How to set up

AN INVESTMENT FIRM

In Luxembourg, investment companies (entreprises d’investissement) (hereinafter, “investment firms”) are financial institutions not qualifying as credit institutions based on the financial and investment services they provide, but also in consideration of the different size, operational complexity and reporting obligations as opposed to banks.

AUTHORISATION REQUIREMENT

The incorporation of an investment firm under Luxembourg law requires written authorization from the Minister of Finance, responsible for the financial supervisory authority. Authorisation is granted after examination of the application by the Luxembourg financial sector supervisory authority, Commission de Surveillance du Secteur Financier (CSSF). Where the services offered by an investment firm also concern insurance products, the application file will, in addition, be assessed by the Luxembourg Insurance regulator, the Commissariat aux Assurances (CAA).

SUPERVISORY AUTHORITY AND REGULATORY FRAMEWORK

Investment firms incorporated in Luxembourg are supervised by the CSSF. Regulatory and supervisory rules apply in the same way to all investment firms incorporated under Luxembourg law, regardless of the nature of their activities. The legal and regulatory conditions governing the establishment of a Luxembourg investment firm are mainly laid down in the Law of 5 April 1993 on the financial sector, as modified, as well as in a series of circular letters issued by the CSSF (Circular CSSF 20/758, Circular CSSF 20/757, Circular CSSF 17/665, Circular CSSF 15/620 and Circular CSSF 15/606).

 

 

LEGAL FORM

The status of investment firm can be granted to natural or legal persons in the form of a public entity or commercial company.

CENTRAL ADMINISTRATION

The registered seat and central administration of a Luxembourg investment firm must be in Luxembourg, meaning that all decision, accounting and administrative functions must be performed in the Grand Duchy. The requirements of a central administration, internal governance and risk management are detailed in the Circular CSSF 20/758 as modified.

SHAREHOLDERS

Authorisation of an investment firm is subject to prior communication to the CSSF of the identity of shareholders or partners, either direct or indirect, individuals or legal entities, who hold a qualifying holding, or a holding which permits them to exercise significant influence over the conduct of its affairs, and the total amount of these holdings. The suitability of these shareholders or partners must be of a satisfactory level, taking into consideration the need to guarantee sound and prudent management of the investment firm.

The structure of the shareholding must be transparent in order not to impede the prudential supervision of the company, especially, when applicable, the supervision of the group on a consolidated basis.

INFRASTRUCTURE

An investment firm must have sound administrative and accounting organisation including a clear organisational structure with defined procedures and responsibilities. It is required to have adequate internal control processes for the monitoring, detection, management, and declaration of risks to which the company might be exposed. It must have autonomous support functions in accounting and data processing, mechanisms for the control and security of its IT systems.

PROFESSIONAL STANDING AND EXPERIENCE

Authorisation is subject to the members of the bodies performing administrative, management and supervisory functions, as well as the shareholders or partners, providing proof of their professional standing. This reputation is assessed based on past history and by any other evidence which shows that the persons concerned have a good reputation and present every guarantee of irreproachable conduct. Particular focus is also put on the absence of any suspicious involvement related to money laundering and/or terrorist financing and or proliferation financing. The management of the investment firm must be exercised by at least two persons who are effectively authorised to determine general business policy.

The executive managers must have the necessary professional repute and sufficient experience for the performance of their duties. Moreover, the authorisation process of the key function holders within the investment firm provided for in CSSF Circular 20/758 should be observed.

 

EXTERNAL AUDITING

The annual accounts must be audited by one or more approved statutory auditors who qualify in Luxembourg as “Réviseurs d’entreprise agréés” and who have the professional experience necessary for the performance of their duties. Any change of external auditors requires prior approval by the CSSF.

OTHER LEGAL OBLIGATIONS

An investment firm’s authorisation is dependent on its membership in the Luxembourg Investor Compensation Scheme (Système d’Indemnisation des Investisseurs Luxembourg) recognised by the CSSF.

CAPITAL BASE

Investment firms incorporated under Luxembourg law are required to have a subscribed and fully paid-up share capital of not less than EUR 50,000. Depending on the category of investment firm for which the authorization is sought, the shareholders’ equity may not fall below the minimum level of share capital of EUR 730,000.  If the shareholders’ equity does fall below this amount the CSSF can, if circumstances justify it, grant a limited time extension for the investment firm to correct its position or cease its activities. Please consult the relevant legal provisions of the Law of 5 April 1993, as modified, to determine the minimum share capital required for each category of investment firms.

AUTHORISATION PROCEDURE

Authorisation is accorded by the Minister responsible for the CSSF (the Minister of Finance) on the basis of a written application and following instruction by the CSSF.

The application must be accompanied by a full set of supporting documentation, together with a business plan identifying the type and volume of business to be undertaken, shareholders structure, capital and liquidity requirements, and the administrative and accounting structures to be put in place.

It is customary for entities applying for authorisation as an investment firm to contact the CSSF to request information on the qualification of their activities and the need for an authorization, including the request for an informal meeting, before submitting a formal request for approval to the Ministry.

SPECIALIST SERVICE PROVIDERS

A number of legal firms have specialist expertise in the creation of companies and can assist applicants during the process of setting up a credit establishment in Luxembourg.

GOVERNANCE – THE “THREE LINES OF DEFENCE” MODEL

In order to ensure sound and prudent business management, the investment firm must adopt a governance model based on three lines of defence (CSSF Circular 20/758, as amended):

  • 1st line of defence – “Front office” functions: the business owns and manages its risks in accordance with agreed risk policies, limits and controls at the operational level in line with local laws, regulations and CSSF requirements (administrative, accounting, computer systems and remuneration procedures). It is composed of the investment firm’s business activities.
  • 2nd line of defence – “Risk” functions: formed of the internal control and the support functions, responsible for defining risk policies and risk processes and controls that contribute to the investment firm’s overall risk control. It is composed of the risk management department, compliance department (as control functions), corporate legal department, fund legal department, corporate planning & strategy department, the data privacy manager and information security department;
  • 3rd line of defence – “Internal audit” functions: provides independent, objective and critical review of the first two lines of defence. This is performed by Internal Audit Department (also part of the internal control functions).

Each of the three control functions shall be under the responsibility of a separate head of function (who, for the risk control function, is referred to as the ‘chief risk officer’). The principle of proportionality applies and it is therefore possible to merge the risk management and compliance functions on a case-by-case basis. The risk management function (as well as the compliance and audit functions) must be permanent and independent, and hold sufficient authority. The chief risk officer must have direct access to the members of the management body or its chair (or chair of the risk committee), the external auditor and the CSSF. It is not permissible to outsource the risk management function. However, under the principle of proportionality, a full-time chief risk officer may not be required for smaller investment firms, and this is evaluated on a case-by-case basis.

USEFUL INFORMATION SOURCES

Commission de Surveillance du Secteur Financier (Luxembourg financial supervisory authority): www.cssf.lu