Like many other countries, Luxembourg is preparing for the withdrawal of the United Kingdom from the European Union without the conclusion of a withdrawal agreement based on Article 50 (2) of the Treaty on European Union (Hard Brexit). In uncertain times, where the final solution is put off week by week, the Luxembourg government is trying to provide certainty, foresight and stability to its residents and the financial industry. For that purpose, several legislative proposals are being discussed currently and will be voted on in the coming days or weeks. Two of the proposals are of specific importance for the investment fund industry.

Bill 74011 aims, in the case of a Hard Brexit only, to confer to the Luxembourg financial sector regulator (Commission de Surveillance du Secteur Financier – CSSF) and the insurance regulator (Commissariat aux Assurances – CAA) the power to treat companies and institutions, which have existing relations with counterparties in Luxembourg, as being of "EU origin" temporarily. The concerned entities would thus continue to benefit from the various economic rights and freedoms (the so-called EU passport) offered by EU legislation for a maximum period of 21 months from the date of withdrawal.

Unlike Bill 7401, Bill 7426, introduced in the Luxembourg Parliament on March 20, 2019, provides for transitional measures in terms of investment restrictions and marketing for Luxembourg-based investment funds, irrespective of a Hard or a soft Brexit, to ensure the smooth functioning and stability of the financial markets, the continuity in Luxembourg of the activity conducted by the undertakings for collective investment in transferable securities (UCITS) registered in the EU or in the United Kingdom (UK UCITS) as well as the protection of the investment funds' investors interest.

In that respect, Bill 7426 aims to grant a grandfathering period of 12 months maximum from the date of withdrawal:

  • For the Luxembourg-based investment funds to cure any potential non-compliance under their respective investment policies directly resulting from the UK leaving the European Union. Such grandfathering would apply only to (i) investments made prior to the withdrawal date, and (ii) to situations of non-compliance which are the direct consequence of this withdrawal;
  • For the UK UCITS managed by a UK management company to continue marketing to retail investors in Luxembourg, provided that (i) they were authorized for marketing retail investors in Luxembourg at the time of the withdrawal and (ii) the UK UCITS is managed by a UCITS management company licensed in accordance with the UCITS Directive2 by the British authorities. To be noted that after the withdrawal, those funds will no longer qualify as UCITS but as third country alternative investment funds (AIFs) within the meaning of the AIFMD 3; and
  • For the UK UCITS managed by a management company established in another EU Member State (not in the UK) to continue marketing to retail investors in Luxembourg, provided that (i) they were authorized for marketing retail investors in Luxembourg at the time of the withdrawal and (ii) the management company also qualifies as a management company under the UCITS Directive and as alternative investment fund manager.

After the grandfathering period, the UK management company will have to comply with the same rules as another third-country manager, marketing a non-EU AIF into Luxembourg.

With regard to services provided via delegation to funds registered in Luxembourg after Brexit, the CSSF has in its press-release of 19/05 already clarified that UK based asset managers will be able to provide by delegation investment management/portfolio management and/or risk management services to Luxembourg registered funds without any disruption post-Brexit, under the condition that the UK delegate meet certain requirements. These notably include the following: (i) The managers are authorized or registered for the purpose of asset management; (ii) The managers are subject to prudential supervision; and (iii) Cooperation between the UK FCA as the manager's supervisory authority and the CSSF is ensured. On February 1, 2019, the European Securities and Markets Authority (ESMA) has stated that Memoranda of Understanding (MoUs) have been concluded with the Financial Conduct Authority (FCA) of the United Kingdom, therewith confirming that the three conditions are met.

Footnote

1 First constitutional vote took place on 26 March 2019, dispense from second vote requested and expected.

2 Directive 2009/65/EC on undertakings for collective investment in transferable securities.

3 Directive 2011/61/EU on alternative investment fund managers.

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