risks in any counterparty or group of

counterparties.

Exposures incurred by CRR institutions towards other entities of the same group are now

expressly exempted from the large exposures regime57

.

53

Article 38-10, New FSL. 54

http://www.eba.europa.eu/regulation-and-policy/remuneration/guidelines-on-the-data-collection-exercise-regarding-high-earners 55

Article 45(3) New FSL 56

Article 73, 2015 Law; Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for Credit Institutions.

57 Article 56-1, New FSL. This exemption was already provided foreseen in the CSSF Circulars implementing the CRD. However,

given its importance for Luxembourg banks which are mostly subsidiaries of foreign groups, it was considered more appropriate to include it in the law itself.

16

Capital buffers The capital buffers introduced in the New FSL constitute a new range of prudential

supervisory tools58

.

Certain CRR institutions detailed below will be required to maintain the following capital

buffers in addition to the own funds requirements contained in the CRR:

a capital conservation buffer;

a countercyclical capital buffer;

a buffer for global systemically important institutions (G-SII);

a buffer for other systemically important institutions (O-SII); and

a systemic risk buffer.

The capital buffer provisions apply to CRR credit institutions and investment firms on both an

individual and a consolidated basis subject to the following exclusions:

the buffer requirements do not apply to investment firms which do not deal on own

their account or underwrite59

;

the CSSF may exempt small and medium-sized investment firms from the above

requirements (under certain conditions)60

;

the G-SII and O-SII buffers only apply to systemically important institutions.

It is for the CSSF to identify Luxembourg systemically important institutions (either G-SII or O-

SII) after consultation with the Luxembourg Central Bank and upon the advice of the systemic

risk committee61

.

The New FSL provides in this respect for detailed identification methods based on quantifiable

indicators62

.

Regardless of what is happening at the consolidated level of a banking group, a minimum

capital buffer requirement will always be guaranteed at the level of each individual subsidiary.

This is of vital importance to host Member States such as Luxembourg whose banking

population is largely made up of subsidiaries of foreign banking groups63

.

58

Chapter 5, Part III, New FSL. 59

Article 59-1 (1), New LFS (which refers to Annex II, section A, point 3 (dealing on own account) and/or Annex II, section A, point 6 of the LFS (i.e. underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis).

60 Article 59-1 (2), New FSL.

61 Article 59-3 (1) and (2), New FSL.

62 Article 59-3 (3) to (6), New FSL. See also Commission Delegated Regulation (EU) No 1222/2014 of 8 October 2014

supplementing Directive 2013/36/EU of the European Parliament and of the Council with regard to regulatory technical standards for the specification of the methodology for the identification of global systemically important institutions and for the definition of subcategories of global systemically important institutions.

63 Article 59-4 (6) and (7), New FSL.

17

Failure to meet these capital buffers is not penalised by licence withdrawal, but will result in

restrictions on discretionary distributions (for example, payment of dividends, allocation of

variable remuneration or discretionary pension benefits)64

.

The provisions regarding the identification of Luxembourg systemically important institutions

as well as those regarding the countercyclical capital buffer, the G-SII and O-SII buffers will

only come into force on 1 January 2016. The requirements regarding the capital conservation

buffer and systemic risk buffer will come into force immediately65

.

Administrative penalties As a result of variations between the penalty regimes applicable to breaches of the CRD, the

European Commission introduced certain minimum requirements regarding administrative

penalties in the CRD IV.

The New FSL now provides that breaches of key elements of its provisions (for example,

commencing banking activities without holding a licence or non-compliance with requirements

regarding qualifying holdings) will be subject to a minimum set of financial and other penalties

applicable to both legal entities and individuals responsible for the breach.66

These penalties include public censure, cease and desist orders, withdrawal of authorisations

and temporary bans on holding office for members of management bodies as well as financial

penalties.

Thus, the CSSF may impose (administrative) fines on legal entities of an amount of up to 10

% of their annual net turnover, and impose (administrative) fines on individuals up to EUR 5

000,000. The CSSF will also be able to impose fines of up to twice the amount of the benefit

derived from a breach of the law where the amount of that benefit can be determined.

These amounts of fines that can now be imposed by the CSSF as a result of the 2015 Law

are potentially higher than the current CSSF practice in this respect and it is yet to be seen if

the CSSF practice will be to apply to lower end of the fine amounts or, on the contrary, change

its practice and substantially increase penalties, including contingent fines.

The CSSF must in principle publish the details of any penalties imposed67

.

CRR institutions must establish a whistle-blowing framework which gives employees adequate

protection68

.

64

Article 59-13, New FSL. 65

Article 73, New FSL. 66

Article 63-1 and 63-2, New FSL. 67

Article 63-3, New FSL. 68

Article 38-12 New LFS (as already foreseen in the Circular CSSF 12/552). The CSSF is also required to establish effective and reliable mechanisms to encourage the reporting of breaches to the LFS and the CRR (article 58-1, New FSL).

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Key items

New provisions for the 1993 Financial Sector Law (FSL)

➲ Access to financial sector activities

Timing for processing a banking licence application: if the banking licence application is complete, the CSSF must take a decision within six months of receiving it, failing which the absence of a decision will be deemed equivalent to a refusal.

Shareholding: in the absence of a qualifying holding in the applicant requesting a banking licence, the CSSF can nevertheless proceed with the approval process if the applicant has communicated the identify of its twenty largest shareholders (or members).

Fit and proper test: when assessing the healthy and prudent management of a credit institution subject to a potential acquisition or a CRR investment firm (as defined in the FSL) which has submitted a licence request, the CSSF must now also check whether any potential members of the management body who will direct the business of the regulated entity have sufficient knowledge and competence for this purpose (and not only their professional reputation and experience).

Capital base: a banking licence is now conditional upon the existence of a minimum share capital of EUR 8,700,000 which must be fully paid up.

Banking licence withdrawal: the FSL broadens the circumstances that may result in the withdrawal of a banking licence.

➲ Enhanced corporate governance provisions

Collective fitness test: the management body must possess adequate collective knowledge, skills and experience to understand the institution’s activities and its inherent risks.

Time commitment of members of the management body.

Ongoing training of the members of the management body.

Diversity requirements.

For Significant Entities, cap on the number of directorships: one executive directorship and two non-executive directorships or four non-executive directorships.

➲ New remuneration principles

Applicable to staff members who have a material impact on an institution’s risk profile.

Introduction of a clear distinction between fixed and variable remuneration.

Bonus cap for variable remuneration: the basic fixed to variable ratio is 1:1 although this ratio can be raised to a maximum of 2:1 if certain conditions are met.

➲ Transparency

CRR institutions (as defined in the FSL) will have to disclose annually a set of information (e.g. profits, taxes) specified by Member State and by third country in which they operate.

➲ Prudential rules

Liquidity supervision of branches of CRR institutions established in another EU Member State will be shifted from the competent authority of the host Member State to that of the home Member State.

Exposures incurred by CRR institutions towards entities of the same group are exempted from the large exposures regime under Regulation (EU) 575/2013 (“CRR”).

➲ Capital buffers in addition to own funds requirements

Capital conservation buffer. Countercyclical capital buffer, Buffer for global systemically important institutions (G-SII).. Buffer for other systemically important institutions (O-SII) Systemic risk buffer.

The CSSF will have to identify Luxembourg’s G-SII or O-SII on the basis of detailed identification methods.

➲ Administrative penalties

Breaches of key elements of the FSL will be subject to a minimum set of penalties (including pecuniary penalties of up to 10% of the annual turnover for legal persons or fines of up to twice the amount of the benefit derived from the breach).

19

Contacts

Banking and Finance Department – Regulatory team

Judith Raijmakers

Partner and head of Banking & Finance

+352 466 230 208

Judith.Raijmakers@loyensloeff.com

Anne-Marie Nicolas

Partner

+352 466 230 314

Anne-Marie.Nicolas@loyensloeff.com

Eric Jungblut

Senior associate

+352 466 230 245

Eric.Jungblut@loyensloeff.com

Vanessa Freed

Professional support lawyer

+352 466 230 432

Vanessa.Freed@loyensloeff.com

Loyens & Loeff N.V. is the first firm where attorneys at law, tax advisers and civil-law notaries

collaborate on a large scale to offer integrated professional legal services in the Netherlands,

Belgium, Luxembourg and Switzerland.

Loyens & Loeff is an independent provider of corporate legal services. Our close cooperation

with prominent international law and tax law firms makes Loyens & Loeff the logical choice for

large and medium-size companies operating domestically or internationally.

Although this publication has been compiled with great care, Loyens & Loeff Luxembourg S.à.r.l. and all other

entities, partnerships, persons and practices trading under the name 'Loyens & Loeff', cannot accept any

liability for the consequences of making use of this publication without their cooperation. The information

provided is intended as general information and cannot be regarded as advice.