On 11 April 2019, two laws dated 8 April 2019 were published in the Official Journal that make amendments to the Luxembourg laws governing various aspects of financial services to ensure continuity in the event of a no-deal exit of the United Kingdom (“UK”) from the European Union (“EU”). This article focuses on the impact of these measures on fund management and distribution, but it should be noted that the amendments also cover credit institutions, payment services and insurance.
Summary
Law n°7401 contains the majority of the amendments to existing laws1, and grants both the Commission de Surveillance du Secteur Financier (the Luxembourg supervisory authority for the financial sector “CSSF”) and the Commissariat aux Assurances (the Luxembourg supervisory authority for the insurance sector) with a series of powers to take temporary measures to ensure the good functioning and stability of the financial markets and to guarantee the protection of the depositors and investors.
Critically, for financial services firms, it gives the CSSF a power to allow a period of recognition of UK firms’ freedom of establishment and freedom to provide services for up to 21 months from the date on which the UK leaves the EU. So, for example, a UK alternative investment fund manager (“AIFM”) will be able to continue to manage a Luxembourg alternative investment fund (“AIF”) potentially until the end of July 2021.
Law n°7426 is specific to specialised investment funds (“SIF”) and undertakings for collective investment in transferable securities (“UCITS”)2, and provides a period of up to 12 months from the date on which the UK leaves the EU for: (1) the settlement of any non-compliance with the SIF and UCITS investment rules resulting from the UK’s withdrawal, such as divesting from positions in UK UCITS which could no longer be considered compliant due to the UK’s departure from the EU; and (2) UK-authorised UCITS to continue to be entitled to be marketed to retail investors in Luxembourg (where the UK-authorised UCITS is managed from outside the UK by an EU Member State management company also authorised as an AIFM, then the UK-authorised UCITS will be considered an AIF for these purposes and permitted to be marketed to retail investors in Luxembourg under Luxembourg’s AIF rules3).
Impact for UK Managers of Luxembourg Funds
According to the CSSF’s data, there were 11 UK management companies managing Luxembourg UCITS at the end of 2017 managing €193bn in assets. Although updated figures are yet to be published, anecdotally we know that a number of these firms have now fully established in Luxembourg as part of their Brexit preparations, so the impact for UCITS may be limited. Therefore, while there may be a couple of outliers at this stage, it is likely that the rules are of more relevance to UK AIFMs managing Luxembourg AIFs.
It is also important to note that, as useful as these rules are, UK promoters of Luxembourg funds should consider the wider implications of operating within the EU in the event of a no-deal Brexit, particularly in relation to marketing their funds:
Where a UK AIFM manages a Luxembourg AIF, in the absence of changes at an EU level, it would become an EU AIF with a non-EU AIFM and therefore lose its manager passport under AIFMD and only be permitted to be distributed elsewhere in the EU27 under the relevant national private placement rules (NPPR).
From a UCITS perspective, as the passport attaches to the fund, not the management companies, anything other than executiononly distribution would fall under MiFID. Again, beyond the borders of Luxembourg, in the event of any domestic legislation in other EU27 Member States, the funds may not be distributable by the UK entity, and some sort of 3rd party or tiedagent marketing arrangements would have to be put in place for the UCITS.
Comment
This package of measures is welcomed by the financial services industry and show Luxembourg’s pragmatism and commitment to financial stability in the event of a no-deal Brexit. However, they should also be viewed with cautious optimism, since there is only so much that can be achieved by the Luxembourg legislature alone, and UK-based promoters of Luxembourg funds should consider the wider EU fund distribution issues in the event of a no-deal Brexit, particularly in relation to MiFID. While AIFs and UCITS can easily be portfolio managed on a delegated basis, the right approach to cross-border marketing and distribution is more nuanced.
It is notable that other EU27 jurisdictions, such as Ireland and Germany, have also passed legislation to reduce the impact of a no-deal Brexit on financial services, but there is no homogeny in approach between EU27 jurisdictions that an EU-led approach would have given us.
What is interesting about this is that the Bill was drafted at a stage when it looked like the UK would have a 29 March departure date, with the 21-month period marrying-up with the proposed transitional period under the draft exit deal. However, the UK’s departure has now been extended up to 31 October 2019, so the period in law n°7401 now takes us to end July 2021, as opposed to end December 2020 (as originally anticipated).
It gives firms a period of time to establish a branch or use a tied agent by the end of the transitional period. This is welcome as it shows an increasing recognition of the use of the tied agent approach as a means of doing business on a cross-border basis. Of course, these new rules remain subject to relevant firms remaining compliant with all other rules in place, including, crucially, those relating to maintaining a necessary degree of substance in Luxembourg.
1. Law N°7401 on measures regarding the financial sector in case of withdrawal from the United Kingdom of Great Britain and Northern Ireland of the European Union amending:
- the amended law of 5 April 1993 on the financial sector
- the amended law of 10 November 2009 on payment services
- the amended law of 17 December 2010 relating to undertakings for collective investment
- the amended law of 12 July 2013 on alternative investment fund managers
- the amended law of 7 December 2015 on the insurance sector
- the amended law of 18 December 2015 on the failure of credit institutions and certain
investment firms
2. Law N°7426 (voted 28 March 2019) on measures regarding the financial sector in case of withdrawal from the United Kingdom of Great Britain and Northern Ireland of the European Union amending:
- the amended law of 13 February 2007 on specialised investment funds
- the amended law of 17 December 2010 relating to undertakings for collective investment
3. As per Article 46 of the amended law of 12 July 2013 on alternative investment fund managers.
