Luxembourg's contingency plans to mitigate the impact of a hard Brexit on the financial sector
Although the full effects of Brexit continue to be unclear, the Luxembourg authorities have expressed their commitment to preserving close business ties between Luxembourg and the UK.
In the eventuality of a hard Brexit, the UK will be classified as a ‘third country' with limited access to EU markets under the AIFMD/Ucits marketing and managing passports and the Markets in Financial Instruments Directive (Mifid II) (to name three of the most important directives).
The supervisory authority of the Luxembourg financial sector (the CSSF), has indicated that the delegation of portfolio management (which is not provided under a passport regime) to UK firms by Luxembourg Ucits Managers or Luxembourg authorised AIFMs continues to be possible on condition that the UK undertaking continues to be authorised for the purpose of asset management, and is subject to prudential supervision.
Regulators in both the EU and the UK are providing for a number of temporary permissions regimes to allow firms and funds to continue regulated business and prevent market disruptions. Luxembourg has provided for a 12-month transitional period during which UK firms carrying out financial activities under a passport regime may continue to operate in Luxembourg following the exit date.
The CSSF has recently announced that the "Brexit Notification" forms are available through the eDesk portal accessible at https://www.cssf.lu/edesk. If UK entities wish to rely on the transitional arrangements, notifications are required to be made by no later than 15 September 2019.
If not already in place, UK firms should, as a matter of urgency, determine their Brexit contingency plans and be in a position to clearly communicate them to the CSSF as part of the application to utilise the transitional period. UK Firms should already have focused on:
- which "alternative" to establishing a new business in Luxembourg suits best. On the investment fund distribution front, a number of creative solutions have been developed by the market (dual hatting, chaperoning, tiered agent);
- submitting a new application for authorisation urgently in Luxembourg or in another EU member state with aim of passporting the service into Luxembourg, bearing in mind that (i) authorisation can take as long as 12 months to obtain; (ii) that regulators are reluctant to commit to a particular timeframe (iii) during the Luxembourg transitional period, UK firms will be restricted to fulfilling existing contracts and cannot market a new product;
- taking steps to liquidate or restructure the Luxembourg funds, if a UK Ucits/AIF Manager no longer wishes to manage the Luxembourg fund and no other option is viable;
- "renting" out a third party AIFM/Ucits manager or forming a JV with a local regulated manager or purchasing a local entity with the appropriate licence;
Pursuant to the first Luxembourg law of 8 April 2019 on Brexit, firms that are currently authorised under Capital Requirements Directive (CRD), Mifid II, Payments
Services Directive (PSD 2) or EMD (Electronic Money Directive) in the UK and intend to conclude new contracts in Luxembourg are required to set up an establishment in Luxembourg and be authorised by 31 October 2019 or set up an establishment in the EU, seek authorisation in that Member State and passport that service into Luxembourg by 31 October 2019.
UK Mifid firms may also submit an application to provide investment services in Luxembourg on a cross-border basis, under Article 32-1 of the Luxembourg Law of 5 April 1993 on the financial sector and CSSF circular 19/716. The UK entity may provide investment services to per se professional clients or to eligible counterparties in Luxembourg without establishing a branch on cross border basis under the national regime (subject to conditions, and no EU passport available) or the EU third country equivalence regime.
Firms that are currently authorised under CRD, Mifid II, PSD 2 or EMD in the UK and have already concluded contracts in Luxembourg or intend to conclude new contracts in Luxembourg that are closely linked to existing contracts can benefit from a transitional period of 12 months by notifying to the CSSF by 15 September 2019. Upon receipt of the notification, the CSSF will confirm (before the 1 November 2019) whether or not the UK firm is granted the transitional relief.
UCIs and their managers established in the UK that are authorised under the Ucits Directive and the AIFMD can benefit from a transitional period of 12 months by notifying the CSSF by 15 September 2019.
More specifically, UK managers authorised under the AIFMD/Ucits Directive managing or marketing Luxembourg AIFs/Ucits are required to state.
- if another entity established in Luxembourg or another EU Member State, duly authorised/in the process of being authorised will be appointed in the place of the UK entity. Proof that the future Ucits manager/AIFM will accept the appointment is also required; and
- if the Ucits/ AIF is to be liquidated or restructured. An application to liquidate/ restructure must be submitted to the CSSF before 31 October 2019.
Vanessa Molloy is a partner at Harneys
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