Niall Esler
Partner
Ireland
On 9 July 2024, Directive (EU) 2024/1619 ("Capital Requirements Directive VI" or "CRD VI") entered into force with the aim of further harmonisation of the banking supervisory framework across the EU, including the provision of core-banking services into the EU by non-EU undertakings.
CRD VI amends Capital Requirements Directive VI, Directive 2013/36/EU, and, amongst other things, requires non-EU (third country) undertakings to establish an authorised EU branch to commence or continue carrying out certain core-banking activities in an EU Member State, unless an exemption applies.
While EU Member States will be required to adopt legislation to implement CRD VI into local law by 10 January 2026, the requirements for the establishment and authorisation of a branch in the EU, must be applied from 11 January 2027.
Here we focus on potential implications these changes will bring for non-EU entities lending to Irish corporate borrowers. Currently, the activity of providing loans to Irish corporates does not in of itself trigger a requirement for a financial services authorisation or licence – this activity is routinely carried on by non-EU banks (e.g. US, UK or Asian) acting on a cross-border basis.
With the introduction of the CRD VI branch requirement, non-EU undertakings now need to assess whether their EU lending activity is impacted and consider the steps required to address the requirements, including whether any exemptions or restructuring options are available.
Trigger for branch requirement
CRD VI introduces a requirement that undertakings established in a third country which carry out certain activities in an EU Member State must establish an authorised third-country branch ("TCB") in that Member State. The regulated activities are:
- For third country credit institutions1: lending (broadly defined) or of providing guarantees and commitments;
- All third country entities: accepting deposits or other repayable funds.
The new requirements impacting lending and the provision of guarantees will be of most interest to the Irish market. This is because deposit taking is already regulated under the Central Bank Act, 1971.
Non-EU lenders which are not credit institutions (i.e. not deposit takers) and those providing MiFID investment services will not be impacted by the new CRD VI rules – they should be able to rely on any applicable existing national exclusions and/or local registrations.
Operating "in" a member state
The TCB requirement applies where the relevant activities are carried out "in the relevant Member State". When an entity will be considered to carry out the activities "in" a Member State is not clarified or harmonised in CRD VI. This has led to some speculation as to what test will be adopted in individual Member States and whether there will be a divergence in approach across the EU regulatory authorities.
The key question for most third country undertakings is whether simply having a client in the relevant EU Member State will be sufficient to trigger the TCB requirement – i.e. whether a restrictive 'solicitation test' will be applied. An alternative would be for Member States to adopt a 'characteristic performance test' and deem the service as being provided where the essential supply for which payment is due took place. We believe that a restrictive 'solicitation test' approach could be taken (i.e. one based on the location of the customer), albeit an analysis will be required for each relevant EU jurisdiction where the third country institution has clients.
An important factor in that analysis will be a review of the implementing legislation and any associated guidance, once published. From an Irish perspective, this may not be available until closer to the transposition date.
Exemptions
The TCB requirement will not apply where the EU client or counterparty:
- approaches the third country undertaking "at its own exclusive initiative" for the provision of any in-scope service (often referred to as "reverse solicitation" – see further information below);
- is a credit institution (the "interbank exemption");
- is in the same group as the third country undertaking providing the service; or
- has entered into the relevant contract before 11 July 2026 (see 'Grandfathering of Contacts' below).
There is also an exemption for the provision of investment services or activities regulated by the Markets in Financial Instruments Directive (Directive 2014/65/EU, "MiFID"), including any accommodating ancillary services, such as related deposit taking or the granting of credit or loans the purpose of which is to provide those investment services. An example of this could be where a prime broker lends to its clients in connection with the client's securities trading.
Reverse solicitation
Where a non-EU undertaking intends to rely on the concept of reverse solicitation, it will be important to document how the client sought the service at their own exclusive initiative. This will require careful management and record keeping.
There are a number of limitations and points to note in respect of reverse solicitation, including:
- Where a third-country undertaking solicits a client or counterparty through an entity acting on its own behalf or having close links with it or through any other person acting on its behalf, the exemption will not apply.
- An initiative by a client does not entitle the third country undertaking to market other categories of products, activities or services than those that the client or counterparty had solicited.
Note: A TCB is not required for any services, activities or products necessary for, or closely related to the provision of the service, product or activity originally solicited by the client or counterparty, including where such closely related services, activities or products are provided subsequently to those originally solicited.
- National competent authorities will have the power to require EU credit institutions and branches to provide information required for monitoring the services provided at the own exclusive initiative of the client or counterparty by non-EU group undertakings. The third country undertakings will need to consider how they can document that the services were genuinely provided on the basis of an approach by the client and that the client was not solicited in any way. This may be difficult to establish.
In other EU-regulatory regimes, the concept of reverse solicitation is interpreted strictly, and it is expected that a similar approach will be taken in respect of CRD VI.
As such, and due to some of the limitations outlined above, the exemption is unlikely to be suitable for firms seeking to establish and grow an EU business.
Interbank exemption
By 10 July 2025, the European Banking Authority ("EBA") is required to review and report on whether the interbank exemption should be amended to cover services provided to other financial sector entities (e.g. insurance undertakings, investment managers and custodians). The review is to consider financial stability concerns and the impact on the competitiveness of the EU.
Grandfathering of contracts
"In order to preserve clients’ acquired rights under existing contracts" the TCB requirement is not applicable in relation to existing contracts entered into before 11 July 2026. It is unclear how far this exclusion will extend and the recitals to CRD VI specifically state that any grandfathering should be "narrowly framed" to avoid instances of circumvention.
As a result, we generally expect that material amendments to existing contracts would fall outside the grandfathering provisions and trigger the TCB authorisation requirement.
Timing
Member States will be required to adopt legislation to implement CRD VI by 10 January 2026. The requirement for establishment and authorisation of TCBs, and most of the other new requirements for TCBs, must be applied from 11 January 2027.
Next steps and structuring options
Given the lead time associated with establishment of an EU TCB / authorised Credit Institution we recommend that affected undertakings take the following actions as soon as possible, ahead of the 11 January 2027 deadline:
1. Identification - evaluate business operations to identify in-scope activities. A first step would be to assess the current lending activity in the EEA, including the jurisdictions involved, product lines, customer types and the source of the business (including any marketing activity).
2. Exemptions - consider applicability of exemptions. Some entities might find that their client base in the EU minimises the impact of the new rules (e.g. if the lending is to EU credit institutions or group entities only), or that the carve out for the provision of MiFID investment services and related services is relevant.
3.Structuring options
If the non-EU undertaking's services are in-scope and it cannot rely on an exemption, consider the following structuring options:
(a) Licensed options
(i) Provide services through an existing EU credit institution subsidiary – many global banking groups will already have an EU credit institution within the group. This entity could passport into other EU Member States to provide the relevant services to EU customers;
(ii) Establish a new EU credit institution subsidiary – if there is no existing EU credit institution within the group, non-EU undertakings might consider establishing a new EU credit institution subsidiary to provide the services;
(iii) Establish a new TCB under CRD VI - consider establishing an EU TCB and seeking authorisation under CRD VI in due course. While an EU TCB is the default requirement under CRD VI, this is unlikely to be universally attractive as the TCB cannot passport to other EU Member States. This means that a non-EU undertaking would need to establish multiple EU-authorised branches if it sought to provide services in more than one EU jurisdiction;
Before adopting any of the above options, non-EU undertakings would need to assess the relative merits of each option, including in relation to capital requirements and the additional supervisory and compliance obligations that would be applicable in each case. Note that the timeline for authorisation of a new EU credit institution subsidiary or a new authorised TCB is likely to be significant.
(b) Use of standalone entity for lending
Non-EU undertakings might explore undertaking lending activities through an out of scope non-bank / investment firm entity (i.e. an entity which would not qualify as a 'credit institution' where it in the EU). It will be important to check that Ireland and any other relevant EU Member States do not require any other licence for the product at issue. Currently, the activity of providing loans to Irish corporates does not in of itself trigger a requirement for a financial services authorisation or licence.
If you wish to discuss how to initiate your assessment of CRD VI, please reach out to any of the individual contacts below.
1 An entity that would qualify as a credit institution (i.e. an undertaking whose business consists of taking deposits or other repayable funds from the public and granting credits for its own account) or that would fulfil the criteria set out in Article 4(1), point (1)(b), of Regulation (EU) No 575/2013 (i.e. certain large investment firms), if it were established in the EU.
