Luxembourg Tightens Rules for Third-Country Banks

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In a move to bolster financial stability and consumer protection, Luxembourg has introduced new regulations for third-country banks seeking to provide investment services in the country. According to the revised rules, such banks must meet strict requirements and demonstrate equivalent authorisation and supervisory standards as those in their home jurisdiction.

New Regulations Apply to Third-Country Banks

The updated rules require third-country banks to establish a branch in Luxembourg if they intend to provide investment services to retail clients or professional clients who are not considered “professional clients per se” under the Banking Act. This includes clients that have requested to be treated as professional clients but do not meet the definition.

Exceptions

However, if the third-country bank intends to provide investment services only to eligible counterparties and professional clients within the meaning of Section A of Annex III of the Banking Act, it may operate in Luxembourg without establishing a branch. To do so, the bank must:

• Be authorised in its home jurisdiction to provide the same investment services.
• Have an equivalence decision from either the European Commission or the CSSF (Commission de Surveillance du Secteur Financier) confirming that the legal and supervisory regime of the third country is equivalent to MiFIR, Directive 2014/65/EU, Directive 2013/36/EU, or the Banking Act.
• Establish cooperation arrangements between the European Securities and Markets Authority (ESMA) or CSSF, as applicable, and the relevant competent authority of the third country.

Additional Requirements for Retail Clients

Third-country banks seeking to provide investment services to retail clients must establish a branch in Luxembourg and meet additional conditions. These include:

• Demonstrating robust internal governance arrangements
• Effective risk management processes
• Adequate internal control mechanisms

Implications for Third-Country Groups

The revised regulations also apply to third-country groups incorporating a bank in Luxembourg. In such cases, the group may need to establish a single intermediate EU parent undertaking.

Conclusion

Luxembourg’s updated rules aim to ensure that third-country banks operating in the country meet equivalent authorisation and supervisory standards as those in their home jurisdiction. The new regulations will help to bolster financial stability and consumer protection in Luxembourg, while also promoting fair competition among financial institutions.