Ownership restrictions and implications

Controlling interest

Describe the legal and regulatory limitations regarding the types of entities and individuals that may own a controlling interest in a bank (or non-bank). What constitutes ‘control’ for this purpose?

Authorisation as a bank is subject to communication to the Commission de Surveillance du Secteur Financier (CSSF) of the identities of the shareholders (direct or indirect) that have qualifying holdings in the bank to be authorised, as well as the amount of those holdings. Owners of a qualifying holding in a Luxembourg bank must produce evidence of their professional repute, which is assessed in particular on the basis of criminal records and any other presented evidence. The regulator also assesses their skills and knowledge as well as their financial soundness. A qualifying holding is any direct or indirect holding that represents 10 per cent or more of the capital or of the voting rights in the relevant bank, or that makes it possible to exercise a significant influence over the management of the bank. Similar requirements apply to other regulated financial sector entities.

Foreign ownership

Are there any restrictions on foreign ownership of banks (or non-banks)?

There are no restrictions on the foreign ownership of banks or non-banks. To the extent that a foreign entity acquires or disposes of a Luxembourg bank (or non-bank), the provisions on acquisitions and disposals of qualifying holdings apply.

Where a bank incorporated under Luxembourg law is part of a third-country group that has two or more institutions (as defined under Regulation (EU) 575/2013, as amended) in the European Union, it must ensure that the third-country group has a single intermediate EU parent undertaking. Where such intermediate EU parent undertaking is established in Luxembourg, it must be a credit institution authorised in accordance with the provisions of the Law of 5 April 1993 on the financial sector, as amended (LFS), or a financial holding company or mixed financial holding company approved under the LFS. The requirement to have an intermediate EU parent undertaking does not apply where the total value of the assets of the third-country group in the European Union is less than €40 billion.

Implications and responsibilities

What are the legal and regulatory implications for entities that control banks?

Entities that hold a qualifying holding in a Luxembourg bank are assessed by the CSSF. They must permanently comply with the reputation, knowledge, skills and financial soundness requirements needed for the bank’s continued authorisation, bearing in mind that the CSSF may withdraw the bank’s authorisation if the conditions for its granting are no longer met. The bank’s management has an obligation to notify the CSSF of any change to the substantial information – including with respect to the shareholder or shareholders – on which the CSSF based its decision.

What are the legal and regulatory duties and responsibilities of an entity or individual that controls a bank?

Owners of a qualifying holding in a bank are subject to notification requirements, for instance in the case of an appointment of a new member of the management body, or the acquisition or disposal of holdings in the bank that exceed certain thresholds.

Entities that control banks may also qualify as parent financial holding company or parent mixed financial holding company, which may trigger prudential supervision on a consolidated basis under Regulation (EU) No. 575/2013 on prudential requirements for banks and investment firms, as amended (CRR), and governance requirements. This includes reporting requirements as well as the requirement to obtain prior approval from the CSSF, for instance in cases of:

  • a change in management or legal representatives;
  • a change in the object, name or legal form;
  • a change in the shareholding structure; or
  • a change of registered office.

 

Luxembourg-based parent financial holding companies and parent mixed financial holding companies (each as defined in the CRR) must seek approval from the CSSF.

This requires the provision of information on the entity and the group to the CSSF, and, where different, the consolidating supervisor. An exemption from the approval requirement is available where certain conditions are met.

What are the implications for a controlling entity or individual in the event that a bank becomes insolvent?

Where a bank faces financial difficulties, several measures impacting shareholders may be taken by the CSSF or the Resolution Board (the CSSF acting as resolution authority). Early intervention measures in the case of a rapidly deteriorating financial situation include the replacement of the management body, which means the shareholders lose the power to appoint management.

Where a bank meets the conditions for resolution, the Resolution Board may take control of the bank and exercise all rights and powers conferred upon the shareholders. The Resolution Board also has several tools and powers at its disposal that may impact shareholders, including:

  • the sale of shares or other instruments of ownership issued by the bank to a purchaser or bridge institution;
  • the sale of assets, rights and liabilities of the bank without shareholder approval; or
  • the cancellation of existing shares or dilution of existing shareholders as a result of a conversion of capital instruments or eligible liabilities into shares or other instruments of ownership in the context of the bail-in tool.

 

One of the principles of resolution is that shareholders bear first losses. In certain cases, the Resolution Board may prohibit distributions. In the context of suspension of payments or winding-up proceedings, there is no implication for shareholders.

Changes in control

Required approvals

Describe the regulatory approvals needed to acquire control of a bank (or non-bank). How is ‘control’ defined for this purpose?

Any natural or legal person, whether acting alone or in concert with other persons, that has taken a decision to acquire, directly or indirectly, a qualifying holding in a Luxembourg bank must first notify the Commission de Surveillance du Secteur Financier (CSSF) in writing of its intention to acquire such a qualifying holding. The approval requires an assessment of the shareholder's fitness. A qualifying holding is any direct or indirect holding that represents 10 per cent or more of the capital or of the voting rights in the relevant bank, or that makes it possible to exercise a significant influence over the management of the bank. Similar requirements apply to other regulated financial sector entities.

Foreign acquirers

Are the regulatory authorities receptive to foreign acquirers? How is the regulatory process different for a foreign acquirer?

The Luxembourg regulatory authorities are receptive to foreign acquirers. In fact, most of the 125 banks established in Luxembourg as at January 2022 are foreign owned. There is no difference in the regulatory approval process between Luxembourg acquirers, EU acquirers or acquirers from third countries.

Under what circumstances can a foreign bank (or non-bank) establish an office and engage in business? For example, can it establish a branch or must it form or acquire a locally chartered bank?

For banks established in a foreign jurisdiction that wish to operate in Luxembourg, a distinction is made between banks established in an EU member state and banks established in a jurisdiction outside of the European Union (a third country).

Banks established and authorised in another EU member state may operate in Luxembourg through the cross-border provision of services, through the establishment of a branch in Luxembourg or through the use of a tied agent, to the extent that the activities to be exercised in Luxembourg are covered by their licence and are covered by applicable EU regulation. In this case, no authorisation from the Luxembourg authorities is required.

There is no obligation for third-country banks to form or acquire a local bank. Third-country banks that wish to establish a branch in Luxembourg to exercise their banking activities are subject to the same licensing requirements as Luxembourg banks. Luxembourg branches of third-country banks are subject to specific reporting requirements.

Banks from a third country that are not established in Luxembourg, but that occasionally and temporarily come to Luxembourg to (among other things) collect deposits and other repayable funds from the public and to provide any other service subject to the Law of 5 April 1993 on the financial sector, as amended, must obtain authorisation.

Specific conditions apply where a third-country bank intends to provide investment services in Luxembourg. If the third-country bank intends to provide investment services to eligible counterparties and to per se professional clients, it may establish a branch in Luxembourg that is subject to the same licensing requirements as Luxembourg-law banks and investment firms. The third-country bank may also provide investment services in Luxembourg to such clients on a cross-border basis to the extent that Luxembourg benefits from an equivalence decision made by the European Commission or the CSSF. A third-country bank that wishes to provide investment services to retail clients, however, must establish a branch that is subject to the same authorisation rules as banks incorporated in Luxembourg.

Other entities regulated at EU level, such as investment firms or payment institutions, benefit from EU passporting provisions. Such entities may provide cross-border services, establish a branch in Luxembourg or use an agent without the need for a local licence. Third-country firms intending to provide investment services in Luxembourg are subject to the requirements described above. EU or third-country entities intending to provide certain specific services that are regulated in Luxembourg may require an authorisation or need to establish a branch, depending on the way in which the services are performed.

Third-country groups incorporating a bank in Luxembourg may need to establish a single intermediate EU parent undertaking where they have two or more institutions (as defined under Regulation (EU) No. 575/2013 on prudential requirements for banks and investment firms, as amended) in the European Union and where the total value of the assets of the third-country group in the European Union is €40 billion or more.

Factors considered by authorities

What factors are considered by the relevant regulatory authorities in an acquisition of control of a bank (or non-bank)?

The CSSF seeks to ensure the sound and prudent management of the bank (or non-bank) that will be acquired, and will assess the suitability of the proposed acquirer based on the following criteria:

  • its professional standing;
  • the professional standing and the professional qualifications of the persons who will direct the daily business of the bank (or non-bank);
  • its financial soundness;
  • the capacity of the bank (or non-bank) to keep complying with the applicable prudential requirements after the acquisition; and
  • the absence of suspicion surrounding money laundering or terrorist financing.

 

Filing requirements

Describe the required filings for an acquisition of control of a bank.

Any potential acquirer of a qualifying holding in a Luxembourg bank must first notify the CSSF in writing of its intention to acquire such a qualifying holding.

The notification to the CSSF must include written submissions that describe the intended acquisition and request its prior approval. Supporting documentation includes all the documents required to assess the suitability of the acquirer (reputation, skills, financial soundness, etc) and the suitability of the new management, if any.

The CSSF carries out its assessment in accordance with the principle of proportionality. It also reviews the proposed acquisition considering the Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector published by the Joint Committee of the European Supervisory Authorities.

The CSSF’s approval is also required for changes to the composition of the target’s management body and its senior staff. Candidates must complete an application form and provide the CSSF with several supporting documents (eg, identity documents, curriculum vitae, recent criminal record extracts, a declaration of honour, highest diploma and corporate documentation appointing the candidate, etc).  

The seller of a qualifying holding in a bank must also notify the CSSF prior to such a sale. Banks must inform the CSSF without delay of any acquisitions or disposals of holdings in their capital that exceed or fall below certain thresholds.

Time frame for approval

What is the typical time frame for regulatory approval for both a domestic and a foreign acquirer?

The CSSF has up to 60 working days (which can be extended to up to 90 working days) as of the notification to assess a proposed acquisition and to declare whether it is opposed to the acquisition. Failing formal opposition, it is deemed to be approved.

Law stated date

Correct on

Give the date on which the information above is accurate.

3 January 2022.