The impending transposition of CRD 6

Before the summer break, we can expect the draft bill of a federal law that will implement CRD 6 and support CRR 3. What is particularly interesting is that CRD 6 standardises EEA market access via so-called "third-country branches" (TCBs) of banks and generally prohibits the cross-border conduct of banking business from a third country into the EEA. Branches from third countries must be clearly distinguished from branches from other EU member states, as the latter fall under the provisions governing the European Passport and are almost exclusively regulated by the home country supervisory authority of the main branch. To date, EU law has been extremely neglectful in how it has treated TCB by only imposing a "ban on preferential treatment" and has not taken into account the cross-border mode, i.e. without a physical presence in the EEA. The result has been the "European patchwork" that the EBA "uncovered" almost exactly three years ago in a report - at least with regard to TCB. According to the EBA report, Germany is the EU member state with the most third-country branches. The legal situation: the investment services and investment management sector was regulated much earlier with regard to third-country access in MiFID and AiFMD. One reason for the EBA's deliberations was certainly Brexit, which raised the question of how the UK, now a banking-related third country with which we were closely linked in the EEA, should be treated in future. Another impetus may have come from the ECB, which previously had no opportunity to influence TCBs directly even if they were categorised as significant institutions due to their total assets. TCBs already play a role, albeit a subordinate one, in one area of supervisory law: the question of whether financial institutions from third-country groups that are not consolidated in the EEA is required to set up an "intermediate parent undertaking (IPU)", subject to consolidation, also depends on the balance sheet volume of the European TCB from the respective third-country group.

What changes are to be expected in Germany?

Since the German Banking Act (KWG) has already treated TCBs as an "institutional fiction" as credit institutions in their own right, for the purposes of supervisory law, the German need for change (compared with less strictly regulated jurisdictions in the EEA) is limited. Section 53 of the KWG is likely to be the main focus of amendments. Interestingly, the EU legislator has refrained from including TCBs in the SSM, i.e. direct or indirect supervision by the ECB. However, following the implementation of CRD 6 the competent national authorities in the member states are granted the right, particularly in the case of systemic relevance, to require the branch to apply for authorisation as a credit institution in the respective member state. The legal structure is somewhat cumbersome because, under German law, only the head office and not the dependent branch could make such an application. Nevertheless, this opens up the possibility of involving the ECB in the authorisation procedure for the supervision of TCBs undergoing transformation via the “Systemically Important” route. The number of TCBs in Germany will tend to decrease.

The (simplified) exemption from the authorisation requirement for cross-border transactions (currently Section 2 (5) KWG), which was previously possible and frequently practised by Swiss banks in particular, will be discontinued. It is unclear whether and how transitional provisions can be created for this. Although customers' existing rights will be protected (Art. 21 (5) CRD 6), it is unclear whether this will result in the possibility of additonal services for existing customers. In any case, the Directive does not provide for any transitional scenarios for the activities of exempted banks outside of customer protection. For existing exemptions, from which many Swiss banks benefit, the question arises as to how these can and must be dealt with in the changed legal situation. In general administrative law, the revocation of a favourable administrative act (Section 49 para. 2 sentence 1 no. 4 VwVfG) is probably the most likely option. However, the hurdles such ground for revocation must overcome are drastic. Where the third-country institutions have made use of the exemption and have invested significantly in their German business, it is almost impossible to revocate the exemption. The German legislator should therefore find a special regulation through special provisions and transitional provisions that take into account both the interest of protecting the status quo and that of the changed EU legal situation. In cases of doubt, predestined conflicts with EU requirements must be clarified "in terms of supervisory policy". This is particularly tricky because the Federal Republic of Germany has concluded a bilateral agreement with Switzerland relevant under international law as part of a memorandum of understanding and an exchange of letters. The question is whether and how such an agreement can and should be terminated. In any case, the regulation on TCBs and the fundamental ban on cross-border banking transactions from third countries closes another gap in the EU's harmonised supervisory programme. It is striking that the EU legislator has so far seen no need to establish an equivalence regime for the banking sector that would allow equivalent supervised banks from third countries easier access to services in the EU. An equivalence list could be considered which might be comparable to the Implementing Decision (EU) 2021/1753 on the equivalence of certain third countries. As a result, Germany will be under greater pressure to "convert" licence-bearing TCBs into licence-bearing subsidiaries in order to avoid third-country branch discrimination and at the same time take advantage of the European Passport mentioned above. This alone allows unrestricted access to all EU member states.

The capital, accounting and governance requirements set out in CRD 6 are based on the other CRD standards. There will therefore be a further convergence of the TCB with subsidiaries.

CRD 6 did not deal with two particularly important issues in cross-border transactions with third countries, despite their relevance.

Cooperation schemes between third-party providers and banks

This is a scenario in which a bank as holder of a regulatory permission, enters into a legal relationship with a third-party provider. In addition, there is a legal relationship between the permission holder and its customers who use the services of the third-party provider without having a contractual relationship with the latter. The third-party provider could also be a bank from a third country. As a result, the bank based in Germany "brokers" the services of the third-party provider from the third country to German end customers without a legal relationship being established between the third-party provider and the customer. It is obvious that this situation can allow the third-party provider to enter the EU market. There is no European legal provison for this important and complex issue.

Back-branching:

In this scenario, a credit institution established in the EEA has set up a TCB, for example in the United Kingdom or the People's Republic of China, and serves customers in the EEA on a cross-border basis from there. Does this - not uncommon - situation fall under the ban on cross-border banking operations from the third country? Legal considerations, as it is a legal entity based in the EU, argue against this. But the ECB's worries and concerns indicate otherwise.

To summarise

The forthcoming law will bring TCBs and subsidiaries of third country groups much closer together. It will hardly be possible to identify any real advantage of TCBs over subsidiaries. Unfortunately, not all forms of market access are yet covered; there is still some need for action.

Authors: Dr. Mathias Hanten, Gerhard Dengl