CRD VI implications for investment funds.
The changes introduced under the Capital Requirements Directive ((EU) 2024/1619) (CRD VI) present risks and, in some respects, an opportunity for Irish UCITS and AIFs. EU funds and fund management companies (FMCs) that receive “core banking services” from non-EU undertakings should be alert to whether those arrangements could trigger EU licensing requirements for the non-EU provider and may lead to a restructuring of current arrangements. For a non-EU undertaking providing core banking services to Irish funds, there is a need to assess and determine whether this continues to be permitted under CRD VI without an EU banking license or whether any of the range of exemptions below may be available. “Core banking services” in a fund context could be borrowing by a fund or FMC and operation of cash accounts in sub-custody arrangements.
One solution would be for non-EU banks to restructure their lending activities into non-bank entities to continue their lending. The loan-originating regime under AIFMD II may provide an opportunity for non-EU banks to carry out cross-border lending to EU corporates using an EU AIFM to manage an EU loan-originating AIF (LO AIF).
Background
From 11 January 2027, third-country undertakings (TCUs) providing “core banking services” to EU clients will be required to establish an authorised branch in each EU Member State where they operate or to operate through an authorised EU entity when providing core banking services in the EU.
In Ireland, the implementation of this new regime will mark a significant departure from the current position, where there is generally no restriction on the direct provision of certain cross border services (e.g. commercial lending) into Ireland from outside the EU. You can read more about the background and implications of CRD VI across financial services in this William Fry article.
Timing
The new CRD VI licensing regime comes into effect on 11 January 2027. Any new borrowing arrangements after 11 July 2026 by Irish funds from non-EU banks will need to comply with the CRD VI licensing requirements. Domestic legislation transposing CRD VI was due by 10 January 2026. Ireland has not yet published measures to transpose CRD VI into Irish law.
Potential impacts on fund financing and fund operations
Lending will trigger the CRD VI licensing requirements if the non-EU undertaking would qualify as a “credit institution” in the EU. For any new lending arrangement after 11 July 2026 from non-EU banks, funds and FMCs should ensure that the counterparties are engaging through an EU branch or subsidiary or be satisfied that the non-EU bank can rely on a CRD VI exemption.
Deposit taking will always trigger the CRD VI licensing requirements. Situations where a non-EU undertaking is operating cash accounts on behalf of an EU depositary for an EU fund or FMC will need to be carefully examined to see if this is categorised as provision of core banking services in the EU under CRD VI.
The legislation does not define what amounts to the provision of a service “in” an EU Member State. However, the background materials make it clear that the European Commission anticipates that all relevant activities with EU clients should be caught.
Exemptions
There are various exemptions to the third country licensing requirements that could be relevant in determining whether any particular arrangements cross over the licensing perimeter. We expect guidance and market practice to develop in relation to these exemptions.
Grandfathering
There are grandfathering provisions which can support lenders and borrowers for loans that are in place before 11 July 2026. Features of loans, such as those with optional extension periods, should be carefully considered to ensure they can continue to avail of the grandfathering period after 11 July 2026.
Reverse solicitation
The reverse solicitation exemption where a European depositary, fund or FMC approaches the non-EU undertaking exclusively on its own initiative may be available and will be very fact specific.
Intragroup exemption
The intragroup exemption may be considered where a core banking service is provided by a non-EU entity to a European depositary or FMC, on behalf of a fund, within its group,. Again, the facts of each situation should be carefully considered.
Interbank exemption
This is available where the non-EU entity provides services to another credit institution. This may be applicable to depositaries who are credit institutions.
MiFID exemption
The MiFID exemption should specifically be considered in the case of sub-custody arrangements. CRD VI states that the CRD VI licensing requirements will not apply to MiFID services or activities listed in Annex I, section A to MiFID including any accommodating ancillary services, such as related deposit taking or the granting of credit or loans, the purposes of which is to provide services under MiFID. Custody is listed in section B. It would appear on a literal interpretation that custody is therefore not excluded from the application of the CRD VI requirements, save in circumstances where it would be deemed an ancillary service, as set out above. We would hope for greater clarity on this point through industry engagement, perhaps in the form of a level 3 Q&A at European level or through eventual Irish transposing legislation.
Loan-originating AIFs – an opportunity?
The CRD VI licensing requirements apply to lending by non-EU “credit institution” entities. Therefore, non-EU non-bank lending activities into the EU can continue after CRD VI transposition without triggering the licensing requirements.
In some cases, third country lenders may be interested in considering a structuring solution in the form of a LO AIF. AIFMD II harmonises the ruleset for direct lending AIFs across the EU and LO AIFs may become an attractive solution for lending efficiently across the EU. AIFMD II and the loan-originating regime becomes effective on 16 April 2026. A possible structure would involve a EU AIFM managing an EU LO AIF whereby the AIFM can delegate portfolio management, including lending decisions and ongoing loan management, to a non-EU bank or affiliate asset manager.
A LO AIF could represent a better structuring solution where it enables better EU market access for third country lenders. This would be the case if the implementation of AIFMD II resulted in a funds passport to lend cross-border in the EU. There is no formal passporting regime for cross-border lending in AIFMD II, but the recitals do contemplate it. It may remain to be seen whether local transposing legislation permits or clarifies this and whether any member states opt to impose specific local requirements.
If a lending passport emerges, there will be points of detail to consider in implementing in accordance with the AIFMD legislative and regulatory framework and other pros and cons to consider. On the plus side, the passport would give EU-wide borrower access. A fund should not be subject to banking capital requirements. On the minus side, an AIF as a regulated collective investment scheme needs to satisfy all regulatory requirements to benefit from that status including raising capital from a number of investors. There are costs and significant governance and oversight requirements to establishing and operating an authorised EU AIFM. It would be possible to appoint an already authorised third-party AIFM.
Specific features of the loan-originating regime would need to be examined to ensure that they would not prohibit the LO AIF from operating as intended e.g. loan risk-retention, concentration limits, prohibition of the “originate-to-distribute” strategy and leverage limits.
Conclusion
Funds and FMCs should carefully examine financing and custody arrangements with non-EU counterparties to identify if there will be any compliance risks with the CRD VI requirements.
LO AIFs may represent a structuring solution for non-EU bank lenders into the EU and can be carefully considered once the AIFMD II transposition process is complete.
If you have any queries in relation to these matters please contact any of our Asset Management & Investment Funds Partners or your usual contact at William Fry.
