Publication of the Brexit Laws
Financial sector and investment funds laws amended.
Whereas the day on which the United Kingdom (UK) will withdraw from the European Union (EU) (the Brexit Date) and the conclusion of an agreement between the UK and the EU (the Agreement) are still unknown, the CSSF published a press release to draw the stakeholders’ attention to the publication of the laws of 8 April 2019 regarding measures to be taken in relation to the financial sector in the event of a withdrawal of the UK from the EU (the First Brexit Law and the Second Brexit Law, together referred as the Brexit Laws).
The purpose of the Brexit Laws is to grant UK firms a grandfathering period with respect to an existing regulatory situation (i.e. EU passport1) in the public interest of the smooth functioning and the stability of the financial markets and the protection of clients /investors.
While the Brexit Laws have strictly the same title (i.e. “measures to be taken in relation to the financial sector in the event of a withdrawal of the UK from the EU”), the laws they amend vary:
- The First Brexit Law amends several financial sector laws and two investment funds laws:
- the Law of 5 April 1993 on the financial sector, as amended (the LFS);
- the Law of 10 November 2009 on payment services, as amended (the Payment Services Law);
- the Law of 17 December 2010 relating to undertakings for collective investment, as amended (the UCI Law);
- the Law of 12 July 2013 on alternative investment fund managers, as amended (the AIFM Law);
- the Law of 7 December 2015 on the insurance sector, as amended (the Insurance Sector Law); and
- the Law of 18 December 2015 on the failure of credit institutions and certain investment firms, as amended (the BRR Law).
- The Second Brexit Law only amends two investment funds laws2, as follows:
- the Law of 13 February 2007 relating to specialised investment funds (SIFs), as amended (the SIF Law); and
- the UCI Law.
Unlike the First Brexit Law which provides transitional measures only in the event of a withdrawal of the UK from the EU without the conclusion of the Agreement, the Second Brexit Law considers all cases of withdrawal (i.e. with or without the conclusion of the Agreement).
2. Continuity of the services and contracts
As soon as the UK leaves the EU without the Agreement, the UK financial sector firms will be considered as “third country firms” and will therefore lose the benefit of the EU passport.
According to the First Brexit Law, the following UK firms will be authorised to continue to provide their services in Luxembourg after the Brexit Date without the conclusion of the Agreement for a maximum of 21 months period:
- UK based credit institutions and investment firms;
- UK based electronic money and payment institutions;
- UK based management companies designated by Luxembourg UCITS;
- UK based alternative investment funds managers (AIFMs) managing Luxembourg alternative investment funds (AIFs); and
- UK based insurance/reinsurance undertakings.
Those temporary measures apply to:
- contracts that entered into force before the Brexit Date; and
- contracts concluded after the Brexit Date with close links to contracts that entered into force before the Brexit Date.
In all other cases (i.e. conclusion of new contracts or starting new activities), UK firms will be required, as applicable, to set up an establishment in Luxembourg or to submit an application to provide investment services in Luxembourg on a cross-border basis under paragraph (1) of Article 32-1 of the LFS (please refer to our flash dedicated to “Luxembourg and MIFID II third countries access regime for investment services: publication of CSSF Circular 19/716”).
3. Regularisation of investment policies/rules
The Second Brexit Law grants the relevant UCIs a maximum 12 months grace period for the regularisation of non-compliance of obligations concerning their respective investment policies.
Such non-compliance may be due to:
- investments that do not comply with the investment policy set forth in the fund’s prospectus/constituting or issuing documents; or
- non-compliance of the investment restrictions provided for by law or by the fund’s prospectus/constituting or issuing documents.
Pursuant to the Second Brexit Law, similarly to the regime provided for UCIs, SIFs must rectify within 12 months after the Brexit Date, any non-compliance with their investment rules (i.e. investments non-compliant with their investment policy or non-compliance with their investment restrictions), taking into account the stability of the financial markets and the interest of the investors.
It should be noted that this period is only granted in relation to positions taken before the Brexit Date and only in relation to non-compliance which are the direct consequence from the withdrawal of the UK from the EU.
4. Marketing UCITS in Luxembourg
According to the Second Brexit Law, UK UCITS which are currently marketed in Luxembourg pursuant to the EU passport rules of UCITS IV3 will be automatically authorised to be marketed to retail investors in Luxembourg4 for a maximum period of 12 months from the Brexit Date.
After the Brexit Date, those UCITS will qualify as “third country AIFs within the meaning of the AIFMD5”, with the following consequences:
- when they are established outside the UK, the management companies that currently manage UK UCITS will be required to obtain, in addition to their UCITS management company status, an authorisation to act as an AIFM from their competent authority; and
- the marketing in Luxembourg will have to be performed in accordance with the relevant provisions of the AIFM Law.
Albeit the First Brexit Law will enter into force on the Brexit Date without the conclusion of the Agreement, the Second Brexit Law will enter into force on the Brexit Date (i.e. with or without the conclusion of the Agreement).
6. Next steps
More than 1,800 investment firms, 270 payment institutions, 124 electronic money institutions and 73 banks in the UK have declared that they operate under the freedom to provide services in Luxembourg.
In addition, at the end of 2018, 116 UK regulated AIFMs and 11 UK UCITS fund managers manage funds in Luxembourg6.
The CSSF intends to inform the public through press release or FAQ that UK firms operating in Luxembourg under the freedom to provide services or through a branch will be able to continue their activities for a limited period of time, but they will have to contact the CSSF to inform them of their activities in Luxembourg and on their post-Brexit plan.
It is likely that the CSSF will grant them a six-month period within which this plan must be submitted to it. This plan will result in either the cessation of the company's activity in Luxembourg, the application for a license in Luxembourg, or the transfer of the activity to one of the other EU Member State7.
CSSF will communicate further in due course to the public as regards the actions to be taken by UK firms to benefit from the transitional period provided for in the Brexit Laws.
1The EU passport allows credit institutions, investment firms and fund managers to provide services authorised in their Member State to clients in the territory of one or more other Member States, either under the freedom to provide services or in free establishment, or by the use of a tied agent, subject to a simple notification from the home competent authority to the host competent authority.
2The Law of 15 June 2004 relating to the Investment company in risk capital is not one of the investment funds law amended by the Second Brexit Law.
3UCITS IV means Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in securities.
5AIFMD means Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers.
6However, uncertainties as to the exact number of companies among these truly active in Luxembourg exist for the simple reason that these companies are not obliged to declare whether they are active or not and that foreign institutions, holding information on this subject, do not always inform the CSSF.