A Luxembourg Brexit Law was recently proposed by the government, in order to mitigate the consequences that a hard Brexit will have on the stability and orderly functioning of both the financial market in Luxembourg and the activities of its participants. Please find the draft of the Luxembourg Brexit Law here.
Whether simply a measure necessitated by the continued political climate of uncertainty, or the first of a long series of more formal acknowledgements of the devastating consequences that a hard Brexit will have in continental Europe, the draft Luxembourg Brexit Law represents indeed a change in the political approach of European member states towards the United Kingdom, which we expect will be followed by other countries.
Luxembourg Brexit Law and The Minister of Finance
The preamble to the Luxembourg Brexit Law bases the need for such exceptional measures in the cumulative interest of participants in the financial markets in Luxembourg and their end clients, who need the most protection from the consequences of a hard Brexit. Whilst, prima facie, we see that the relief might be suitable for asset managers based in the United Kingdom and that currently manage, or have managed for a long period of time, Luxembourg based investment funds, there is more to these measures. In fact, specific powers are conferred by the draft bill of law also to the supervisory authority of the insurance sector, in addition to the one of financial services.
Particularly emphasized is the existence of long-standing contractual arrangements between service providers from United Kingdom and Luxembourg as well as the passporting rights, or loss thereof in case of hard Brexit. Very interestingly, hard Brexit is defined in the draft Luxembourg Brexit Law as an unorganised retreat of the United Kingdom from Europe. Of course, we are not surprised that Luxembourg is the first Member State to propose such measures. It indeed remains one of the main hubs for investment funds in Europe and as such will be the choice for investment managers who intend to target a clientele based in the southern hemisphere of Europe.
Also, the Luxembourg minister of Finance has been recently ambassador of a more moderate approach to Brexit (please see an interesting video interview here). Once the dramatic turmoil of the first months after of the Brexit declaration has passed, reason has to supersede emotions and, with that, the invitation to a more detached analysis of the interests at stake, especially for Europe, and the need to ensure that measures are adopted also at European level to help the transition. And we can see that these declarations echo also what was said already by the chair of ESMA on the topic of MiFID II and the draft bill itself is also a welcome consequence to the multilateral memorandum of understanding that was also implemented recently.
Now, The Technical Bit
In essence the draft Luxembourg Brexit Law creates a temporary permission regime, similar to the one already instituted in the United Kingdom, in order to allow certain categories of financial services provider to continue to offer their service in Luxembourg on the basis of a fictitious extension of the passporting rights and certain conditions being met. This regime will last for at least 21 months.
For what we are mainly concerned here, by and large, UK based management companies of both UCITS and AIF will be able to carry out with the provision of core and non-core services for Lux domiciles funds, consisting in management of the portfolios as well as other ancillary management, administration and marketing activities. In order to be able to do so, such UK based entities will have i) to be authorised under the relevant directives in the United Kingdom; ii) manage funds established in Luxembourg; and iii) carry out relevant activities either on a freedom to provide services basis or through a branch.
Pending approval of the law there are no guidelines or other indications issued by the relevant competent authorities on how to signify the intention to avail of the temporary permission regime introduce by the law.
Divorces are very emotional matters. Financial stability and orderly functioning of the markets in Europe requires though that longer gestational periods are imposed, through ad hoc legislative measures, to facilitate the adjustment to the third country regime, which will be adopted both in the UK and in Europe in the case of a hard Brexit.