By Ezechiel Havrenne |Jad Nader | Miryam Lassalle | Josée Weydert | Greet Wilkenhuysen
On 31 January 2019, the Luxembourg finance minister introduced a bill (n° 7401) on measures to be taken in relation to the financial sector in the event the United Kingdom (the “UK”) leaves the European Union (the “EU”) without reaching an agreement on the final terms of its withdrawal (the “Bill”). The Bill is currently pending before the Finance and Budget Committee of the Luxembourg Parliament. In the event of a no deal scenario, it would enter into force on 29 March 2019.
The Bill grants the Luxembourg financial supervisory authority (Commission de surveillance du secteur financier or CSSF) and the Luxembourg insurance supervisory authority (Commissariat aux assurances or CAA) special powers to authorise, on a case-by-case basis, UK-accredited financial, investment and insurance institutions to continue to provide services to existing Luxembourg-based clients during a grandfather period of up to 21 months from the withdrawal of the UK from the EU (the “Effective Brexit Date”).
The Bill concerns: (i) credit institutions and investment firms, (ii) payment and electronic money institutions, (iii) insurance and reinsurance companies, (iv) management companies (“UCITS ManCos”) of undertakings for collective investment in transferrable securities (“UCITS”) licensed in the UK in accordance with Directive 2009/65/EC, that had already been appointed as UCITS ManCos for Luxembourg based UCITS, and (v) alternative investment fund managers (“AIFMs”) licensed in the UK in accordance with Directive 2011/61/EU that had already been appointed as AIFMs for Luxembourg based alternative investment funds. This being said, it should be noted that AIFM and UCITS marketing passports are not covered by the Bill. For this reason, Luxembourg-based AIFs and UCITS managed by UK-based AIFMs and UCITS ManCos may no longer be marketed after the Effective Brexit Date in other Member States on the basis of European marketing passports. The marketing of such funds will therefore have to be addressed on a country-by-country basis unless and/or until the European authorities conclude an agreement on this matter.
Temporary authorisations or, as the case may be, exemptions from accreditation are, in all cases, subject to two main conditions:
(i) the UK-based financial, investment or insurance institution must have properly passported its services before the Effective Brexit Date via the free provision of services, a branch or, as the case may be, a tied agent in Luxembourg; and
(ii) the UK-based financial, investment or insurance institution must have entered into an agreement with the relevant Luxembourg-based client prior to the Effective Brexit Date or afterwards, but in this case only if the agreement is closely connected to agreements entered into force before the Effective Brexit Date.
The Bill also contains specific measures applicable to securities settlement and payment systems with the aim to secure continued application of the current statutory framework and the inclusion, under certain conditions, of UK systems under the new definition of a “third-country system”. A third-country system is one that is subject to supervision by the regulatory authority of a State whose central bank is a shareholder in the Bank for International Settlements and which has been included by the Luxembourg Central Bank on the official list of third-country payment systems and securities settlement systems.
Finally, the Bill provides security regarding the continued application of the current recovery and resolution framework for credit institutions and certain investment firms (BRRD). In this regard, the Bill extends the protection regime arising from Directive 2014/59/EU to third-country systems appearing on the Luxembourg Central Bank’s official list.
In a communication dated 13 February 2019, further to a statement by ESMA, the CSSF provided additional Brexit guidance with regard on MiFIR transaction reporting, ESMA databases and MiFID II calculations. The CSSF encourages investment firms and credit institutions subject to MiFIR reporting obligations that use the services of an Approved Reporting Mechanism (ARM) in the UK to check the continuity of these services after the Effective Brexit Date, as UK ARMs will be considered as third-country entities.
In another recent communication, the European Commission further informed that, unless specifically provided otherwise, judicial cooperation procedures and matters related to the recognition and enforcement of UK decisions shall, as from the Effective Brexit Date, no longer be governed by EU rules. As a result, Luxembourg, along with other EU Member States, is currently in the process of evaluating the risks and solutions available under national law and applicable international conventions in relation to any and all procedures that might remain outstanding at the Effective Brexit Date.
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The Bill constitutes a strong response by Luxembourg to Brexit uncertainties in a no-deal scenario. The Bill’s broad scope of application and the security it provides through the extended recognition and grandfathering go beyond similar initiatives in other EU countries. It thus sends a very positive message that Luxembourg is intent on preserving the financial market stability and on protecting the users (e.g. investors, depositors, insurance policyholders, insured parties and beneficiaries, ceding companies, etc.) of UK-based undertakings engaged in the provision of cross-border financial, investment, insurance and reinsurance services in Luxembourg.
Compliments of Nauta Duthil, a member of the EACCNY