Snapshot: the regulatory framework for financial services compliance in Luxembourg

Pevita Lena

Regulatory framework

Regulatory authorities

What national authorities regulate the provision of financial products and services?

National regulatory authorities responsible for supervision of financial products and services are the Luxembourg Ministry of Finance, the Commission de Surveillance du Secteur Financier (CSSF) and Central Bank of Luxembourg (BCL).

The Luxembourg Ministry of Finance is the ultimate authority, defining the policy regarding the financial sector in the Grand Duchy of Luxembourg.

Placed under the direct authority of the Ministry of Finance, the CSSF is the supervisory authority supervising and regulating the market in financial products, instruments and services.

The BCL also has a role in the regulation of financial products and services. As an integral part of the European System of Central Banks, it implements decisions of the European Central Bank.

What activities does each national financial services authority regulate?

CSSF

The CSSF regulates the following types of entities:

  • central securities depositories, responsible for the registration and safekeeping of securities and the settlement of securities in exchange for cash through their securities settlement systems;
  • credit institutions, whose activities consist in receiving deposits or other repayable funds from the public and granting credit for their own account;
  • investment firms, including:
    • investment advisers;
    • brokers in financial instruments;
    • commission agents;
    • private portfolio managers;
    • professionals acting for their own account;
    • market makers;
    • underwriters of financial instruments;
    • distributors of units/shares in undertakings for collective investment;
    • financial intermediation firms;
    • investment firms operating a multilateral trading facility (MTF) in Luxembourg; and
    • investment firms operating an organised trading facility (OTF) in Luxembourg;
  • investment fund managers (of alternative investment funds and UCITS, etc):
  • investment funds and vehicles;
  • mortgage credit intermediaries;
  • payment institutions/electronic money institutions/account information service providers;
  • data reporting service providers, including:
    • approved publication arrangements;
    • consolidated tape providers; and
    • approved reporting mechanisms;
  • specialised professionals of the financial sectors (PFS), including, among others:
    • registrar agents;
    • professional depositaries of financial instruments;
    • professional depositaries of assets other than financial instruments;
    • operators of a regulated market authorised in Luxembourg;
    • currency exchange dealers;
    • debt recovery (ie, parties that collect third parties’ debts);
    • professionals performing lending operations;
    • professionals performing securities lending;
    • family offices;
    • mutual savings fund administrators;
    • corporate domiciliation agents; and
    • professionals providing company incorporation and management services;
  • support PFS, acting as subcontractors of operational functions on behalf of other specialised professionals of the financial sector including:
    • communication agents;
    • administrative agents of the financial sector;
    • primary IT system operators of the financial sector;
    • secondary IT system and communication networks operators of the financial sector;
    • dematerialisation service providers;
    • conservation service providers;
  • Virtual asset service providers.

 

BCL

When it comes to regulation of specific activities, the BCL is mainly responsible for ensuring efficiency and safety of payment and securities settlement systems as well as safety of payment instruments.

What products does each national financial services authority regulate?

‘Product’ or ‘financial product’ is not defined under Luxembourg financial supervision law. However, the CSSF supervises the market in financial instruments. A list of financial instruments is included in Annex II Section B of the Law of 5 April 1993 on the financial sector, and includes:

  • transferable securities, including:
    • shares in companies and other securities equivalent to shares in companies, partnerships or other entities and depositary receipts in respect of shares;
    • bonds or other forms of securitised debt, including depositary receipts in respect of such securities; and
    • any other securities giving the right to acquire or sell any such transferable securities or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures;
  • money-markets instruments (cheques, bills, certificates of deposit, etc);
  • units in collective investment undertakings;
  • options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, emission allowances or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash;
  • options, futures, swaps, forwards and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (other than by reason of default or other termination event);
  • options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market or an MTF;
  • options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned under the previous bullet point, and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognised clearing houses or are subject to regular margin calls;
  • derivative instruments for the transfer of credit risk;
  • financial contracts for differences; and
  • options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contracts relating to assets, rights, obligations, indices and measures, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognised clearing houses or are subject to regular margin calls.

 

We acknowledge that in certain European countries the term ‘financial product’ also includes for instance:

  • payment accounts and related payment facilities;
  • savings accounts and related saving facilities;
  • electronic money; and
  • credit.

 

Although the aforementioned items do not qualify as a financial instrument under Luxembourg law, these products are regulated by the CSSF as well. Further, the BCL is responsible for ensuring efficiency and safety of payment and securities settlement systems as well as safety of payment instruments.

Authorisation regime

What is the registration or authorisation regime applicable to financial services firms and authorised individuals associated with those firms? When is registration or authorisation necessary, and how is it effected?

Authorisation is required for most of the regulated activities in Luxembourg. Registration requirements apply for instance to tied agents and virtual asset service providers.

 

Authorisation process

Although it is expected that this process will change, currently the authorisation to perform regulated activities is generally granted by the minister responsible for the CSSF. Currently this is the Luxembourg Minister of Finance. The authorisation is granted upon written application to the Minister of Finance. Upon receipt of a written application, the CSSF performs an investigation of the application and verifies whether all legal requirements for the relevant application are fulfilled. The CSSF encourages applicants to first transmit their application files to the CSSF before filing the formal application request with the Minister of Finance.

Before transmitting the application to the CSSF, the applicant may contact the CSSF to request information on the qualification of an activity, on the need for an authorisation, on the status requested, on the application documentation for the authorisation file or any other important question relating to the applicant’s project.

The applicant may submit a detailed and complete file to the CSSF by using the application forms available on the CSSF website. The complete application file must be submitted to the CSSF in paper and electronic form. The application file has to include all necessary information required for the assessment thereof.

Upon receipt of the file by the CSSF, the applicant receives an acknowledgement mentioning the department in charge of the file and the name of a contact person at the CSSF. The CSSF will examine the file and may raise comments or request additional information. Once the CSSF deems that the relevant conditions are fulfilled, the applicant will be notified in writing and the applicant may file an official request with the Minister of Finance.

Once the application file is submitted to the Minister of Finance, the decision of the Minister of Finance will (in principle) be notified to the applicant within six months following receipt of the application file. Should the application file be incomplete, the applicant will be notified of the decision of the Minister of Finance within six months following receipt of the missing information.

A decision shall be taken within 12 months, at the latest, of the receipt of the application. If no decision is notified within 12 months, it means that the application has been refused.

 

Registration process

The registration starts with sending a formal registration application filed with the CSSF. If an applicant submits a formal registration file to the CSSF, all documents and information required must be included by using the relevant forms made available on the CSSF website.

The registration file must be provided to the CSSF in electronic form via the ‘managed file transfer system’ of the CSSF. The required link will be provided to the applicant by the CSSF. The submission of a registration file does not entail registration with the CSSF. The registration is effective upon inclusion of the applicant in the CSSF register.

The CSSF reserves the right to ask for additional information and documents during the registration process. The CSSF also reserves the right not to commence the analysis of the registration file as long as the registration file is not complete and the requested information and documents are missing.

Legislation

What statute or other legal basis is the source of each regulatory authority’s jurisdiction?

The CSSF has been established by (and derives its regulatory authority from) the Law of 23 December 1998, as amended from time to time.

The BCL is currently governed by (and derives its regulatory authority from) its Organic Law of 23 December 1998, as amended.

What principal laws and financial service authority rules apply to the activities of financial services firms and their associated persons?

There is no central financial supervision law in Luxembourg regulating all financial services (and their providers). Various laws apply to regulated entities, the main laws being:

 

In addition to these laws, the CSSF has published many complementary rules and guidance, such as FAQs, regulations and circulars. These can all be freely accessed on the CSSF’s website, www.cssf.lu/en.

Scope of regulation

What are the main areas of regulation for each type of regulated financial services provider and product?

When applying for approval and during its lifetime as a regulated entity, various specific criteria must be complied with by regulated entities. These criteria heavily depend on the kind of service that is provided or business that is performed. For instance, the following regulatory requirements can be identified:

  • Legal form: for most regulated entities specific requirements exist concerning legal form. For example:
    • central securities depositories (CSDs) must be a legal entity;
    • credit institutions must be legal persons incorporated under Luxembourg law (either a public limited company (société anonyme), limited partnership with a share capital (société en commandite par actions) or cooperative society (société cooperative));
    • investment firms: parties managing third party funds must be legal persons, etc;
    • a management company of an investment fund may have the form of a public limited company (société anonyme), a private limited company (société à responsabilité limitée), a cooperative company (société coopérative) or a cooperative company set up as a public limited company or a corporate limited partnership (société en commandite par actions);
    • payment institutions and electronic money institutions must be a legal person;
    • specialised professionals of the financial sectors (specialised PFSs) may, in general, be natural or legal persons (either a public entity or commercial company). However, most categories of specialised PFSs require that the applicant be a legal person; and
    • a support PFS must be a legal person (either a public entity or commercial company).
  • Capital base and own assets: whether requirements apply varies per regulated financial service provider. For example:
    • credit institutions must have a fully paid-up share capital of at least €8.7 million and the capital base may not be less than the amount of the prescribed authorised capital;
    • investment firms must prove that they have a subscribed and fully paid-up share capital of not less than €50,000. Depending on the category of investment firm for which the authorisation is sought, the required minimum share capital may amount to up to €730,000;
    • a management company of an investment fund mast have a fully paid-up (in cash) share capital of at least €125,000;
    • a payment institution must have initial capital of €20,000–€125,000 (depending on which payment service is provided) and its own funds may not be below this threshold;
    • an electronic money institution must have initial capital of at least €350,000 (and its own funds may not be below this threshold);
    • specialised PFSs must have a fully paid-up share capital of not less than €50,000. Depending on the category of specialised PFS for which the authorisation is sought, the required minimum share capital may amount to up to €730,000; and
    • support PFSs must have a fully paid-up share capital of not less than €50,000. Depending on the category of support PFS for which the authorisation is sought, the required minimum share capital may amount to up to €370,000.
  • Central administration: in general the registered office and central administration of financial service providers must be located in Luxembourg. Further requirements may apply with respect to the location of for instance personnel (HR, compliance, internal control, etc) and IT, depending on the kind of service that is provided.
  • Shareholders: the shareholding structure of a financial service provider has to be transparent and well organised.
  • Professional standing and experience: members of the management and the shareholders must be of good reputation, and persons involved have to be adequately skilled and experienced. Evidence thereof is commonly requested (ie, in the form of police records, declaration of honour, copy of identity cards, resume, etc).
  • External audit: unless exempted under specific provisions, financial service providers must have their annual accounts and, if applicable, their consolidated accounts audited by one or more approved statutory auditors.
  • Adequate internal control procedures: financial service providers have to implement internal control functions for a functioning and prudent management of the firm. In this context, compliance, risk and internal audit functions are of importance.

Additional requirements

What additional requirements apply to financial services firms and authorised persons, such as those imposed by self-regulatory bodies, designated professional bodies or other financial services organisations?

Besides applicable laws and regulations, financial service firms should take into account the various FAQs, circulars, regulations and other guidance published by the CSSF. Although these rules do not constitute formal laws or regulations, these should be taken into account by financial service firms as well. These documents can are published on the CSSF’s website, www.cssf.lu/en.

Further, financial service providers that are commercial companies should comply with the corporate law provisions, for instance included in:

 

These provisions mainly concern registration of the company and publication of annual accounts, amendment of the articles of association, manager of the company, but can also cover non-cumulating requirements of key functions, conflict of interest issues and requirements to be present in Luxembourg.

Law stated date

Correct on

Give the date on which the information above is accurate.

8 March 2021

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