The European Parliament and the Council have reached a political agreement on the new Capital Requirements Directive VI (CRD VI), together with the Capital Requirements Regulation (CRR III), which constitute the implementation of the final set of international standards of Basel III in the European Union.
It is expected that the legal texts of both CRR III and CRD VI will be published in the coming weeks, and important changes are to be expected to ensure strong supervision and sound prudential regulation across the European Union, while taking also into consideration Environmental, Social and Governance (ESG) risks in the EU banking sector.
1.1. An additional supervision of acquisitions and divestures, and mergers and divisions
CRD VI introduces a new set up of regulation governing not only the acquisition and disposal of qualifying holdings (as was the case in previous directives), but also in case institutions intend to acquire or divest a holding exceeding 15% of their eligible capital. In that case, they will need to previously notify and get the approval or non-objection from the competent authority, as it is the case with the abovementioned procedure on qualifying holdings. It is worth noting that Luxembourg law is already providing for a similar regime. Should the acquisition under the new regime also concern a qualifying holding in a credit institution, both notifications would then be required.
CRD VI will also include a new set of rules that will regulate material transfers of assets and liabilities (commonly structured through business transfers agreements). Under the amended CRD, a prior notification shall be filed with the competent authority and, while it still depends on the final version of the legal text of the CRD VI that is still to be published following the political agreement between the EU Parliament and the Council, the competent authority may have the possibility to oppose to the intended transaction.
Finally, CRD VI also establishes a notification procedure in case of mergers and divisions, with a similar procedure to those described above. In this case, there will be an obligation to notify the competent authority in advance of the completion of the proposed transaction, and the closing of the intended operation will then be subject to the issuance, by the competent authority, of a positive opinion on the merger or division.
1.2. The introduction of new provisions regarding the fit and proper assessment of directors
CRD VI seeks to also amend the framework applicable to the fit and proper assessments of directors of institutions in the banking sector. To do so, and depending on the final version that will be published of the CRD VI, we note that attention will paid to a more thorough assessment of the proposed directors of the institutions subject to its provisions by, for example, foreseeing that a simple absence of criminal conviction or of ongoing criminal prosecution would not, as such, suffice to prove the good repute and of honesty and integrity of the proposed directors.
Concerning the overall composition of the management body and, pending to be confirmed by the final version that will be published as well, CRD VI could also foresee that the management bodies of institutions shall reflect an adequately broad range of experiences, and institutions could be required to put in place a policy setting a target for the minimum representation of the underrepresented gender and concrete measures to balance gender participation. In addition, members of the management body could also need to be trained on ESG and ICT-related risks, so they are able to understand the risks the institution is exposed to, in the short, medium and long term.
Overall, the provisions that concern the amendments relating to the management body remain at this stage rather uncertain, and the final changes made to its regulation will need to be clarified with the publication of the final text of CRD VI. They are to be viewed as an evolution of the rather detailed EBA standards that are currently applicable.
“Members of the management body could also need to be trained on ESG and ICT-related risks, so they are able to understand the risks the institution is exposed to, in the short, medium and long term.”
1.3. The strengthening of risk management: managing ESG risks
One important aspect that has been raised is the relevance of the ESG subject in the banking industry. In this respect, it is foreseen that institutions will need to have, as part of their governance, robust strategies, processes, and systems so they are able to identify, measure, and monitor the ESG risks to which the institution is subject to in the short, medium, and long term horizon.
To demonstrate how the above is an important piece of legislation in the upcoming banking package, it is also established that the competent authorities will have supervisory powers to assess and monitor the plans prepared by the institutions in relation to the managing of the ESG strategy and risk management.
1.4. A new regulatory framework for third-country branches
CRD VI has established a requirement to establish a branch for the provision of certain services by third-country (i.e., non-EU) firms, which could potentially prevent a wide range of institutions from providing services into the EU on a cross-border basis.
However, the principle requiring the establishment of an authorised branch in the territory of the EU has some exceptions, such as in case the services/activities provided by that third-country firm are to (a) a customer/counterparty that is established/situated in the EU and it has approached the third-country firm on a reverse solicitation basis (meaning that it is the client that at its sole initiative requires the services of that third-country firm); to (b) a credit institution, and to (c) an undertaking of the same group as that of the undertaking established in the third country.
Although the final details of the new regime are yet to be determined, it is important to note that the scope of the provisions relating to the establishment of a third-country branch would not apply where such branch would only provide investment services defined under MiFID (such as, for example, provision of investment advice or portfolio management services). In that case the MiFID third country regime applies.
OTHER LEGISLATION TO THE NEW BANKING PACKAGE REFORMS
It is expected that the competent authorities, and particularly the European Banking Authority (EBA), will develop regulatory technical standards (RTS), as well as interpretative guidelines to ensure a consistent interpretation of the new banking package throughout the Member States of the European Union.
Following the publication in the EU Official Journal, it is expected that CRD VI will enter into force on 1 January 2025. Although it may seem that it is still a long way off, it is important for institutions to prepare for the new regulatory framework and start reviewing their internal governance (whether it is at the management level, or reviewing policies and procedures), as well as other aspects of their business activity that may be potentially impacted by it.
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