The Provision Of Investment Services In Luxembourg In A Post-Brexit World: What You Need To Know

So what are the consequences of Brexit for the financial sector? In this article, we analyse whether UK entities may still provide investment services to Luxembourg clients and, where this is the case, under which conditions. In this respect, the applicable regime varies depending on the category of clients which receives the relevant investment services: (i) retail and professional clients on demand on the one hand (A); and (ii) eligible counterparties and professional clients per se on the other hand (B). In both cases, certain exceptions are available (C).

I. The provision of investment services to Luxembourg clients

Even though this article focuses on investment services, other financial services are also impacted by Brexit. This is, for example, the case for banking, payment and insurance services. A credit institution wishing to service clients in the EU, and more specifically in Luxembourg, will need to verify the applicable regime in order to ascertain whether it may enter into business relationships with Luxembourg clients. The investment funds’ industry is also impacted by Brexit and we have noticed in Luxembourg substantial relocations and reorganisations as a result thereof.

The regime applicable to the provision of investment services to Luxembourg clients by third country firms (i.e. established outside the EU) is set out under Directive 2014/65/EC on markets in financial instruments (MiFID), such as implemented under Luxembourg law and Regulation (EU) No 600/2014 on markets in financial instruments (MiFIR). National specificities should furthermore be taken into consideration.

A. Retail and professional clients on demand

Pursuant to Luxembourg law[i], third country firms wishing to provide investment services and ancillary services[ii] to retail and professional clients on demand[iii] are required to establish a branch in Luxembourg. Such third country firms shall be subject to the same authorisation rules as credit institutions and investment firms incorporated under Luxembourg law. The authorisation is subject to certain requirements (the requesting firm is duly authorised, existence of a cooperation arrangement between the Commission de Surveillance du Secteur Financier (CSSF), the Luxembourg supervisory authority for the financial sector, and the relevant competent authority of the country where the requesting firm is established, etc.). The authorisation shall be granted after careful examination by the CSSF of a complete application file. Finally, the relevant branch, once authorised, will be required to comply with certain provisions of Luxembourg law and relating notably to the rules of conduct.

In practice and to the best of our knowledge, few UK firms have chosen this path, rather electing for the full-fledged subsidiary, duly authorised as an investment firm under Luxembourg law. In turn, this investment firm is able to act as parent undertaking for the former branches of the UK firm established in various EU jurisdictions. Furthermore, the full-fledged investment firm benefits from EU passporting rights and may thus service clients established in other EU jurisdictions on a cross-border basis.

B. Eligible counterparties and professional clients per se

Third country firms, such as UK financial institutions, wishing to provide investment and ancillary services to this category of clients will have the choice of either establishing a branch in Luxembourg or providing their services on a cross-border basis[iv].

In the first case, conditions for establishing a branch in Luxembourg are the same as those applicable to credit institutions and investment firms incorporated under Luxembourg law.

In the second case, the relevant third country may register with the European Securities and Markets Authority (ESMA) in accordance with the provisions of MiFIR. However, in the absence of an equivalence decision taken by the European Commission in accordance with Article 47(1) of MiFIR or during a transitional period following such decision, a Luxembourg national regime is available.

Under the national regime, the provision of services to eligible counterparties and professional client per se will be subject to a specific authorisation to that effect granted by the CSSF upon compliance with the following conditions:

• the relevant third country firm is authorised in its jurisdiction to provide the investment services and activities it wishes to provide in Luxembourg;
• it is subject to a supervision and to authorisation rules that the CSSF deems equivalent to those laid down in the LFS; and
• the cooperation between the CSSF and the supervisory authority of this firm is ensured.

The relevant third country firm will be required to submit to the CSSF a request which takes the form of an application file with relevant appendices.

This authorisation enables the third country firm to service Luxembourg clients on a cross-border basis.

Again, both of the above (branch or national regime) have rarely been chosen by UK firms as a solution following Brexit. In particular, the temporary nature of the national regime does not give the necessary comfort to UK firms which are looking for a more permanent solution. On the contrary, we have observed that the vast majority of such UK firms rather rely on exceptions for the provision of their services to Luxembourg clients.

C. Exceptions

There are several exceptions to the aforementioned regimes,  notably the following:

• the own exclusive initiative of the relevant clients[v];
• the provision of services in Luxembourg.

Under the first case, the aforementioned provisions will not be applicable in case the provision of investment services and ancillary services is requested from the third country firm at the own exclusive initiative of the relevant client (whatever the category of client concerned). The fact that the client takes the initiative of requesting a service from the third country firm will enable the latter to provide such service without entailing compliance with the aforementioned requirements. This will be the case, however, only for the specific service requested by the client in relation to the specific category of investment products. The third country firm will thus not have the ability to market new investment services or new categories of investment products to such clients following the initiative of the client. Guidance as to what constitutes effectively the own exclusive initiative of the client has been provided by ESMA in its questions and answers on investor protection[vi]. We will merely underline herein that this exception should be construed restrictively.

Finally, another exception is available for eligible counterparties, professional clients per se and professional clients on demand. Indeed, third country firms have the ability to provide investment services and ancillary services to these clients on a mere cross-border basis where the characteristic performance of the relevant service is not provided whilst being in Luxembourg[vii]. Therefore, UK firms will be able to service these clients without triggering authorisation or notification requirements. This exception is, however, only available for clients in Luxembourg and does not enable the relevant UK firm to service clients established in other jurisdictions. 

II. Conclusion

Luxembourg has been able to position itself as a prime location for financial actors in the context of Brexit. Entities have relocated to Luxembourg with the establishment of fully authorised subsidiaries thereby enabling international groups to continue servicing clients in the EU. Even though such entities have endeavoured to keep their substance in Luxembourg to the minimum, this has nonetheless resulted in job creations and a bolstering of the financial sector’s attractiveness. Apart from such entities which have chosen to relocate, other financial actors have elected to merely rely on exceptions for the provision of services to Luxembourg clients. In this respect, the recent guidance of the CSSF on the notion of provision of services in Luxembourg has facilitated the provision of services by UK entities on a mere cross-border basis[viii]. This interpretation has been most welcomed and has enabled, to a certain extent,  the alleviation of discrepancies amongst entities belonging to the financial sector.

Footnotes:

[i] Article 32-1 (2) of the law of 5 April 1993 on the financial sector, as amended (the LFS)

[ii] Annex II, Sections A and C of the LFS

[iii] Annex III of the LFS

[iv] Article 32-1 (1) of the LFS

[v] Article 32-1 (3) of the LFS

[vi] ESMA35-43-349

[vii] CSSF circular letter 19/716 as amended.

[viii] CSSF circular letter 20/743 which amends the CSSF circular letter 19/716

Aurélia Viémont
Aurélia is Partner in the Banking & Finance team of CMS Luxembourg. She is a regular author for various law journals and publications.