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Regulatory framework
What are the principal governmental and regulatory policies that govern the banking sector?
Luxembourg is a major financial centre and the development of the financial sector is, therefore, an important policy consideration. The Ministry of Finance works together with Luxembourg for Finance (the Luxembourg agency for the development of the financial centre) to promote, develop and diversify the Luxembourg financial centre, and identify new opportunities. Current priorities include digitalisation, anti-money laundering and countering the financing of terrorism (AML/CFT), sustainable finance, and financial education. Policies are being adjusted as needed to address the covid-19 pandemic, to which the sector has been quite resilient.
What are the defining characteristics of a bank to be caught by the banking laws and regulations? Is non-bank fintech regulated differently?
Credit institutions or banks are defined in the Law of 5 April 1993 on the financial sector, as amended (LFS), as legal persons whose activity consists of receiving deposits or other repayable funds from the public and granting credits for their own account. Any person that performs these two activities qualifies as a bank, falls within the scope of banking laws and regulations, and must obtain an authorisation.
There is no dedicated legal framework for non-bank fintech activities in Luxembourg, except a registration requirement for virtual asset service providers (which includes certain virtual asset exchanges, virtual asset transfer services, virtual asset safekeeping or administration services and custodian wallet services) under anti-money laundering legislation and the new European framework for crowdfunding service providers under Regulation (EU) 2020/1503.
Whether banking laws and regulations apply (or other laws and regulations, for instance in relation to payment services) depends on the nature of the activities performed by a given entity, regardless of its status as a fintech. This should be analysed on a case-by-case basis.
Do the rules vary depending on the size or complexity of the banking institution?
To a certain extent, yes. Although there is a standard set of rules set out in laws and regulations, the legal framework applicable to banks is completed by regulations and circulars adopted by the Commission de Surveillance du Secteur Financier (CSSF) as well as guidelines issued by the European Supervisory Authorities – in particular, the European Banking Authority (EBA). Certain of these rules include a proportionality principle whereby certain requirements can be applied in a manner that is appropriate to the bank’s size and internal organisation, and the nature, scope and complexity of its activity. This may impact, for instance, the bank’s governance or the organisation of its internal control functions.
Summarise the primary statutes and regulations that govern the banking industry.
The main law governing banks in Luxembourg is the LFS, which covers:
As Luxembourg is an EU member state, European banking regulations are also applicable to Luxembourg banks. These include, in particular, Regulation (EU) 575/2013 on prudential requirements for banks and investment firms, as amended.
Many specific laws and regulations also apply depending on the activities pursued by Luxembourg banks (eg, investment services, payment services, securitisation, derivative transactions, securities financing transactions, etc).
Luxembourg banks are also subject to the following:
The legal framework is completed by grand-ducal regulations, CSSF regulations and CSSF circulars on a variety of specific topics. One of the most important circulars is CSSF Circular 12/552 on the central administration, internal governance and risk management of banks, investment firms and professionals performing lending operations, as amended.
Which regulatory authorities are primarily responsible for overseeing banks?
The regulatory authorities responsible for overseeing banks are the CSSF, the European Central Bank (ECB) and the Banque centrale du Luxembourg (BCL).
The CSSF falls under the authority of the Luxembourg Ministry of Finance, and is responsible for the authorisation and prudential supervision of banks in Luxembourg. The CSSF also acts as the competent authority under a number of specific regulations. In particular, the CSSF is the competent authority with respect to AML/CFT measures, and acts as the Luxembourg resolution authority.
The ECB plays a central role in the supervision of banks within the framework of the Single Supervisory Mechanism (SSM). The ECB is in particular responsible for:
The ECB is also responsible for the effective and consistent functioning of the SSM. It directly supervises a number of significant banks (whereas less significant banks are supervised by their national supervisory authorities) and may impose sanctions.
The BCL forms part of the European System of Central Banks. The BCL implements the decisions made by the ECB in Luxembourg and is competent for monetary policy operations in favour of Luxembourg banks.
The BCL is also responsible for:
The BCL has regulatory power, and may issue regulations and circulars on subject matters relating to its tasks. It also enforces ECB decisions and implements the sanctions imposed by the ECB.
The EBA, which is part of the European System of Financial Supervision, also plays a role in the overall supervisory framework – in particular, by publishing guidelines addressed to national competent authorities that are aimed at harmonising regulatory practices.
Finally, the AML/CFT package published by the European Commission on 20 July 2021 seeks to establish a new authority for combating the same, with a view to enhancing supervision of AML/CFT concerns in the European Union. Details regarding the new authority have not yet been announced.
Describe the extent to which deposits are insured by the government. Describe the extent to which the government has taken an ownership interest in the banking sector and intends to maintain, increase or decrease that interest.
Deposits are protected by the Fonds de Garantie des Dépôts Luxembourg (FGDL). The FGDL ensures repayment to depositors – in the case of the unavailability of their deposits – up to €100,000 per person and per institution. The standard €100,000 protection may be increased to €2.5 million in certain specific cases and subject to specific conditions. Certain deposits are excluded from protection.
All Luxembourg banks, as well as Luxembourg branches of third-country banks, must be members of the FGDL. The FGDL collects contributions from member institutions on an annual basis. The amount of each institution’s contribution is calculated based on the amount of the covered deposits and the degree of risk incurred by the institution.
There is also an investor compensation scheme (Système d’indemnisation des investisseurs Luxembourg) that, subject to certain conditions, protects customers holding financial instruments.
In addition to its shareholding in a number of international financial institutions, the Luxembourg government holds 100 per cent of the shares in the Banque et Caisse d’Épargne de l’État (BCEE) as well as stakes in BGL BNP Paribas SA and Banque Internationale à Luxembourg SA (BIL). The BCEE was established in 1856 and is the oldest financial institution in Luxembourg. The shareholdings of the Luxembourg government in BGL BNP Paribas SA and the BIL stem from the 2008 financial crisis. There does not appear to be an intention by the government to increase its ownership in the banking sector.
Which legal and regulatory limitations apply to transactions between a bank and its affiliates? What constitutes an ‘affiliate’ for this purpose? Briefly describe the range of permissible and prohibited activities for financial institutions and whether there have been any changes to how those activities are classified.
There is no regulation specific to transactions between a bank and its affiliates. As a general principle, banks should ensure that transactions with their affiliates are entered into on arm’s-length terms. Certain regulations include specific rules or exemptions in the case of intra-group transactions. For instance, Regulation (EU) No. 648/2012 includes exemptions from certain requirements – such as the clearing obligation for over-the-counter derivatives or requirements with respect to the exchange of collateral – for intra-group transactions that comply with certain conditions. Luxembourg also offers a flexible environment to outsource back to group companies, which is a common operating model in Luxembourg, but specific rules apply.
Intra-group financial support arrangements are subject to specific conditions.
The CSSF also exercises supplementary supervision of Luxembourg banks that belong to a financial conglomerate for which the CSSF assumes the role of coordinator with respect to intra-group transactions. The CSSF monitors, in particular, the possible risk of contagion in the conglomerate, the existence of conflicts of interest, the circumvention of sectoral rules, and the level and volume of intra-group transactions.
Banks are authorised to:
What are the principal regulatory challenges facing the banking industry?
The banking industry faces a continued influx of new regulations, which began with the 2008 financial crisis and has not yet come to a halt. On 7 June 2019, a banking package (the 2019 Package) was published by the European Commission that introduced a number of changes, such as, among others:
Certain measures of the 2019 Package have been adapted or delayed through regulatory adjustments introduced in response to the covid-19 pandemic.
Certain banks are impacted by Regulation (EU) 2019/2088 on ESG disclosures, which imposes transparency with respect to the integration of sustainability risks and the provision of sustainability-related information with respect to financial products.
Banks should monitor the upcoming regulation of cryptoassets further to the publication of the digital finance package and the proposal for a regulation on markets in cryptoassets (2020/0265(COD)), as well as the impact of the new AML/CFT package published on 20 July 2021.
In addition, the European Commission published a new banking package on 27 October 2021 (the 2021 Package), which includes proposed amendments to Directive 2013/36/EU and Regulation (EU) 575/2013 that aim to:
Are banks subject to consumer protection rules?
The Luxembourg Consumer Code (LCC) includes a number of requirements that must be complied with by professionals when dealing with consumers. These include information to be provided to consumers, prohibition of unfair business practices and requirements for contracts entered into with consumers, including mortgages and loans. There are rules on:
Clauses in consumer credit and mortgage loan agreements that breach the LCC are void. The LCC also includes administrative and criminal sanctions.
In what ways do you anticipate the legal and regulatory policy changing over the next few years?
The evolution of the regulatory environment for banks in Luxembourg is largely driven by developments at the level of the European Union. These developments include, in particular:
AML/CFT measures as well as measures against proliferation financing will also remain a priority, as evidenced by the recent publication of a new AML/CFT package. This package includes proposals for a new AML/CFT regulation, an update to Regulation (EU) 2015/847 on transfers of funds and a sixth AML/CFT directive, as well as a proposal for the establishment of a new EU AML/CFT authority.
Law stated date
Give the date on which the information above is accurate.
3 January 2022.
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