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Branch requirement for Swiss banks in the EU?

In 2021, the EU Commission submitted a proposal to amend the European Capital Requirements Directive [1]. The background to this was the harmonization of banking supervision in the EU with the aim of creating a level playing field, among other things. However, the proposal could pose a considerable obstacle, particularly for Swiss banks wishing to operate in Germany or other EU member states.
The European Commission, the European Parliament and the Council of the European Union have agreed on a final compromise as a result of the trilogue negotiations. The compromise was published on December 14, 2023, and the final vote planned for the first half of 2024 may mean that it will be implemented soon. This provides an opportunity to take a closer look at the impact of the new regulations, particularly for Swiss banks.

Content of the compromise proposal

According to the so-called compromise solution, a branch requirement is to be introduced in the EU for financial service providers from third countries that provide core banking services - such as the acceptance of deposits and other repayable funds; lending transactions, in particular consumer credit, credit agreements in connection with real estate, factoring with and without recourse, trade finance; as well as guarantees and loan commitments.

Exemptions from the branch requirement

The scope of the obligation is restricted to the extent that it does not apply to services regulated by Annex I Section A of MiFID II or directly related thereto. This refers to investment services and investment activities as well as all related ancillary services, such as the associated acceptance of deposits or the granting of credits or loans that serve this main purpose.
The provision of services in connection with trading in financial instruments or private asset management should also continue to be possible without a branch.
Existing contracts are to remain unaffected by the branch requirement. In addition, the passive freedom to provide services ("reverse solicitation") and related financial services are not to be covered. This means that if a service is provided solely on the initiative of the customer, the banking institution or financial service provider from a third country can also provide this service without a branch in the EU.

Next steps

Despite the agreement of the so-called EU power triangle, the result is not (yet) binding. The European Parliament remains free to reject this compromise. However, this is not expected at present, if only because of its involvement in the trilogue discussions.
The expected approval of the European Parliament would make it necessary to transpose the EU directive into the national law of the member states. The decision on the new regulation is expected in the first half of 2024. As soon as the directive enters into force on January 1, 2025 - as currently planned - the implementation period of 18 months will begin. It is therefore expected to be transposed into national law by fall 2026.

Effects on Switzerland

The regulation appears to be particularly problematic for smaller banks in Switzerland, as they - in contrast to the large institutions - are often unable to establish and maintain a branch for cost reasons.
They would therefore only have the option of "reverse solicitation", which is generally not a viable business model.

German exemptions

It is also unclear how national exemptions and bilateral agreements, such as those between Germany and Switzerland, should be dealt with in this context.
In Germany, a banking license in accordance with Section 32 KWG is generally required even if the provider of the service has its registered office or habitual residence abroad, but is targeting the domestic market in order to provide banking transactions or financial services. The operation of banking transactions or financial services without the corresponding license in Germany is punishable by imprisonment of up to five years or a fine in accordance with Section 54 (1) KWG.

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However, Swiss banks can currently be exempted from the licensing requirement as part of the standard exemption procedure in accordance with Section 2 (5) KWG or the simplified exemption procedure before the German Federal Financial Supervisory Authority (BaFin).

Due to a bilateral agreement between BaFin and FINMA, the simplified exemption is reserved for Swiss banks only. Unlike the standard exemption, it also allows direct action vis-à-vis German private and business clients without the intermediary of a domestic or EEA credit institution (so-called fronting bank requirement).

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The compromise solution found at EU level does not address the relationship between the planned branch requirement and the possibility of such national exemptions. However, the purpose of the amendment to the directive to standardize the regulation of financial companies from third countries suggests that national exemptions in their current form will no longer be permitted in the future.

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It is also still unclear how exemptions that have already been granted will be dealt with. Exempted Swiss institutions may have to take care of establishing a branch and obtaining a banking license in accordance with Section 32 KWG in good time.

In individual cases, it may be expedient to establish a subsidiary in an EU member state and apply for a banking license there in order to benefit from the so-called "EU passport". This allows the business to be carried out throughout the EU. In the case of a (dependent) branch, it is only possible to provide services in the respective EU member state in which the branch is located; however, a banking license is also required in this case.

Renewal of existing licenses required

Even larger banks that already have branches in other EU countries must not lose sight of the status of the legislative process. This is because the amendment also provides for a new application for licenses. This also applies if - as is currently the case in Germany, for example, under Section 53 KWG - a banking license requirement already existed for foreign branches. However, the member states may exempt certain companies from the obligation to reapply. However, this only applies if the companies received their license 12 months before the new regulation comes into force.

It is worth keeping an eye on the status of the proceedings so that you can act in good time. We will be happy to help you analyze the possible scenarios for you in order to position yourself optimally.

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[1] Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2013/36/EU as regards supervisory powers, sanctions, third-country branches and environmental, social and governance risks and amending Directive 2014/59/EU.

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