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CRD VI will significantly impact the way third country firms provide core banking services into the EU and how third country branches (TCBs) will be supervised. We expect CRD VI to be implemented by Q4 2025. Although there are some transitional provisions, third country firms would be wise to start planning now.

Following political agreement in December 2023, the Banking Package (CRR III/CRD VI) adopted by the European Commission in October 2021 to amend the Capital Requirements Regulation and Capital Requirements Directive IV was approved at a plenary session of the European Parliament on 24 April 2024. The latest available texts for CRD VI and CRR III can be found here and here. We expect the Official Journal versions to be published around June 2024.

Under the existing regime, the provision of financial services into the EU by non-EU firms is largely a matter of national law and there is no harmonised EU requirement for third country firms to operate with a branch licence. This post focuses on the impact of CRD VI on third country firms, in particular how the new branch licensing requirement will impact firms providing core banking services in the EU.

The wider reforms introduced by the Banking Package, including the implementation of the final elements of Basel III and EU-specific reforms (including, amongst others, incorporating ESG factors into banks' risk management, introducing new approval and notification requirements on acquiring, divesting or transferring material holdings, and mergers and divisions) are not covered in this post. Please contact us if you would like to discuss these changes.

1. CRD VI – third country provisions at a glance

Key provisions:

  • Branch licensing requirement – restriction on cross-border services: CRD VI introduces a branch licensing requirement which means that from Q4 2026, unless an exemption applies, in-scope third country firms that provide core banking services (broadly, deposit-taking, lending and the provision of guarantees and commitments) will need to become authorised as TCBs in each relevant member state where they provide these services. The branch licensing requirement effectively restricts the provision of core banking services on a cross-border basis. Non-EU firms which qualify as a credit institution or a large investment firm (see 'Scope - Core banking services and in-scope third country firms' below) will need to assess whether their activities – for example, syndication activities, trade finance services, cash management – in member states could constitute core banking services.
  • Minimum requirements applicable to branches: CRD VI introduces harmonised requirements for TCBs. TCBs will be required to meet minimum authorisation, prudential and regulatory requirements. Some of these requirements will be onerous, such as reporting requirements which cover regulatory and financial information not only of the TCB, but also that of its head undertaking. TCBs will be designated as either Class 1 or Class 2, with Class 1 TCBs required to comply with more stringent requirements. National competent authorities (NCAs) may also require TCBs to meet additional requirements.
  • Subsidiarisation: Under CRD VI, NCAs will also have the power to require systemic branches to subsidiarise in some circumstances.

See section 2 below for more details on the requirements.

Key issues to consider: we have set out below in section 3 some of the issues and options which third country firms should be considering now. The impact of the new rules on non-EU firms' EU operations will vary depending on factors such as the business lines involved, the way operations are structured, which member states they operate in and whether the third country in which the head undertaking is based has a banking regulatory framework that is at least equivalent to CRR/CRD. As restructuring may be necessary in some cases, firms should start their planning process now.

Key dates: If we assume that CRD VI is published in the Official Journal by June 2024:

  • Member States will have 18 months to transpose CRD VI – by Q4 2025
  • There will be an additional 12-month transitional period before the cross-border services restriction (ie the branch authorisation requirement) and minimum requirements applicable to TCBs start to apply – Q4 2026
  • Reporting on third country branches – 18 months + 1 day from entry into force, likely to be Q4 2025.
  • Provision on preserving clients’ acquired rights under existing contracts – 24 months + 1 day from entry into force, likely to be mid-2026.

2. Third country firms – key CRD VI measures in more detail

Branch licensing requirement Third country firms that provide core banking services (see 'Scope - Core banking services and in-scope third country firms' below) in a member state will no longer be able to do so on a cross-border basis, and will need to become authorised as TCBs unless they provide these banking services through a subsidiary, or exemptions apply (see 'Scope – Exemptions' below).

A set of minimum requirements will apply to all TCBs across the EU (see 'Minimum requirements applicable to TCBs' below).

A TCB may only apply for authorisation to carry on activities that are covered by its head undertaking authorisation. More clarification is needed on this point. For example, what would happen where an activity, such as lending, is not regulated in the jurisdiction of the head undertaking?

Scope - Core banking services and in-scope third country firms Core banking services within the scope of CRD VI are those listed below when carried out by the specified types of in-scope third country firms:

  • Any third country firm: Taking deposits and other repayable funds;
  • Any third country firm which would qualify as a credit institution or as a 'CRR investment firm' (broadly, a very large investment firm which deals on own account or underwrites financial instruments, with (either on its own or as part of a group) over EUR 30 billion in assets, or which carries out investment services exceeding EUR 30 billion):
    • Lending, including consumer credit, credit agreements relating to immovable property, factoring, with or without recourse, financing of commercial transactions (including forfeiting); and
    • Guarantees and commitments.

Core banking services have, to the relief of many, been much pared down from the services originally proposed to be within scope (which had included financial  leasing, payment services, issuing and administering other means of payment (eg travellers' cheques and bankers' drafts), credit reference services, safe custody services and issuing e-money).

Third country firms which provide services such as trade finance, clearing, cash management, or carry on syndication activities, will need to assess whether these activities fall within the scope of core banking services described above.

Scope - Location requirement When a firm is deemed to be carrying on core banking services in a member state may not always be clear-cut. The preamble of CRD VI appears to suggest that the location of the client will become the determinative factor when considering if a core banking service takes place in the EU. However,  the operative provisions of CRD VI are not conclusive on this point.

Whether divergent interpretations will spring up across member states in due course may depend on whether the European Banking Authority provides EU-wide guidance (in which case, divergent interpretations are less likely) or individual NCAs are left to come up with their own interpretation.

Scope - Exemptions The new Article 21c provides the following exemptions from the branch licensing requirement:

  • Interbank and interdealer transactions (ie services provided to banks or CRR investment firms – see above).
  • Intragroup transactions.
  • Reverse solicitation – subject to limitations and strict criteria regarding its application, noting, however, that the CRD VI concept of reverse solicitation appears to be less restrictive than the one under MiCA and MiFID.
  • Investment services and ancillary services – investment services and activities, and any accommodating ancillary services the purpose of which are to provide services under MiFID. Although which ancillary services would fall within the exemption in practice is not entirely clear, it appears that deposit taking, granting credit or loans provided solely for the purposes of supporting MiFID activities should be out of scope.

By June 2025, EBA will review and submit a report on whether any 'financial sector entity', in addition to credit institutions, should be exempted from the requirement to establish a branch.

Scope - Existing waivers for cross-border services Existing national waivers (eg Germany) relied on by third country firms providing cross-border services into the EU are not expected to be available once CRD VI restrictions on cross-border services start to apply in Q4 2026.
Minimum requirements applicable to TCBs CRD VI introduces minimum requirements for the authorisation of TCBs, as well as ongoing prudential and regulatory requirements including:

  • capital endowment requirements;
  • liquidity requirements;
  • internal governance and risk controls (eg a requirement for TCBs to have at least two persons approved by NCAs to direct their business in relevant members states, requirements relating to outsourcing arrangements and critical or important functions carried out by head undertakings);
  • booking requirements (TCBs to keep a registry book of booking arrangements, and to develop a policy on booking arrangements approved by the TCB's head undertaking, and an independent opinion on the implementation and on-going compliance with CRD booking requirements to be prepared and addressed to NCAs at regular intervals; and
  • reporting obligations regarding regulatory and financial information of TCBs, as well as their head undertaking.

Gold-plating: These are minimum standards and are without prejudice to other applicable requirements in accordance with national law. For example, NCAs have the power to impose additional reporting requirements on TCBs where they deem the additional information to be necessary to gain a comprehensive view of the branch's or head undertaking's business, activities or financial soundness, or in order to verify compliance.

Proportionality: Branches will be designated as either Class 1 or Class 2, with Class 1 being subject to more stringent requirements.

Subsidiarisation NCAs have the power, on a case-by-case basis, to require a TCB to apply for authorisation as a subsidiary where:

  • the TCB has been engaging in prohibited cross-border activities with clients or counterparties in other member states; or
  • the TCB is considered to be systemically important and poses significant financial stability risks in the EU or the member state where it is established; or
  • the aggregate amount of the assets of all TCBs in the same third country group is equal to or higher than EUR 40 billion; or
  • the amount of the TCB assets on their book in the member state in which it is established is equal to or higher than EUR 10 billion.

This power may be used only after the NCA has already applied other measures (eg requiring the restructuring of the branch in order for it to no longer qualify as systemic, applying higher prudential requirements) or where the NCA can justify that those measures would be insufficient to address the NCA's supervisory concerns.

Grandfathering Existing branches NCAs may decide that the authorisations of TCBs granted before the branch authorisation requirement kicks in (Q4 2026) can remain valid, provided that the TCBs that were granted the authorisation comply with the minimum requirements laid down in CRD VI.

Existing contracts'acquired rights' under existing contracts entered into before mid-2026 (24 months + 1 day after CRD VI enters into force) will be preserved. It is unclear exactly what 'acquired rights' means in this context and whether amendments to existing contracts could trigger the branch authorisation requirement, and if so, whether only material amendments would do so. The recitals to CRD VI suggest that any measures taken by member states to preserve clients' acquired rights under existing contracts 'should apply solely for the purpose of facilitating the transition to implementation of this Directive' and should be 'narrowly framed'. This is another area open to divergent interpretation by member states.

3. What should non-EU firms consider now

Non-EU firms currently providing cross-border banking services will need to consider the extent to which their activities (eg lending, syndication, providing guarantees and commitments) in the EU fall within scope of the new requirements. Where they currently rely on cross-border waivers (eg Germany), it would be prudent to assume that these waivers will not be available from Q4 2026. They should consider whether they can rely on any of the exemptions (in particular, the intra-group and interbank exemptions) and whether reliance on reverse solicitation is viable given its limitations. If none of the exemptions apply, and seeking TCB authorisation in each member state is not feasible, they should consider their restructuring options, eg move in-scope business lines into:

  • Entities which are out of scope of CRD VI (ie entities which would not qualify as a credit institution or a CRR investment firm – see above).
  • Existing EU subsidiary within the same group.

Existing EU brancheskey consideration here will be whether they require re-authorisation. Branches will need to consider whether the relevant NCAs are likely to exercise their discretion to grandfather existing authorisations. They should also assess what additional CRD VI minimum requirements apply beyond the TCBs' current obligations, and what complying with the additional obligations would mean for their business (eg systems changes). Other key considerations will include whether they are likely to fall within Class 1 or Class 2, the likelihood of a systemic classification and the risk of subsidiarisation. If a systemic classification is likely, they may wish to consider restructuring options such as moving certain business lines into out-of-scope entities or EU subsidiaries within the same group.

 

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Marina Reason

Partner, London

Marina Reason
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Clive Cunningham

Partner, London

Clive Cunningham
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Kelesi Blundell

Partner, London

Kelesi Blundell
Patricia Horton photo

Patricia Horton

Professional Support Lawyer, London

Patricia Horton
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Chris Hurn

Senior Associate, London

Chris Hurn
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Ioannis Asimakopoulos

Associate, London

Ioannis Asimakopoulos

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Marina Reason photo

Marina Reason

Partner, London

Marina Reason
Clive Cunningham photo

Clive Cunningham

Partner, London

Clive Cunningham
Kelesi Blundell photo

Kelesi Blundell

Partner, London

Kelesi Blundell
Patricia Horton photo

Patricia Horton

Professional Support Lawyer, London

Patricia Horton
Chris Hurn photo

Chris Hurn

Senior Associate, London

Chris Hurn
Ioannis Asimakopoulos photo

Ioannis Asimakopoulos

Associate, London

Ioannis Asimakopoulos
Marina Reason Clive Cunningham Kelesi Blundell Patricia Horton Chris Hurn Ioannis Asimakopoulos