Luxembourg Financial Sector Brexit Emergency Law

Summary

On 31 January 2019 the Luxembourg government proposed a so-called “Brexit Urgency bill” in order to address, during a fixed period, any serious disruptions in Luxembourg in case of a no-deal/hard Brexit.

The below is a summary of the draft bill (drafted in French) provided by Dupont Partners who is currently assisting various players in the market, in particular UK AIFMs in using Luxembourg as EU hub for their relevant services, continuing to benefit from their UK expert teams.

Background

On 29 March 2017, the United Kingdom of Great Britain and Northern Ireland notified the European Council of its intention to withdraw from the European Union and Euratom (also known as “Brexit”), on the basis of Article 50 of the Treaty on European Union. The modalities for the United Kingdom’s withdrawal from the European Union remain uncertain, while the British Parliament has just rejected on 15 January 2019 the withdrawal agreement negotiated between the European Union and the United Kingdom.

The departure of the United Kingdom from the European Union will have consequences for the British financial sector companies currently operating in Luxembourg using the European passport. In the event of a disorderly withdrawal from the United Kingdom, these British companies will no longer be able to benefit from the European passport system and will risk losing access to the Luxembourg market from one day to the next.

In particular, such a situation will make it uncertain what will happen to many of the contractual relationships that existed at the time of the United Kingdom’s withdrawal from the European Union on the basis of the European passport between companies in the United Kingdom financial sector and Luxembourg counterparties and which continue to produce effects well beyond such date of withdrawal.

In order to avoid the risks that may arise from such a situation for financial stability, the proper functioning of financial markets, Luxembourg financial sector participants and their clients, depositors, investors, unitholders and policyholders, it is important that the competent Luxembourg authorities have the necessary powers to ensure, where appropriate, the continuity of the above contracts after the United Kingdom’s withdrawal from the European Union for a specified period. Following the example of legislative initiatives under way in other Member States of the European Union, including France and Germany, this bill aims to give the Commission de Surveillance du Secteur Financier (“CSSF”) and the Commissariat aux Assurances (“CAA”) the power to take temporary measures to avoid the above-mentioned risks and ensure an orderly transition.

The Bill amends the main texts of the “financial services” legislation in order to include specific transitional provisions for Brexit. The potential consequences of a disorderly withdrawal on financial sector players, but also and above all on their customer-consumers, namely depositors, policyholders and investors, and even on the Luxembourg economy as a whole, dictate the need for exceptional measures. The powers conferred by the draft law on the CSSF and the CAA are closely defined in terms of their personal, material and temporal scope. They are strictly limited to the scope of competence ratione materiae and ratione personae of the CSSF and the CAA. It should be noted that these powers do not allow the CSSF or the CAA to take measures that would have the effect of restricting the freedom of trade and industry. On the contrary, the bill aims to allow a kind of grandfathering of a currently existing regulatory situation for a limited period of time, all in the public interest of the proper functioning and stability of financial markets and the protection of clients/consumers. The draft law also makes a number of other adjustments relating to payment and securities settlement systems in third countries. Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems was transposed into national law in January 2001.  The relevant provisions are now included in Title V of the amended law of 10 November 2009 on payment services. Recital (7) of the said Directive allows Member States to apply the provisions of the Directive to their own institutions which participate directly in third country systems and to guarantees provided in connection with participation in such systems. With Brexit, this scenario has taken on a new dimension. It is important to ensure that Luxembourg banks and investment firms can continue to participate in third country systems. Many EU countries have recently reacted by transposing recital (7) into national law, such as Denmark, Finland, Sweden, Spain, the Netherlands and Italy.

Other countries, such as France and Hungary, are in the process of adapting their laws. The approach of these Member States is not uniform, but is characterized by some common features:

• an extension of the definition of the term “system” to include third country systems;
• the extension to third country systems of the rule of private international law granting pre-eminence to the laws of the system; and
• a system for the recognition or identification of third country systems.

This draft bill addresses these three main areas.

The amended law of 18 December 2015 on the failure of credit institutions and certain investment firms is adapted to take into account these amendments to Title V of the amended law of 10 November 2009 on payment services.

MAIN CHANGES PICKED OUT BY DUPONT PARTNERS

Article 1 of the draft law changing the Luxembourg law on the financial sector of 5 April 1993

Summary of article 1: “For a period of 21 months starting as of the Brexit bank, UK financial institutions will be allowed to provide services as if they were financial institutions from an EU- member state.”

Rationale: Brexit will have significant consequences for British financial sector companies and their Luxembourg clients.  Unless agreement is reached on the withdrawal of the United Kingdom, companies in the United Kingdom financial sector, including credit institutions and companies providing investment services under United Kingdom law, will become third-country companies and will lose the benefit of the European passport system.

Thus, credit institutions and companies providing investment services under [English or Nothern Ireland][1] law will no longer benefit from the principle of mutual recognition of authorizations laid down by the various sectorial European texts which allow a credit institution or company providing investment services authorized in a Member State to carry on business in the territory of one or more other Member States, either under the freedom to provide services or under the freedom of establishment or by using a tied agent, subject to simple notification by the authorization authority (authorité d’agrément) to the competent authority of the host State.

Considering that the obligations and effects of financial contracts extend in many cases beyond the date of the United Kingdom’s withdrawal from the European Union, the loss of the “European passport” by credit institutions and companies providing investment services under United Kingdom law will make the fate of many of the contracts they have concluded under this regime with counterparties in Luxembourg uncertain.  This legal uncertainty applies in particular to uncleared derivative contracts with companies in the Luxembourg financial sector.  In the event of a disorderly withdrawal from the United Kingdom, credit institutions and companies providing investment services under United Kingdom law could be forced to terminate the contracts in question abruptly if they are unable to extend them or transfer them to contractors in the European Union.  Considering the volume of activities involved, such a situation would pose considerable risks for the Luxembourg counterparties to these transactions and for the proper functioning and financial stability of the Luxembourg financial sector as a whole.

It remains unclear whether a solution to this issue will be put in place at European level before the United Kingdom withdraws from the European Union.  Other European countries with major financial centers, including Germany and France, have therefore initiated legislative processes to be able to mitigate, where appropriate, the above risks posed by the United Kingdom’s withdrawal from the Union.

In this context, Article 1 of the draft law aims to give the CSSF the power to apply after the withdrawal of the United Kingdom from the European Union the provisions of Article 30 of the Act of 5 April 1993 to credit institutions and companies providing investment services under British law which rely at the time of the withdrawal of the United Kingdom on the European passport to carry out banking activities or to provide investment services in Luxembourg.

It is specified that the CSSF may apply the above-mentioned rules only for a maximum transitional period of 21 months after the United Kingdom’s withdrawal from the European Union.  The duration of this transitional period is based on the transitional phase discussed in the negotiations between the United Kingdom and the European Union.  The purpose of a power of attorney granted to the CSSF is to guarantee the continuity of contracts existing at the time of the United Kingdom’s withdrawal from the European Union between these companies and Luxembourg counterparties in order to enable it to act in order to preserve the proper functioning or stability of financial markets in the broad sense, or even to guarantee the protection of depositors and investors.

Since the main purpose is to ensure an orderly transition to the United Kingdom’s third-country status, the draft law specifies that the powers conferred on the CSSF do not extend to the conclusion of new contracts after the United Kingdom’s withdrawal from the European Union, unless it is possible to establish a close link between these contracts and contracts existing at the time of withdrawal.  This exception should in particular make it possible to cover cases where transactions in relation to existing contracts (life-cycle events) give rise to the conclusion of a new contract.

Article 3 of the draft law changing the Luxembourg law of 17 December 2010 relating to undertakings for collective investment

Summary of article 3: “For a period of 21 months starting as of the Brexit UK UCITS management companies will be allowed to provide services as if they were UCITS management companies from an EU- member state.”

The departure of the United Kingdom of Great Britain and Northern Ireland from the European Union scheduled for March 29, 2019 will also have significant consequences for collective investment undertakings established in Luxembourg under Part I of the amended law of 17 December 2010 concerning collective investment undertakings, which in accordance with Directive 2009/65/EC have appointed a UCITS management company authorized by the British authorities until the date of the United Kingdom’s withdrawal from the European Union. In order to in particular to prevent UCITS from being withdrawn from the European Union by the United Kingdom in question, which have designated such a UCITS management company authorized by the authorities British, are in a state of forced liquidation pursuant to, inter alia, the provisions of article 22 of the aforementioned law, and in order to protect investors of these UCITS and for the proper functioning and stability of financial markets within the meaning of Article 3 provides that the CSSF may allow these UCITS, for a period of maximum 21 months from the date of the United Kingdom’s withdrawal from the European Union, to continue to operate with their management company approved by the British authorities.

Article 4 of the draft law changing the Luxembourg law of 12 July 2013 on alternative investment fund managers

Summary of article 4: “For a period of 21 months starting as of the Brexit UK authorized alternative investment fund managers will be allowed to provide services as if they were alternative investment fund managers from an EU- member state.”

The departure of the United Kingdom and Northern Ireland from the European Union scheduled for March 29, 2019 will also have significant consequences for managers of alternative investment funds. As a result, managers based in the United Kingdom and Northern Ireland managing AIFs established in Luxembourg and/or providing services in Luxembourg will lose the benefit of the passport obtained in accordance with Directive 2011/61/EU after the withdrawal of the United Kingdom from the European Union.

In order to protect investors in these alternative investment funds and to the proper functioning and stability of financial markets in the broad sense, Article 4 provides for that the CSSF may allow managers established in the United Kingdom to continue to provide activities and services in Luxembourg insofar as they provided them to the time of withdrawal from the United Kingdom or through a branch, for a maximum period of 21 months from the time of withdrawal of the United Kingdom from the European Union.

Conclusion

As mentioned, this is only a draft bill but Dupont Partners’ experts do not expect much changes to the main text of the draft bill. We will keep you updated on this matter.

For any further information please do not hesitate us.

DISCLAIMER

The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter.

You should not act or refrain from acting on the basis of any content included in this article without seeking legal or other professional advice. The contents of this article contain general information and may not reflect current legal developments or address your situation. We disclaim all liability for actions you take or fail to take based on any content in this article.

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[1] The draft bill mentions British.