Luxembourg Proposes 21-Month Grandfathering Period in a "Hard Brexit" Scenario
By Gus Black, Patrick Goebel, Marianna Tothova and Christine Renner, Dechert LLP
Published: 21 March 2019
The Luxembourg government has proposed legislation (Draft Bill)1, which would allow UK financial service providers to continue rendering certain services in Luxembourg for a period of up to 21 months after the date when the UK withdraws from the EU (Exit Date). This would potentially allow UK-based AIFMs or UCITS management companies to continue to directly manage their existing Luxembourg funds following a "hard Brexit" during the transitional period.
The Draft Bill aims to entrust the Luxembourg supervisory authority of the financial sector, the Commission de Surveillance du Secteur Financier (CSSF), and the Luxembourg supervisory authority for the insurance sector, the Commissariat aux Assurances (CAA), with certain limited powers to safeguard financial stability should the UK withdraw from the EU without an agreement. The purpose of the Draft Bill is to allow the CSSF and the CAA to take temporary measures to limit the risks that might be caused by such a "no-deal" withdrawal, and ensure an orderly transition with the aim of continuing the proper functioning of the financial markets and safeguarding the interests of the Luxembourg financial sector, its participants and their clients.
Powers to the CSSF and CAA
For a period of 21 months after a "no-deal" Brexit, the CSSF and the CAA, each within its field of competence, would be able to allow UK credit institutions, payment institutions, investment firms, UCITS management companies, AIFMs and insurance and re-insurance companies (each, a UK Service Provider) to continue servicing their Luxembourg-based clients, by creating a legal fiction that their pre-existing EU passport continues to be in effect. However, such measures may be applied only where the UK Service Provider: (i) has properly passported its services into Luxembourg before the Exit Date; and (ii) has entered into an agreement with the relevant Luxembourg client prior to the Exit Date, or after the Exit Date but only for so long as such agreement is connected closely to agreements entered into before the Exit Date.
Should the Draft Bill be approved, a UK-authorised AIFM or a UK management company could be allowed to continue to manage a Luxembourg UCITS or AIF for a maximum period of 21 months after the Exit Date. If the entity marketing the relevant Luxembourg UCITS or AIF was notified in Luxembourg prior to the Exit Date, such entity could also be allowed to continue to market the relevant UCITS or AIF in Luxembourg.
While the Draft Bill notes that the CSSF and the CAA may continue to apply the relevant provisions relating to the passport, it unfortunately does not provide guidance as to the process to be followed by a UK Service Provider to benefit from this grandfathering.
The Luxembourg government points out in the recitals to the Draft Bill that the proposal follows similar legislative initiatives of the German and French governments.
The German draft bill provides that similar powers would be given to the German supervisory authority, Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), after this bill has been lodged with and discussed in the German Bundestag. A short bill on the national transposition of the withdrawal agreement had been lodged previously.
France adopted an omnibus law in January of this year that derogated powers to the government, but no sector-specific laws have yet been adopted or lodged.
Similar to France, Ireland has prepared an omnibus bill comprised of 17 parts that, if passed, will be implemented by the relevant individual Ministers at the appropriate time.
The Luxembourg Budget and Finance Commission will discuss the Draft Bill in one of its next sessions. The State Council will also review the Draft Bill and might request further clarification regarding the roles of the CSSF and the CAA, as these roles are arguably vague in the current text. Time pressure to enact the Draft Bill is high, with the Exit Date (currently expected to be 29 March 2019) less than 50 days away.
It was recently announced that an MoU will be entered into between the EU regulators and the FCA in case of a "no-deal" Brexit. This MoU would aim to ensure that delegation of portfolio management to UK asset managers by EU AIFMs and management companies will continue to be allowed in case of "no-deal" Brexit.
The Draft Bill presents an important attempt by the Luxembourg government to ensure the stability of the Luxembourg financial markets, by allowing UK AIFMs and UK management companies to continue providing certain services in Luxembourg for a period of up to 21 months after the Exit Date. This would provide UK asset managers with additional time to rearrange their activities and adapt to the new regulatory landscape as it unfolds in the coming months.
1 Projet de loi relative à des mesures à prendre en relation avec le secteur financier en cas de retrait du Royaume-Uni de Grande Bretagne et d'Irlande du Nord de l'Union européenne. Bill of law n°7401 on measures to be taken in relation to the financial sector in case of withdrawal of the UK from the EU. The Draft Bill was lodged with the Luxembourg Parliament on 31 January 2019, and proposes to amend, inter alia: the law of 5 April 1993 on the financial sector, as amended; the law of 17 December 2010 on undertakings for collective investment, as amended; and the law of 12 July 2013 on the alternative investment fund managers, as amended.