Spotlight on Luxembourg

With the United Kingdom having left the European Union on 31 December 2020 it is no longer a Member State of the EU. This raises a number of questions for UK firms wanting to do business in Luxembourg. The below is an overview of how a UK firm might go about this as a third country firm.

The National Equivalence Regime for investment services

The National Equivalence Regime has been introduced in Luxembourg whilst we wait for the European Commission to publish an equivalence decision under MiFIR. As part of the implementation of MiFID II into Luxembourg law, the CSSF was given the power to determine which supervision and authorisation rules can be deemed equivalent to those in force in Luxembourg.

This means that a third-country firm can provide MiFID investment services or activities as well as ancillary services in Luxembourg to eligible counterparties and per se professional clients, without setting up a branch in Luxembourg. This does not allow the provision of investment services to retail clients and is not to be confused with a European passport granting access to other EU countries nor as an additional licence.

In order to benefit from the National Equivalence Regime, firms need to complete the standard application form available on the CSSF website and provide a number of supporting documents. There is currently no fee charged by the CSSF for the review of the application and the process itself is quick and straightforward.

The CSSF published its first list of third countries which it considers provide for an effective equivalent system in July 2020 and although it was the moment everyone had been waiting for, the UK was not on this list. Whilst the political discussions had everyone on the edge of their seats, this stalled the process. Nevertheless and as had been expected all along, the CSSF formally announced that the UK was included on this list. We therefore have 7 third countries currently considered to have an equivalent system; Canada, Hong Kong, Japan, Singapore, Switzerland, the US and the UK.

Ever since the introduction of the National Equivalence Regime in spring 2019 many UK firms submitted applications to the CSSF in anticipation of being able to rely on this. Although there was no legal basis for this at the time, the clock was ticking and firms wanted to make sure they could continue to do business in the new year. Since the announcement in December 2020 more UK firms are considering this option and submitting the application to the CSSF.

Providing investment services “in Luxembourg” – CSSF clarification on territoriality and the reverse solicitation exemption

UK firms may also be able to provide investment services on a cross-border basis without triggering Luxembourg licence requirements or having to set up a Luxembourg branch where these services are not being performed “in” Luxembourg. The CSSF has clarified that “in Luxembourg” should be read as being “on the Luxembourg territory”. Fly-in activities where staff come to Luxembourg is therefore not permitted but on this basis investment services can be provided to professional clients (including opt-in professionals) and eligible counterparties where this is being done remotely. To be able to do this the firm should not already have an establishment in Luxembourg and the characteristic performance of the service needs to be outside of Luxembourg. There is no legal definition of characteristic performance and each entity needs to make their own assessment and document this analysis, before providing cross-border services to Luxembourg. In many cases this can lead to the conclusion that no additional licence or notification is required to provide these services to Luxembourg clients.

Like in the other Member States a third country firm can rely on the reverse solicitation exemption although in light of ESMA’s publication last month, it is clear that this is not to be taken as the easy way out. To be able to provided investment services to clients on this basis it is important that the firm has strong internal policies and verifications and that a simple disclaimer will not be good enough. For firms with regular business and more importantly intending to sell new products and services and also engage with new clients, this is not the solution.

UK UCI(TS) become AIFs

Brexit also resulted in UK UCITS no longer being considered UCITS but alternative investment funds (or AIFs). This means, among other things, that UK funds have also lost the right to make use of the marketing passport under the UCITS Directive.

In anticipation Luxembourg drew up a transitional regime before Christmas last year. The law is yet to be voted but the intention is to apply a transitional regime until 31 July 2021 in order to avoid "any legal uncertainty" for Luxembourg investors in UK UCITS. This law would permit a UK UCITS that is registered for the marketing of its units in Luxembourg on 31 January 2021 to continue to do so until 31 July 2021, so long as, at the time the extended transition period ends, the fund is managed by a UCITS management company which is authorised in the UK in accordance with the UCITS Directive. We expect the law to be voted by the end of February at the latest.