On 31 January 2019, the Ministry of Finance has submitted a bill of law to the Luxembourg Parliament (the Bill 7401) as regards the measures to be taken in relation to the Luxembourg financial sector in the case of the exit of the United Kingdom (UK) from the European Union (EU) without the conclusion of an agreement (Hard Brexit).
1. MAIN OBJECTIVE OF THE BILL 7401
The main purpose of the Luxembourg government is to maintain adequate protection to depositors, insurance policy holders and investors. The Bill 7401 therefore aims at organising the regulatory framework applicable to UK firms currently benefiting from the EU passport in Luxembourg in the aftermath of a Hard Brexit.
It is intended to achieve this by applying a transitional period where the relevant Luxembourg competent supervisory authorities (i.e., the CSSF and the CAA) will have the possibility to ensure the continuity of existing client relationships with these firms for a determined period of time.
2. AMBIT OF THE BILL 7401
The transitional period will apply to UK firms passported in Luxembourg (either via a branch, via the freedom to provide services, or, where applicable, via the use of an agent/intermediary, together the Firms) and performing any of the following services to Luxembourg clients:
(i) banking and financial activities/services (including investment services within the meaning of MiFID II) covered by the Luxembourg act of 5 April 1993 on the financial sector, as amended;
(ii) e-money activities and/or providing payment services covered by the Luxembourg act of 10 November 2009 on payment services, as amended (the Payment Services Act 2009);
(iii) the activity of management of UCITS (and any investment services provided by a UCITS management company under its MiFID top-up licence) covered by the Luxembourg act of 17 December 2010 on undertakings of collective investment, as amended;
(iv) the activity of management of AIFs (and any investment services provided by an AIFM under its MiFID top-up licence) covered by the Luxembourg act of 12 July 2013 on alternative investment fund managers, as amended; and
(v) the activity of insurance or reinsurance covered by the Luxembourg act of 7 December 2015 on the insurance sector, as amended.
It should be noted that the Bill 7401 does not (and cannot) cover the marketing passport for AIFs and UCITS, which will need to be addressed at EU level. Therefore, if the Bill 7401 is adopted in its current form, UK UCITS management companies and UK AIFMs will, during the transitional period, be allowed to continue acting as UCITS management companies and AIMFs of Luxembourg UCITS and AIFs. However whether and to which extent they will still be in a position to benefit from the UCITS and the AIFMD marketing passport to market the relevant UCITS or AIFs in other EU member states will depend on local rules in the relevant jurisdictions (and the Bill 7401 remains silent on this point as to marketing in Luxembourg).
The Bill 7401 also foresees amendments in Title V of the Payment Services Act 2009 by including a definition of ‘third country systems’ (covering both payment settlement systems and securities settlement systems governed by third country laws) and a possibility for the Luxembourg Central Bank to admit such third country systems as ‘systems’ for the purposes of the provisions of Title V of the Payment Services Act 2009 (under certain conditions).
3. NATURE OF THE TRANSITIONAL MEASURES
The competent supervisory authority will have the discretion to exempt Firms from the relevant Luxembourg licensing requirements related to their activity for a maximum period of 21 months from the official date of a Hard Brexit and only in relation to existing contractual relationships at the time of a Hard Brexit.
Any new (or renewed) contract concluded after the day of the Hard Brexit will benefit from the above exemption only to the extent that it presents a close link with the existing contractual relationship that existed at the time of a Hard Brexit. For instance, life-cycle events in relation to existing contracts and leading to the conclusion of a new contract would fall under this exemption.