Estimated reading time: 8 minutes

In this 2-part series, TFG’s Deepesh Patel spoke with Adam Harwood, Associate, A&O Shearman and Bob Penn, Partner, A&O Shearman, breaking down CRD VI and its implications on the syndicated lending and trade finance industry.

DP: Can you explain the exemptions provided under CRD VI, particularly focusing on reverse solicitation, and their implications for trade finance?

AH: There will be exemptions for: 

1. interbank services (i.e. services provided to another credit institution); 
2. intragroup services; and 
3. reverse solicitation.

Services provided which are ancillary to ‘core’ MiFID services and activities (i.e. deposit-taking, and granting credit or loans which are related to investment activities, as listed in Section A Annex I to MiFID) are also excluded from scope. 

The scope of this carve-out is not yet clear: it seems it will capture margin loans, and deposits taken as part of broker-dealer activities, but it is not clear how remote banking activities can be from core MiFID activities.

Depending on the particular business line, it might be possible to continue cross-border activities in reliance on one or more of the exemptions. 

Interbank lending will remain permitted. The EU authorities will conduct a review before implementation on whether the ‘interbank’ exemption should be extended to cover services provided to other financial sector entities. It is not clear what the scope of “financial sector entity” will be, though there is an existing definition for the term in CRR.

In respect of cross-border lending activity not in the scope of the interbank or intergroup exemptions, the main avenue may be reliance on reverse solicitation. In the context of syndicated lending, this may be feasible – particularly where an institution only acts as part of a syndicate and does not play any role in soliciting the loan. This would require implementing guardrails regarding marketing to potential EU borrowers and participation from EU lenders. 

It remains to be seen how the EU authorities react to this type of approach: the reporting framework under CRD VI includes requirements to report on reverse solicitation business, and it may be that reliance on the approach results in additional scrutiny and potential narrowing of the exemption.

In addition to this, there is a ‘grandfathering’ provision in CRD VI which protects rights acquired under contracts that are entered into before 11 July 2026 (i.e. 6 months before the ‘go-live’ of the licensing restriction) which would otherwise be unlawful, provided they do not become re-characterised as a ‘new’ contract. 

This may be relied upon for lending arrangements put in place ahead of the cut-off date. With regards to continuing facilities, it will be necessary to diligence the effect of any incidental or complementary activities on the reliance on grandfathering, since this provision will only protect rights acquired under “existing contracts”. 

Variation of existing contracts risks the creation of a new contract such that grandfathering may not apply. For example, particularly in the context of loan restructuring, the amendment and restatement of loan documentation, transfer/assignment/novation, or increase of credit under a facility could create a new contract under law superseding the “existing” (grandfathered) contract if the amended terms were not sufficiently within the contemplation of the parties from the outset. This risks losing the benefit of any grandfathered contracts. 

By contrast, drawings made under pre-existing commitments should be permissible (noting that this position will need ultimately to be assessed against implementing legislation in each Member State, and any relevant guidance).

DP: How will the prohibition on certain cross-border services and the new regulatory framework affect syndicated lending arrangements?

BP: For the loan market, the effect of the changes will be to deprive in-scope non-EU firms of the ability to provide loans, guarantees and commitments into those EU Member States where those activities are currently unregulated, or a cross-border license is currently available, except where an exemption is available. 

In those jurisdictions in which a licensed establishment is already required, the impact will be more limited (although reauthorisation may still be required and firms will need to comply with minimum prudential, governance and reporting requirements, which may be new, depending on the EU Member State). Affected firms will therefore face the following options:

Reliance on exemptions: it might be possible to continue cross-border activities in reliance on one or more of the exemptions. As discussed , the most likely exemptions to be available in a syndicated lending context would be the interbank exemption (preserving interbank lending), or reverse solicitation (particularly where an institution only acts as part of a syndicate and does not play any role in soliciting the loan). These exemptions are likely to be relatively narrow in practice, so proper diligence will be required before relying on an exemption as the basis for continuing an entire business line. 

Establish a TCB in relevant jurisdictions: the purported aim of Article 21c is to require the establishment of licensed branches. In practice, this will be the least desirable option for most firms. Under CRD VI, branch authorisation will not give rise to any cross-border rights. It would therefore be necessary to establish a branch in each jurisdiction into which core banking services are being provided (if this option alone were used). The costs of licensing alone would be punitive.

Migrate relevant business lines into an EU subsidiary: a further alternative would be to migrate business to an EU bank subsidiary. Article 21c only captures third-country institutions. A locally authorised EU entity can provide core banking services, and unlike a branch can operate across the EU via passporting rights. 

Migrating business to an EU subsidiary would carry a variety of other costs and constraints though – aside from the operational considerations, there will likely be an impact for the EU subsidiary with regards to large exposures, regulatory capital and liquidity requirements, risk management and governance to account for the extra business.

De-scoping activities (migration to non-institutions): Article 21c only applies to in-scope firms. It does not apply to providers which are neither a bank nor large investment firm. On the face of the Directive it is therefore open to third country institutions to continue to provide services from an unregulated entity within a banking group into those Member States in which lending is currently unregulated.  

There are extensive reporting obligations under the regime which could be used to collect data about the use of this approach, and it is possible (though not provided for under current law) that this avenue could be cut off in future. Member States may also choose to apply the restrictions to a broader set of legal entities.

Portfolio sales: Some entities may decide to withdraw from the affected markets and in so doing, may look to sell their existing loan book business.

DP: What advice are you providing to clients to help them navigate the changes introduced by CRD VI?

AH: In the short term, non-EU banks will need to assess their cross-border services undertaken in the EU to identify: 

1. which entities are third-country institutions within the scope of the regime;
2. which of their business lines within those entities identified under (a) involve the provision of core banking services into the EU; and
3. how far those business lines can benefit from exemptions under the regime 

To enable a quantitative assessment of the impact of the regime, they will then need to conduct an analysis of the available options described above and move towards implementation through 2026, whether by scaling back activity or restructuring it into EU branches or subsidiaries. Should structural reform and/or new licenses be required, or significant changes to the activities of EU subsidiaries, there is likely to be a considerable lead time.

DP: How do you foresee the regulatory landscape evolving post-CRD VI, and what should market participants prepare for in the coming years?

BP: CRD VI reflects a clear political intention from EU-level authorities to gain visibility and supervisory oversight of banking activity within the Union. Where banking services are provided cross-border by persons who are regulated outside the EU or not at all, it is difficult for EU-level authorities to monitor and supervise such activities either directly or indirectly through national competent authorities. 

Article 21c will significantly limit firms’ ability to provide cross-border banking services in the EU without a presence in the EU. In addition to the cross-border restriction, CRD VI also introduces harmonised minimum supervision standards for third-country branches, increasing the scrutiny that authorities are able to apply to third-country branches, their head undertakings and even other group members outside the Union providing services into the EU.

This follows a trend seen across other pieces of legislation in the EU of seeking to onshore financial services activities in the EU. Further regulation in this space will likely follow this theme, with a clear preference for EU banking activities to be carried out by local, fully operational and fully capitalised undertakings.

We expect that third-country banking groups will face the strategic choice of either establishing a meaningful EU presence (by standing up (a network of) subsidiaries/branches) which can operate on a standalone basis without significant support from its third-country group, or exiting/reducing business provided into the EU market. 

DP: How can A&O Shearman support market participants in understanding and implementing the requirements of CRD VI to ensure compliance and operational efficiency?

AH: A&O Shearman has been heavily involved in the industry discussions surrounding CRD VI. We are working closely with trade associations to help industry participants navigate the impacts of CRD VI. 

We are also currently advising several global institutions on their CRD VI implementation projects.

Project planning for CRD VI will be a highly complex and institution-specific process. Our work to date has focused on producing tailored implementation plans, taking into account the relevant institutions’ group structure, business lines, target markets and strategic goals. 

If you would like to ask any further questions on how CRD VI may impact your business or discuss how A&O Shearman may be able to assist you to prepare, please contact Bob Penn, Kate Sumpter, Kirsty Taylor or Adam Harwood.