Discussions regarding the proposal for a Directive of the European Parliament and of the Council amending Directive 2013/36/EU (Capital requirements directive, “CRD”) as regards supervisory powers, sanctions, third-country branches (“TCBs”), and environmental, social and governance risks, and amending Directive 2014/59/EU (Bank recovery and resolution directive, “BRRD”) (the “CRD 6”) are well advanced.
In this alert, we will focus on the regime applicable to entities established in a third country (i.e. outside the European Union – “EU”) and notably the prudential supervision of TCBs under the CRD 6.
TCBs refers to branches established in a Member State by either (i) an undertaking which has its head office in a third country for the purpose of carrying certain activities or (ii) a credit institution which has its head office in a third country.
Third country undertakings are required to establish a branch and apply for authorisation to commence or continue conducting certain activities[1] in the relevant Member State. Exceptions to such principle pertain to (i) the provision of investment services and activities as set out under Directive 2014/65 on markets in financial instruments (“MiFID II”), (ii) the provision of banking services on a reverse solicitation basis, (iii) the provision of services or activities to a credit institution established in the EU or (iv) to an undertaking of the same group.
TCBs are classified into two categories (class 1 or class 2) depending on their total value of the assets and the amount of deposits and other repayable funds.
The authorisation process of a TCB requires the latter to comply with certain requirements including (i) capital endowment (depending on the classification of the TBCs), including specific requirements on the nature of the assets, (ii) liquidity requirements and (iii) internal governance and risks controls.
TCBs have at least two persons in the relevant Member State effectively directing their business subject to prior approval by the competent authorities. Those persons are of good repute and possess sufficient knowledge, skills and experience and commit sufficient time to the performance of their duties. Depending on their classification, TCBs may be required to establish a local management committee to ensure an adequate governance of the branch. TCBs establish reporting lines to the management body of the head undertaking that cover all material risks and risk management policies. They have in place adequate ICT systems and controls to ensure that policies are complied with. They also monitor and manage their outsourcing arrangements. They have adequate resources to identify and properly manage their counterparty credit risk where material risks associated with assets booked by the TCB are transferred to the counterparty, where engaged in back-to-back or intragroup operations. Where critical or important functions of the TCB are carried out by its head undertaking, it shall be done in accordance with internal arrangements or intragroup agreements. In some cases, competent authorities in charge of the supervision of TCBs have access to all information they need to fulfil their supervisory function and they periodically require the assessment by a third party of the aforementioned requirements.
Under certain circumstances, competent authorities have the power to require TCBs to establish a subsidiary.
The EU may conclude agreements with one or more third countries regarding the means of exercising supervision on a consolidated basis over the following: (a) institutions the parent undertakings of which have their head offices in a third country; (b) institutions situated in third countries the parent undertakings of which, whether institutions, financial holding companies or mixed financial holding companies, have their head offices in the Union.
EBA will be developing further details on the application of the CRD 6, which is scheduled for a vote by the European Parliament on 22 April 2024.
Should you have any questions on the above, please do not hesitate to contact one of our experts in the regulatory team.
[1] These activities include e.g. (i) taking deposits and other repayable funds, (ii) guarantees and commitments and (iii) lending (inter alia consumer credit, credit agreements relating to immovable property, factoring, with or without recourse, financing of commercial transactions including forfeiting).
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