On 31 January 2019, the Luxembourg Chamber of Deputies published a draft law in relation to a “No-deal” Brexit to avoid potential instability for the Luxembourg financial sector and to ensure the protection of clients/consumers.
The withdrawal of the United Kingdom (UK) from the European Union (EU) will have consequences for British financial sector institutions which currently carry out activities in Luxembourg by relying on the European passport or freedom to provide services. Following its withdrawal, the UK will be considered as a third country. In a No Deal Brexit scenario, deprived from the European passport and in the absence of other arrangements, those companies will no longer be able to carry out financial activities in Luxembourg and their contractual relationships will be uncertain.
In order to avoid uncertainty of contractual relationship causing instability for the financial market and to ensure that clients/consumers will have adequate protection, the Luxembourg government is preparing itself for a No Deal Brexit scenario.
By withdrawing from the EU, UK credit institutions and investment firms will no longer benefit from the mutual recognition licensing regime laid down by the various sectoral European legislation which allow a credit institution, or an investment firm authorised in the UK to carry out its activities in the territory of another Member State.
By no longer being entitled to the European passport, UK credit institutions and investment firms dealing in the EU may be forced to abruptly terminate contractual relationships if they are unable to transfer those contractual relationships to appropriate EU hubs.
In a “No Deal” Brexit scenario, the UK will leave the Single Market and UK firms will lose the right to passport financial services and activities from the UK to the other Member States. To avoid such effect, the Draft Law gives certain power to the Luxembourg Commission de Surveillance du Secteur Financier (CSSF) and the Commissariat aux Assurances (CAA) for the purpose of preserving the proper functioning and stability of the financial market and to guarantee the protection of depositors and investors. The Draft Law attempts to achieve this by amending the existing Luxembourg legislation and by building in certain provisions catering for a potential No Deal Brexit.
The Draft Law aims to ensure the continuity of financial services without any disruption and the temporary conservation of the European passport in Luxembourg for UK firms.
The CSSF and the CAA may allow, during a 21 month-period following the withdrawal of the UK from the EU (the Grandfathering Period), UK institutions to continue to carry out their Luxembourg operations either by the establishment of a branch, or a tied agent or under the freedom of providing services.
The Draft Law if and when adopted, will enter into force on 29 March 2019, coinciding with the scheduled Brexit date.
Credit institutions, MiFID firms and insurance and reinsurance companies
In the event of a “no-deal” Brexit, the CSSF may therefore continue to apply the European Passport regime to UK credit institutions and MiFID firms doing business in Luxembourg for this transitory period. This means that existing entities will be able to continue relying on their passport. In addition, entities wishing to establish a new relationship with the Luxembourg market can do so as if the UK were still a Member State.
Insurance and reinsurance companies incorporated in the UK will also not be treated as originating from a third country by the CAA for this Grandfathering Period.
UK Management Companies
The Grandfathering Period will apply to UK UCITS management companies as well as for UK alternative investment fund managers (together the UK Management Companies). UK Management Companies will be able to keep using their passport during the Grandfathering Period provided that:
- they are authorised by the UK authorities
- management activities are carried out either by an established branch or under the freedom of providing services, and
- UCITS or AIFs they manage are established in Luxembourg.
UK payment or securities settlement systems
The Draft Law introduces the concept of “third party system” to cater for UK payment or securities settlement systems following a No Deal Brexit.
In order to qualify as a “third party system” it must:
- qualify as a system under the existing Luxembourg legislation
- be supervised by the competent authority of a state whose Central Bank holds a stake in the Bank of International Settlement’s capital, and
- be admitted to the Luxembourg Central Bank’s table available on its official website.
The admission to the online table of systems requires a simple application whereby compliance with the conditions is verified and therefore does not entail a lengthy or complicated approval procedure. The intentions of this new concept are that the UK payment systems would fall within this definition and simply have to make the request for admission to the online list to continue carrying out activities in Luxembourg.
The BRRD resolution tools available in case of insolvency proceedings are also extended to “third party systems” to ensure adequate protection.
Continuation of contracts
The Grandfathering Period is based on the principle of continuity of contracts. This Grandfathering Period applies to contracts entered into before the withdrawal of the UK but not to new agreements unless such contracts present “close links” with contracts entered into prior to this date. The Draft Law does unfortunately not precise what “close links” means but from a practical perspective this is aimed at capturing, in particular, derivative contracts with life-cycle events.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.