The Law of 18 December 2015 regarding the failure of credit institutions and certain investment firms (“Law”), which entered into force on 28 December 2015, implements into Luxembourg law two major pieces of the Banking Union: the Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms, and the Directive 2014/49/EU on deposit guarantee schemes.
1. The new framework for banking resolution
For the sake of readability and consistency of the legal framework, the Luxembourg legislator decided to maintain in the Law of 5 April 1993 on the financial sector, as amended (“Financial Sector Law”), all legal provisions regarding the “going concern” (i.e. the measures to be taken by the institution, while it is still active, to anticipate a resolution or achieve a recovery), while the Law deals with the “gone concern” (i.e. the occurrence of a resolution event).
A. “Going concern”: restatement of Part IV of the Financial Sector Law
This new Part IV applies to (i) Luxembourg credit institutions, (ii) Luxembourg investment firms which shall legally have an initial capital of at least EUR 730,000, and (iii) certain financial holding or mixed activity holding companies.
Concerned institutions, provided they are not forming part of a group submitted to a consolidated supervision, must draw up and maintain a recovery plan, updated at least annually or after a material change to the institution. This recovery plan must be submitted to the CSSF, which assesses its appropriateness.
Furthermore, CSSF is granted early intervention powers, in case the institution infringes, or is likely to infringe, any requirements of national or EU law regarding its solvency. In this regard, the CSSF may (i) require the removal of the senior management or management body of the institution, partly or entirely; and/or (ii) appoint a temporary administrator. Any such measure taken by the CSSF, shall not, per se, trigger the early enforcement by the co-contractor of a contract entered into by the institution (including a financial collateral arrangement under the Law of 5 August 2005, as amended).
B. “Gone concern” Resolution
This part of the Law applies to Luxembourg credit institutions, investment firms and Luxembourg branches of institutions established in non-EU countries, as well as to certain financial holding and mixed activity holding companies, without prejudice to EU Regulation 806/2014 (“Regulation”). The Regulation creates a Single Resolution Board (“SRB”), which works together with the national resolution authorities within the framework of the Single Resolution Mechanism (“SRM”). The Regulation applies to Euro-area credit institutions, certain investment firms and certain financial holding or mixed activity holding companies (“Holdings”).
Without prejudice to the powers granted to the SRB by the Regulation, the CSSF is appointed as “resolution authority” in Luxembourg, to apply the resolution tools and exercise the resolution powers through a “resolution council”. As such, it must draw up a resolution plan for each institution, which does not form part of a group subject to consolidated supervision.
In the event of failure of an institution, and after assessment of its “resolvability” (i.e. the possibility to safeguard the continuity of essential banking operations, protecting not only its clients’ assets and deposits, but also public funds), the resolution council within the CSSF can designate a special administrator to replace the existing management body.
It can also decide to apply, individually or in combination, the following tools:
(a) the sale of business, through the transfer to a purchaser (that is not a bridge bank) of any or all assets and/or liabilities of an institution under resolution;
(b) the bridge institution, through the transfer to a temporary “bridge bank” of the shares of the institution and/or its assets, liabilities and core activities, to preserve essential banking functions or facilitate continuous access to deposits;
(c) the asset separation, through the transfer of toxic assets, rights or liabilities of an institution under resolution or a bridge institution, to one or more asset management vehicles (a “bad bank”); and
(d) the bail-in, through (i) the recapitalisation of the institution, and/or (ii) the conversion to equity, or the reduction of the principal amount, of claims or debt instruments, which are then transferred pursuant to the tools described above.
The transferor under (a) or (b) above is then wound up under normal insolvency proceedings.
The resolution council within the CSSF is entrusted with the implementation of the resolution tools contemplated here above, even if the decision of resolution has been taken by the SRB.
In order to finance the implementation of such tools, the Law creates a resolution fund (the Fonds de resolution Luxembourg – “FRL”), funded at least annually, on an ex ante basis, by the credit institutions and the investment firms authorised in Luxembourg, including any Luxembourg branches of institutions authorised in a third country, in proportion to their liabilities and risk profile. By 31 December 2024, the available financial means of the FRL must reach at least 1% of the amount of covered deposits of all the institutions authorised in Luxembourg. For the year 2015, pursuant to CSSF Circular 15/628, a total amount of EUR 28,550,229 should have been collected by the CSSF. The part of this amount contributed by Luxembourg institutions falling into the scope of the Regulation has been transferred to the Single Resolution Fund (“SRF”) by the end of January 2016.
By the end of 2023, the available financial means of the SRF shall reach at least 1 % of the amount of covered deposits of all credit institutions authorised in all of the Member States participating to the SRM. From 2016 onwards, Luxembourg institutions falling into the scope of the Regulation (excluding the Holdings) will have to contribute to the SRF, instead of the FRL: the contributions due by such institutions will be calculated by the SRB and collected by the FRL, which will transfer them to the Luxembourg compartment within the SRF. As of 2016, the FRL will continue to exist, but it will cover, and will be fed only by certain Luxembourg investment firms, and Luxembourg branches of institutions established in non-EU countries.
Finally, Part II of the Law regarding reorganisation and winding-up substantially corresponds to the former Part IV of the Financial Sector Law (that Part IV being replaced by the provisions described above under A). This part of the Law applies to (i) Luxembourg credit institutions and investment firms, (ii) their branches in other Member States, and (iii) professionals of the financial sector managing third-party assets.
2. The new framework for deposit-guarantee schemes and compensation schemes for investors
Part IVbis and Part IVter of the Financial Sector Law regarding deposit-guarantee schemes and compensation schemes for investors, respectively, are abrogated.
Former provisions of the Financial Sector Law regarding compensation schemes for investors are now transferred into the Law, without material changes. Such schemes are however replaced by the Système d’indemnisation des investisseurs Luxembourg – “SIIL”, operated by the CSSF, and managed by the Conseil de Protection des Déposants et des Investisseurs – “CPDI”, a new body within the CSSF created by the Law.
By contrast, deposit-guarantee schemes are substantially reshaped. The AGDL (Association pour la garantie des dépôts Luxembourg), a private system, financed on an ex post basis, is now replaced by the Fonds de garantie des dépôts Luxembourg (“FGDL”), a public system distinct from the CSSF, having a legal personality, and financed on an ex ante basis by the annual contributions from the Luxembourg credit institutions, and, as the case may be, from the Luxembourg branches of credit institutions authorised in a third country. By 31 December 2018, the available financial means of the FGDL shall reach at least a target level of 0.8 % of the amount of the covered deposits of its members. The contribution due by an institution is calculated in proportion to the amount of guaranteed deposits and its risk profile.
Other significant changes can be quoted, such as:
(a) protection, during one year after the amount has been credited or from the moment it became legally transferrable, up to EUR 2,500,000 for certain deposits arising, inter alia, from real estate transactions relating to private residential properties, divorce, or inheritance;
(b) a reduction of the general timeframe for reimbursement, from 20 to 7 working days, as of 1 June 2016;
(c) a modification of the scope of eligible deposits, which now encompasses any company regardless of its size – except for inter alia companies operating in the financial sector.
Finally, credit institutions must provide depositors with information regarding the deposit protection to which they are entitled, not only before entering into a contract on deposit-taking, using a standard form the template of which is provided under Annex 2 to the Law, but also on an ongoing basis, on their statements of accounts.