1. Background
On 19 June 2024, the final texts of two key pieces of legislation for the European banking sector were published in the Official Journal of the European Union ("EU"). These are part of the banking package presented by the European Commission in 2021:
- Directive 2024/1619 of the European Parliament and of the Council of 31 May 2024, which amends Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms. This is known as the Capital Requirements Directive ("CRD"). Directive 2024/1619 deals with supervisory powers, sanctions, third-country branches, and environmental, social and governance risks ("CRD VI" or the "Directive"); and
- Regulation (EU) 2024/1623 of the European Parliament and of the Council of 31 May 2024, which amends Regulation (EU) 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. This is known as the Capital Requirements Regulation ("CRR"). Regulation (EU) 2024/1623 deals with requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor ("CRR III" or the "Regulation").
Underlying this banking package were three main guidelines aimed at making institutions more resilient to possible systemic shocks: (i) completing the implementation of the Basel III reforms agreed by the Basel Committee on Banking Supervision ("BCBS") in 2017, (ii) sustainability and contributing to a green transition, and (iii) strengthening the supervisory powers of competent authorities.
2. The key changes in CRD VI
2.1. ESTABLISHMENT OF BRANCHES FOR THE PROVISION OF BANKING SERVICES BY THIRD-COUNTRY ENTITIES
As noted by the European Commission in its proposal 1, since Brexit, there has been no consistent approach in the EU to third-country banking groups operating in the EU. Third-country branches are subject to separate prudential requirements and this situation has potential to jeopardise the financial stability of the EU. In this respect, the European Commission underlines that, according to the European Banking Authority ("EBA"), the 15 largest third-country banking groups have a significant presence in EU banking markets and more than three quarters of their assets in the EU are held through third-country branches.
In addition, there are no integrated supervisory mechanisms that allow for the exchange of information between competent authorities supervising branches and subsidiaries of the same group. This creates inherent risks for market integrity in the EU.
New regulatory framework: Third‑country banks must now have a physical presence in a Member State in order to start or continue providing banking services.
To address this, a new regulatory framework has been introduced in Title VI of the CRD. This covers everything from authorisation requirements to minimum prudential requirements for capital adequacy, liquidity, internal governance and risk management. It also sets out reporting requirements and the supervisory powers of Member States.
Most importantly, third-country banks must now have a physical presence in a Member State in order to start or continue providing the services listed in points 1, 2 and 6 of Annex I to the CRD (i.e. taking deposits, granting loans or providing guarantees) in that Member State, under the conditions set out in the new Article 47(1) of CRD VI. In addition, an authorisation is required in order to be regulated and supervised in the EU (Article 21c of CRD VI).
However, this requirement is subject to the following exceptions:
- It does not apply to cases of provision of services on the sole initiative of the client (“reverse solicitation”), which are covered by Articles 21c(2) and 47(1) of CRD VI. In other words, a firm established in a third country may provide a service or activity covered by points 1, 2 and 6 of Annex I to the CRD (i.e. taking deposits, granting loans or providing guarantees) on the sole initiative of a retail client, an eligible counterparty or a professional client within the meaning of Annex II, Sections I and II of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (“MIFID”), established or resident in the EU. In this case, there is no need to establish a branch in that country;
- It does not apply when the firm established in a third country provides a service or activity to a client or counterparty established or located in the EU which is a credit institution or an entity belonging to the same group as the firm established in a third country;
- It does not apply to the services or activities listed in Annex I, Section A of the MiFID, including any ancillary services.
Furthermore, this new framework should be applied without prejudice to the discretion currently enjoyed by Member States to require, as a general rule, that companies from certain third countries carry out banking activities in their territory only through subsidiaries authorised under Title III, Chapter 1 of the CRD. This applies, for example, to cases where third countries apply banking supervision and prudential standards that are not equivalent to those laid down in the Member State's national legislation. It also applies to third countries that have strategic deficiencies in their AML/CFT legislation (Article 48i of CRD VI). Article 48i of CRD VI).
The minimum conditions for the authorisation of branches in third countries are described in the new Article 48c. It provides that the competent authorities may decide that authorisations granted until 10 January 2027 will remain valid, provided the thirdcountry branches to which these authorisations were granted comply with the minimum requirements laid down.
Finally, CRD VI (Article 48a of CRD VI) introduces proportionality in the minimum requirements imposed on branches in third countries in relation to the risk they pose to the financial stability and integrity of the EU market by creating different classes of branches. They should be in class 1 if they are considered to pose a higher risk, or otherwise in class 2 if they are considered to be small and non-complex and do not pose a significant risk to financial stability. This is defined in Article 4(145)(1) of the CRR. For example, branches in third countries with assets of EUR 5 billion or more in a Member State are considered higher risk, as are those authorised to take deposits, irrespective of their size, if the amount of such deposits exceeds a certain threshold.
Although branches of third-country institutions do not have a significant presence in Portugal, it has become apparent that there is a need to establish a specific regulatory framework for these branches, which is not the result of purely prescriptive rules. In addition to ensuring consistency within the EU, the existence of a solid specific regulatory framework will undoubtedly help the competent authorities to exercise greater control over these entities, thus contributing to greater legal certainty and stability.
Of particular note is the explicit provision, for the first time in the European banking regulatory framework, of the possibility of providing banking services on the sole initiative of the client. In Portugal, this possibility is expressly provided for only in relation to the provision of investment services by investment firms (Article 38 of Decree-Law 109-H/2021 of 10 December).
These rules on the establishment and supervision of branches of third-country entities will apply from 11 January 2027 (except for existing contracts signed before 11 July 2026, which will apply from that date).
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