EU finalises rules for third country branches (TCBs)

What does this mean?

Authorisation and re-authorisation

Under the new rules, third country firms which wish to provide core banking services (deposit taking, lending, and guarantees and commitments) in the EU will need (other than in certain circumstances) an authorised presence in the EU. Existing TCBs will need to be re-authorised. The application will require supporting documents on business activities, structure and control. There is a provision to grandfather an existing licence where it was granted within 12 months of the new rules coming into force. 

Capital and liquidity requirements

TCBs will be classified as Class 1 or Class 2, depending on size and activities undertaken. This will determine the regulatory capital and liquidity requirements. Class 2 TCBs along with ‘qualifying branches’ will be subject to less stringent requirements.

Internal governance and controls

TCBs will have to establish local management governance and committee structures as well as an internal control function. The proposals require at least two people to be appointed to direct the business in the Member State.

Reporting

New reporting obligations, including reporting on the parent entity, will apply to TCBs. TCBs will be required to track and keep a comprehensive and precise record of all the assets and liabilities associated with the branch. Some waivers may be available on reporting related to the parent entity for ‘qualifying TCBs’.

Cross-border activity

Core banking services cannot be undertaken cross-border into the EU, unless on the basis of reverse solicitation. Intra-group transactions, services to credit institutions,  interdealer services, or activity deemed to be MiFID ancillary activity are also permitted cross-border activities.  

Supervision by Competent Authorities

Competent Authorities will assess TCBs’ compliance with the requirements and undertake periodic independent assessments. Competent Authorities will also consider the size of the TCB’s assets and whether the branch is of systemic importance, which may warrant additional prudential requirements including subsidiarisation.

What do firms need to do?

Firms with existing branches should conduct a gap assessment against the new rules and prepare for compliance on Day 1. Firms should commence early engagement with regulators to request any applicable waivers or relief, with appropriate supporting documentation. Firms should consider updating processes and systems to capture the new reporting requirements. 

Firms that provide cross-border lending without a physical presence in Member States should either re-evaluate their business model or prepare to seek authorisation as per the new rules.

Next steps

After entry into force (expected mid-2024), there will be an 18-month transposition period for Member States to implement CRD VI, followed by a 12-month transition period. This means the new requirements will go live towards the end of 2026.