Banks
As a member of the European Union, Luxembourg has a legal and regulatory environment that is largely determined by the numerous Directives and Regulations adopted at a Community level. However, when transposing these standards into domestic law, the legislative authority has skillfully taken advantage of the margins for manoeuvre available within the Directives to create a legal environment that promotes the international character of the financial centre.
The legislative authority has two objectives: to ensure the stability of the financial centre and guarantee an optimal level of protection for investors. Hence, all professional activity within the financial sector is subject to prior ministerial agreement. Equally, all companies that are professionally active in the financial centre are subject to the prudential supervision of either the Commission de surveillance du secteur financier (CSSF) or the Commissariat aux assurances (CAA).
The fundamental law regulating the banking sector is the Law of 5 April 1993, as amended.
Over the years, specific legal frameworks have been created for niche products and promising services, such as covered bond issuing banks and electronic payment establishments.
While remaining subject to strict rules with regard to financial privacy, actors in the Luxembourg financial centre must respect a set of legal measures in the area of the fight against money laundering and the financing of terrorism.
Mortgage bond banks
The activity of covered bond issuing banks is regulated by a specific piece of legislation, the law of 21 November 1997 on covered bond issuing banks.
This text gives a detailed definition of the principal, accessory and auxiliary activities of a covered bond issuing bank and gives legal protection to the expression "lettre de gage" by reserving the right to issue such securities by this name or any name that means the same thing in another language (such as "Pfandbriefe" in German, or mortgage backed bonds in English) to banks that have been specifically created for this purpose.
The law sets a limit to the number of covered bonds in circulation and a series of rules regarding the assets held as security. For instance, it requires covered bond issuing banks to keep a "register of pledges" in which all the assets pledged as cover are individually listed. Furthermore, covered bond issuing banks must engage a second auditor, who may not be responsible for auditing the company accounts, to ensure that the bank is in compliance with legal provisions with regard to the cover assets.
