Adoption of the law establishing a new prudential regime for investment firms – Finance and Banking

Luxemburg: Adoption of the law establishing a new prudential regime for investment firms

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Investment firms offer a variety of services and vary in size, business model, risk profile and complexity. Considering that their activities and their risk profiles have not always been correctly taken into account by the prudential framework resulting from the CRR/CRD IV regime, applicable to both credit institutions and investment firms, a new prudential regime by the Investment Firms Directive 2019/2034 (“IFD“) and the Investment Firms Regulation 2019/2033 (“IFR“) was developed at EU level. The new EU regime entered into force on 26 June 2021.

What’s new? The Luxembourg law of 21 July 2021 transposes the IFD and implements certain operational aspects of the IFR (“Law” – available in French). It makes significant changes to the law of 5 April 1993 on the financial sector, as amended (“EPA“).

Why is this important? A number of changes to the EPA merit discussion.

The most significant change introduced is a new classification of investment firmsgenerally designated by the following 4 classes:

  • Class 1 are investment firms considered as credit institutions in their own right and will continue to be subject to the CRR/CRD IV regime;

  • Class 1b are investment firms which, given their size and importance or their membership of a group, will remain subject to several CRR/CRD IV obligations.

Class 1 and 1b credit institutions and investment firms are now referred to as “CRR institutions”.

  • Class 2 represents traditional investment firms subject to IFR and IFD;

  • Class 3 concerns small non-interconnected investment firms, which benefit from certain derogations from the IFR/IFD framework with regard to the principle of proportionality.

Class 2 and Class 3 investment firms will be referred to as “IFR investment firms”. The new categorization notably affects their capital requirements (application of new risk parameters defined by the IFR, the so-called “K” factors), prudential supervision, governance and remuneration policies.

In addition, the law provides a modernization of the status of certain professionals of the financial sector(“PSF“), including investment firms.

From now on, for investment firms, the existing Luxembourg denominations and provisions are abandoned. The investment activities and services carried out must be those listed in Section A of Annex 1 of Directive 2014/64/EU (“MiFID II“). Access to these activities and services is reserved for legal persons only. The existing authorizations to carry out investment services or activities remain valid but the entities concerned must regularize their situation in accordance with the provisions of the law.

Furthermore, the Law introduces additional changes for PSF. The category “persons carrying out foreign exchange transactions” is deleted. From now on, only credit institutions will be authorized to carry out cash purchase and sale operations in foreign currencies. In addition, the categories of operators of primary computer systems and operators of secondary computer systems and communication networks of the financial sector are merged A new creation of the category of operators of computer systems and communication networks of the financial sector.

Finally, the law also transposes the requirements of Directive (EU) 2021/338, which notably made certain changes to the MiFID II regime to facilitate the recovery from the pandemic, including the requirement that all communications from MiFID clients must be provided in electronic form, although retail clients can still request that the communication be provided on paper. You can find more details about this directive in the article on our website under this link.

What does it mean? Investment firms should assess the impact of the IFR/IFD regime and determine which category of investment firm they will be classified into, which will determine the changes they need to implement. A new license comparable to that of a credit institution will be required for the largest CRR investment firms. Additional indications on the practical aspects of the new regime are awaited from the CSSF. A coordinated version of the LFS should soon be available on the CSSF website.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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