Luxembourg Brexit Laws were enacted earlier in April 2019 containing measures 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 related CSSF press release 19/18 here.
The CSSF also recently issued two additional press releases for mandatory notifications in the context of Brexit. One is press release 19/33 for UK investment firms operating in Luxembourg (please find it here) and the other is the 19/34 for UK collective investment undertakings and their managers (also available here).
On October 11th the CSSF issued two new press releases. These apply to both UK managers which have NOT submitted the notification described in further details below and to the ones which instead have submitted the notification. Please find a link to the relevant press release here.
In essence, the UK managers which did not submit the notification to the CSSF will be considered third country managers as of November 1st in case of a no deal Brexit and will both lose the passport rights and will not be able to take advantage of the transitional regime made available by the CSSF as a consequence of the notification to be made through the Brexit portal. However, in order for these UK managers to be considered as third country managers, they will have to seek approval to their shareholders before October 31st and evidence of the approval will have to be provided to the CSSF. Failing to do to, those UK managers will be considered as operating in breach of regulation.
Also for those UK managers which instead have already timely notified the CSSF of their intention to make use of the transitional regime, it is possible to waive the notification and seek instead approval of their shareholders to continue to manage as third country managers the relevant AIFs.
Luxembourg Brexit Laws
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 Luxembourg Brexit Laws represented a change in the political approach towards the United Kingdom, which we expect will be followed by other countries. The preamble to the Luxembourg Brexit Laws bases the need for a transitional regime for UK firms and collective investment schemes operating in Luxembourg in the cumulative interest both 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 generally to the measures enacted with the Luxembourg Brexit Laws. In fact, specific powers are conferred by the 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. Of course, we are not surprised that Luxembourg is the first EU 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.
Now, the Technical Bit
In essence the Luxembourg Brexit Laws created a transitional regime, similar to the one already instituted in the United Kingdom, in order to allow certain categories of financial services providers to continue to offer their service in Luxembourg on the basis of a fictitious extension of the passporting rights. The main premise to enforce the transitional regime is the occurrence of a hard Brexit, in which case UK firms and collective investment schemes will be all considered as third country entities. Differently to what was initially proposed, the CSSF has now set the length of the transitional regime to 12 months following the date of a hard Brexit. Similar to the UK FCA, the CSSF has introduced a dedicated portal for the notifications of the intention to avail of the transitional regime. Please access the portal here.
UK Investment firms MiFID authorised
With reference to the activities of UK investment firms authorised under MiFID and currently passported into Luxembourg, the CSSF distinguishes between existing activities and new contracts. For all UK investment firms wishing to continue their business in Luxembourg after a hard Brexit and conclude new contracts, those firms should have already or shall in the very near future apply for a local license in Luxembourg for the provisions of those services, which could take up to 12 months to be obtained.
UK investment firms instead currently providing services in Luxembourg under the passport and servicing existing contracts might be granted with permission to carry on their activities under the transitional regime subject to specific notification made to the CSSF, by no later than September 15th 2019, on a dedicated web portal which the CSSF will make available in the coming weeks. The CSSF will have discretion to grant permission to operate under the transitional regime to notifying firms and will look specifically at the passport of existing licenses in Luxembourg.
UK Collective Investment Schemes and their Managers
UK UCITS and AIFs as well as their managers will have the same ability to avail themselves of the transitional regime with the CSSF by means of filing a similar notification on the dedicated web portal by the same deadline of September 15th 2019. Similar to investment firms, both UK managers and funds intending to continue to provide their services in Luxembourg after a hard Brexit will have until October 31st 2019 to file any related additional notification or application for authorisation depending on the type of service or activities intended to be carried out. For UCITS and AIF, of course the second deadline will be relevant to file an application for national private placement in Luxembourg, whilst for managers to inform the CSSF of their plans, including the application for a local license, unless they already applied for one.
The CSSF, on the basis of the additional applications or notifications made by the second deadline, will be at discretion to grant the authorisation to operate under the transitional regime for a period of 12 months. For entities authorised both under UCITS and AIFMD, there is a requirement to carry out a transitional regime notification for each license.
Conclusion
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 Europe in the case of a hard Brexit.
Luxembourg made great progress on this point and we expect that the transitional regime so introduced will be highly beneficial to all investment firms and funds that haven’t yet put in place solid plans for Brexit and are still waiting for last minute decisions. Unsurprisingly, these are a not a minority.