Guidance from CSSF on third country firms investment services

In brief:

• The CSSF Circular 19/716 applies with immediate effect as of 10 April 2019.
• Where a third country firm (i.e. a firm established in a country outside the European Economic Area) provides MiFID 2 Services in Luxembourg, it shall comply with Article 32-1 of the law of 5 April 1993 on the financial sector, as amended (the “Law on the Financial Sector”). The law provides for different applicable regimes according to the type of client involved (i.e. retail clients, professional clients on request, per se professional clients, and eligible counterparties).
• Where MiFID 2 Services are provided at the Luxembourg client’s own exclusive initiative, the third country firm can rely on the so-called ”Reverse Solicitation” exemption and will not be subject to any Luxembourg authorisation requirements.
• CSSF Circular 11/515 referring to authorisation requirements in relation to services provided while being physically present on the Luxembourg territory (i.e. fly-in) no longer applies to third-country firms with respect to the provision of MiFID 2 Services. Hence, it would appear that where the third-country firm provides MiFID 2 Services in Luxembourg by remote means from outside the Luxembourg territory (i.e. reach-in), Luxembourg licensing requirements will be triggered.

The type of client

• MiFID 2 Services provided to retail clients and professional clients on request

When providing MiFID 2 Services to retail clients and professional clients on request, it is clear that the third-country firm is required to establish a branch in Luxembourg. The branch will be subject to the same authorisation requirements as Luxembourg investment firms.

• MiFID 2 Services provided to professional clients and eligible counterparties

A third-country firm can provide MiFID 2 Services in Luxembourg to professional clients and eligible counterparties (i) by establishing a branch in Luxembourg, (ii) on the basis of the ESMA Register or (iii) pursuant to the “National Regime”. In each case, the third country firm will, before offering any MiFID 2 Services, be required to inform its clients that it is not allowed to provide such services other than to eligible counterparties and per se professional clients and that it is not subject to supervision in the European Union.

ESMA is expected to publish the ESMA Register following the adoption by the European Commission of an equivalence decision. This will allow a third country firm to provide MiFID 2 Services in the entire EU market without further licensing requirements.

The National Regime

Until the ESMA Register becomes available, the CSSF may adopt its own equivalence regime, the National Regime. The CSSF Circular 19/716 provides guidance on the conditions applicable to a third country wishing to benefit from this.

A third country is required to make an application with the CSSF and the CSSF will analyse whether the following conditions are satisfied:

• it is authorised to provide the relevant MiFID 2 Services in its home country;
• it is subject to supervision and authorisation rules that the CSSF deems to be equivalent to those of the Law on the Financial Sector; and
• cooperation between the CSSF and the supervisory authority of the home country of the third-country firm is ensured.

The Circular clarifies that third countries that are not signatories of the IOSCO Multilateral Memorandum of Understanding and those that do not have adequate legislation and supervision on the fight against money laundering and terrorist financing (AML/CFT) will in principle not be considered as equivalent. Equivalence is also assessed with reference to the list of high-risk and/or non-cooperative jurisdictions established and assessed by the Financial Action Task Force (FATF).

The CSSF will publish a list of countries that it considers as equivalent for the purpose of the National Regime that will be updated from time to time. Where the CSSF takes an equivalence decision and at a later stage, the European Commission has adopted an equivalence decision for the same third country, the third country firm will be able to continue to provide MiFID 2 Services in accordance with the National Regime for a period of up to three years after the adoption of the equivalence decision by the European Commission on the third country concerned.

Cooperation will take the form of an agreement entered into with the supervisory authority, which is usually a memorandum of understanding. The cooperation relates to the exchange of information, supervision of the conduct of business rules, and ALM/CFT.

The National Regime Application Process

The application form to be used is attached as Annex II to the Circular and shall be sent by email to direction@cssf.lu together with supporting documents and information. This includes a copy of the license, the firm’s articles of association, and the three last audited financial statements. The firm must also provide a written confirmation that it will only provide the relevant MiFID 2 Services to per se professional clients and eligible counterparties. The application form should contain information regarding the legal framework applicable to the third-country firm in its home country, the firm’s plans in Luxembourg, and arrangements for safeguarding investor protection. The firm shall provide the CSSF with all information it needs to assess equivalence, which can include, where appropriate, independent legal advice on the equivalence.

The Reverse Solicitation exemption

The Reverse Solicitation exemption applies where the client has requested a specific service at its own initiative. The Circular clarifies and confirms that the third country firm must assess on a case-by-case and continuous basis the situation to determine whether the exemption continues to apply, notably by taking into account the Questions and Answers published by ESMA.