Introduction

The EU Capital Requirements Directive (2013/36/EC) (CRD IV) has been implemented into Luxembourg law by the Act of July 23 2015. This act also amends:

  • the Act of April 5 1993 on the financial sector, as amended (the 'Financial Sector Act');
  • the Act of December 23 1998 establishing the CSSF (the Luxembourg financial sector regulator), as amended (the 'CSSF Act'); and
  • the Act of July 12 2013 on alternative investment fund managers (AIFMs) (the 'AIFM Act').

Certain other provisions of CRD IV that were considered too granular to be incorporated into the Financial Sector Act have been implemented through CSSF Regulation 15-02 of August 14 2015, which relates to the supervisory review and evaluation process applicable to institutions that are subject to the EU Capital Requirements Regulation (575/2013). The purpose of CRD IV, alongside the Capital Requirements Regulation, is to implement the Basel III regulatory framework into European law. Basel III and CRD IV are intended to:

  • increase the quality and quantity of capital, including by expanding capital requirements for certain types of risk;
  • improve liquidity coverage and harmonise liquidity standards;
  • strengthen governance requirements, including remuneration policies; and
  • ensure better-coordinated cross-border supervision.

Impact on Financial Sector Act

Key definitions

A number of key definitions have been introduced into the Financial Sector Act to pave the way for implementation of the EU supervisory framework for credit institutions and investment firms. In particular, the definition of 'CRR institutions' was introduced in Article 1 (11bis) of the Financial Sector Act, which applies to credit institutions and investment firms that are subject to the Capital Requirements Regulation as set out in Article 4(1) of the regulation. Methods and procedures to identify 'systemically important institutions' are also set out under Article 59-3 of the Financial Sector Act. Moreover, a distinction has been made between 'CRR investment firms' (broadly, those authorised to hold client assets or engage in proprietary trading, underwriting, placement of financial instruments or operation of multilateral trading facilities) and firms which fall outside the scope of the Capital Requirements Regulation. CSSF Circular 15/606 of February 23 2015 sets out precise criteria to distinguish between CRR and non-CRR investment firms and with regard to holding client assets.

Capital buffers

In addition to the total capital ratio requirements provided under the Capital Requirements Regulation, Basel III and EU-specific capital buffers have been introduced by the new Chapter 5 of the Financial Sector Act (Articles 59-1 to 59-14). These include:

  • the capital conservation buffer;
  • the countercyclical buffer;
  • the systemic risk buffer;
  • the global systemic institution risk buffer; and
  • other systemic institution buffers.

The calculation method for countercyclical capital buffer rates is set out in CSSF Regulation 15-01 of August 14 2015, implementing Article 140 of CRD IV into Luxembourg law.

Governance

The internal governance regime has been strengthened, primarily through addressing the management body's composition and functioning, as well as by imposing certain principles and prescriptions – such as the separation of certain functions as set out under Article 38-1 of the Financial Sector Act – in order to promote effective and prudent management.

Remuneration

Rules governing remuneration policies within credit institutions and certain types of investment firm were initially introduced by EU Directive 2010/76/EC (CRD III). Remuneration principles established by CRD III were implemented into Luxembourg law through CSSF Circular 10/496 for credit institutions and CSSF Circular 10/497 for investment firms. In addition to the existing rules, CRD IV introduces a clear distinction between fixed and variable remuneration and establishes a ratio of the fixed and variable components of remuneration by fixing the bonus cap at 100% of fixed remuneration. However, the shareholders may increase the variable part of remuneration to a maximum of 200% of fixed remuneration, following a special procedure set out under Article 38-6 of the Financial Sector Act. CSSF Circular 15/606 of October 21 2015 specifies the CSSF notification requirements in case of such an increase.

Disclosure

Public disclosure and reporting requirements have been increased through (among other things) the introduction of country-by-country disclosure requirements (Article 38-3 of the Financial Sector Act).

Penalties

Administrative fines and other measures to combat non-compliance with CRD IV and the Capital Requirements Regulation have been introduced, and fines have been increased (Article 63-1 of the Financial Sector Act).

Impact on CSSF Act

The CSSF Act is slightly amended in order to introduce new rules regarding the cooperation with the European Systemic Risk Board. Article 3-1 of the CSSF Act has been adapted in order to comply with these new cooperation obligations under the Single Supervisory Mechanism. In addition, Article 16 of the CSSF Act now specifies that the professional secrecy obligations of the CSSF do not prevent disclosure of information covered by the cooperation obligations relating to the European Systemic Risk Board.

Impact on AIFM Act

A new paragraph has been inserted into Article 5(6) of the AIFM Act, providing that Article 101(2)-2 of the Act of December 17 2010 on undertakings for collective investment applies to investment portfolio managers, including those owned by pension funds and retirement institutions, in accordance with mandates given by investors on a discretionary, client-by-client basis. This amendment is intended to introduce consistent rules on own-funds adequacy for AIFMs, managers of undertakings for collective investment in transferable securities and other investment firms providing the same services.

For further information on this topic please contact Josée Weydert or Jad Nader at NautaDutilh Avocats Luxembourg by telephone (+352 26 12 29 1) or email (josee.weydert@nautadutilh.com or jad.nader@nautadutilh.com). The NautaDutilh Avocats Luxembourg website can be accessed at www.nautadutilh.com.

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