Impact for Swiss banks
Against this context, the revised CRD VI framework will require that third-country banks established outside of the European Union (EU), such as Swiss banks, establish a branch within the EU Member State to provide certain core banking services to clients domiciled in that Member State.
The core banking services covered by the branch requirement include the services defined in points 1, 2, and 6 Annex 1 to Directive 2013/36/EU:
1. Taking deposits and other repayable funds.
2. Lending including, inter alia: consumer credit, credit agreements relating to immovable property, factoring, with or without recourse, financing of commercial transactions (including forfeiting).
6. Guarantees and commitments.
However, there are several exemptions mitigating the impact on Swiss private banks providing services to EU clients.
Reserve solicitation exemption
Under the current proposal, an exception to the EU third-country branch rule is made for reverse solicitation, whereby the client approaches the third-country bank independently for service provision. In such a case, the regulatory requirement for the third-country bank to establish a branch in the Member State is no longer applicable.
For an action to qualify for a reverse solicitation exemption, as currently proposed, the initiative to establish the provision of service must come exclusively from the client. It must not be induced or influenced in any manner by the service provider.
Also, an initiative by a client would not entitle the third-country undertaking to market other categories of products, activities, or services beyond those that the client has initially sought, unless this is done through a third-country branch established in a Member State.
Moreover, if a third-country undertaking solicits clients or potential clients in the EU via an entity acting on its behalf or having links with the third-country undertaking, then such a service cannot be deemed as one initiated solely by the client.
Understanding and navigating the subtleties of reverse solicitation is crucial, as failure to conform to the requirements can lead to regulatory scrutiny and reputational risks. EU bodies have stressed that reverse solicitation should be interpreted narrowly to preserve the integrity of EU financial markets and to protect consumers. This also minimizes regulatory arbitrage, where firms could potentially try to circumvent the stricter EU regulation by influencing EU clients to use the reverse solicitation route.
MiFID II Investment services exemption
For certain types of investment services, an exemption from the requirement for third-country credit institutions to establish a branch in a Member State is proposed.
This includes cases of interbank and interdealer transactions.
Furthermore, the branch establishment requirement in the EU does not apply to third-country credit institutions providing investment services and activities listed under Annex I, Section A of Directive 2014/65/EU, commonly known as MiFID II. This implies that any associated ancillary services, such as providing trading of financial instruments or private wealth management services, can also be offered without the need to establish a branch.
The exempted investment services and activities mentioned under Annex I, Section A of MiFID II include:
- Reception and transmission of orders related to one or more financial instruments
- Execution of orders on behalf of clients
- Dealing on one’s own account
- Portfolio management
- Investment advice
- Underwriting of financial instruments and/or placing financial instruments on a firm commitment basis
- Placing financial instruments without a firm commitment basis
- Operation of a Multilateral Trading Facility (MTF)
- Operation of an Organised Trading Facility (OTF)
However, exercising this exemption should be done considering compliance with MiFID II, Anti-Money Laundering and Counter-Terrorist Financing rules. It is also important to note that this exemption should not be misconstrued as a general pass to operate freely in the EU without regulatory oversight. Regardless of the provision utilized, third-country credit institutions are required to adhere to the European Union’s financial market regulations to maintain market integrity and protect consumers.
Impact on currently operating TCBs of Swiss banks
Under the proposed new framework, TCBs currently operating in the EU may in some cases need to be re-authorised and face additional requirements.
