On 2 July 2015, the Luxembourg Parliament adopted the law implementing, amongst others, the CRD IV (1) into Luxembourg law (the “Law”) which, together with CRR (2), forms the supervisory framework for credit institutions and investment firms, adopted at the European Union level to implement the Basel III Agreement.
Among the numerous goals of the CRD IV, some should be highlighted, especially the determination to have a more balanced liquidity, more and better capital, and a more efficient and strengthened cross-border supervision. As Luxembourg is late in its implementation which was required for 31 December 2013, the CSSF has already applied most of the requirements since then.
Besides repealing long-established CSSF Circulars (e.g. CSSF Circulars 06/273 and 07/290), the CRD IV implementation required a substantial and overall amendment of the Law on the Financial Sector (Loi sur le Secteur Financier) (the “LSF”).
The key alterations, or even innovations introduced in the LSF can be summarised as follows:
- Elementary definitions laid down in Article 1 of the LSF have been amended and adjusted so as to reflect the CRR alterations and, amongst others things, a new subcategory of investment firm has been created, i.e. “investment firm within the meaning of the CRR” (the “CRR Investment Firm”)(3);
- The Law strengthens the internal governance requirements applicable to “CRR Institutions” in order to substantiate the sound and prudent management culture (Part II, new Chapter 4bis of the LSF). Article 38-1 of the LSF therefore lays down certain principles and standards which aim to promote the efficiency of the CRR Institutions’ overall supervision by the managing body;
- The Law implements specific provisions with respect to remuneration policies (which were already partially covered by the CSSF Circulars 14/594, 15/601 or 14/585), in particular the requirement to establish a maximum ratio between the variable and the stable components of the total remuneration, so as to prevent excessive risk-taking (4);
- CRR Institutions are required to establish and hold, in addition to other existing own fund requirements, capital buffers, such as (i) the capital conservation buffer, (ii) the institution-specific countercyclical capital buffer, (iii) the systemic risk buffer, and (iv) the combined buffer requirement (Part III, new Chapter 5, Article 60 of the LSF);
- Besides strengthening the CSSF’s overall supervising powers, the Law allows the CSSF, under certain circumstances, (i) to inflict specific administrative fines on CRR Institutions, the amounts of which have been increased (in relation to the previous thresholds), and harmonised at European level, or (ii) to impose other administrative measures, in accordance with Articles 63-1 and 63-2 of the LSF; and
- The Law further implements several provisions into the LSF as regards the so-called “Systemically Important Institutions”, in particular the criteria which allow identification of the Systemically Important Institutions (Article 59-3 of the LSF), as well as the subsequent regulatory impacts resulting from this legal status.
(1) Directive 2013/36/EU of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC.
(2) Regulation (EU) 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investments firms and amending Regulation (EU) No 648/2012.
(3) Article 1 (9bis) of the LSF.
(4) Article 38-6 of the LSF.