In anticipation of the UK leaving the EU (or simply “Brexit” as it is more commonly referred to) without an agreement in place (the so-called “Hard Brexit” scenario), the Luxembourg legislator has taken swift action to facilitate a smooth transition for those who may be most affected – it has adopted two new laws for the Luxembourg financial sector.
On April 11th 2019, a new law of 8 May 2019 was published relating to the measures to be taken in relation to the UK’s withdrawal from the EU, and amending:
- the law of 5 April 1993 on financial sector;
- the law of 10 November 2009 on payment services;
- the law of 17 December 2010 on undertakings for collective investment;
- the law of 12 July 2013 on alternative investment fund managers;
- the law of 7 December 2015 on the insurance sector; and
- the law of 18 December 2015 on resolution, recovery and liquidation measures of credit institutions and some investment firms; (hereinafter the “Financial Sector Brexit Law”).
Pursuant to the Financial Sector Brexit Law, extraordinary powers are vested in the Luxembourg competent authorities – the CSSF and the Commissariat aux Assurances (“CAA”) in order to maintain financial stability and ensure consumer protection in the context of a Hard Brexit.
On a case-by-case basis, the CSSF and the CAA may decide on the right for UK companies to continue providing services or for a branch office to continue operating in Luxembourg following a Hard Brexit, but for a maximum period of 21 months. This power is limited to contracts concluded before the Hard Brexit or to contracts concluded thereafter where there is a close link with prior existing contracts. These remedial powers granted to the CSSF concern UK credit institutions, UK investment firms, UK payment services providers, UK electronic money institutions as well as UK UCITS management companies and UK AIFMs. The corresponding powers granted to the CAA concern insurance and reinsurance companies.
Furthermore, the Financial Sector Brexit Law shall extend to certain third country payment and securities settlement systems the protection which is afforded to EEA systems (under the Settlement Finality Directive) against the insolvency of a Luxembourg participant. To benefit from this protection, the third country systems must be admitted to a list managed by the Luxembourg Central Bank.
On April 11th 2019, another new law of 8 May 2019 was published relating to the measures to be taken in relation to the UK’s withdrawal from the EU, but amending only the following laws:
- the law of 17 December 2010 on undertakings for collective investment; and
- the law of 13 February 2007 relating to specialized investment funds.
(hereinafter “the Financial Sector – UCI Brexit Law” and together with the Financial Sector Brexit Law, the “Brexit Laws”).
The Financial Sector – UCI Brexit Law provides for transitional measures in case of not only a Hard Brexit scenario but any Brexit scenario.
Pursuant to this Law, in case of a Hard Brexit, the CSSF is empowered to allow:
- a UK-established UCITS with a UK management company to continue marketing to Luxembourg retail investors for a period of 12 months;
- a UK-established UCITS with a non-UK management company to continue marketing to Luxembourg retail investors for a period of 12 months if they are authorized as an AIFM prior to Brexit
Furthermore the Financial Sector – UCI Brexit Law introduces a notion of passive infringement to deal with any potential breach of investment restrictions in a UCITS, Part II Fund or SIF as a consequence of a Brexit (not only a Hard Brexit). Such funds will have 12 months to rectify passive breaches relating to positions taken prior to the withdrawal date.
With these two new laws, the Luxembourg financial sector is hopefully well-positioned to face Brexit head-on, whenever it may occur (if at all). In the meantime, the CSSF has announced in its Press Release 19/18 regarding the new Brexit Laws, that it is adopting a wait-and-see approach, noting that it will inform the public in due course, of any actions to be taken by UK firms, to benefit from the transitional period provided for in those laws.