Third country firms providing investment services on a cross-border basis – challenging times
23 May 2019
New Article 32-1 of the Banking Act 1993 changed materially the way third country firms (that is, firms established outside of the European Economic Area) can provide investment services to Luxembourg-based clients. In particular:
- it will not be possible to serve “retail investors” or “opt-in professional clients” residing in Luxembourg without the establishment of, at least, a branch in Luxembourg (which is subject to requirements applicable to the establishment of a subsidiary in Luxembourg) (Article 32-1(2) of the Banking Act 1993); and
- it will be possible to serve “per se professional clients” and “eligible counterparties” residing in Luxembourg either via a branch (as mentioned above) or through the provision of investment services on a cross-border basis, subject to certain conditions (please see below) (Article 32-1(1) of the Banking Act 1993).
Only few exemptions are available to fall out of the scope of the new Article 32-1 regime, namely:
- he intra-group exemption, where investment services are provided by an entity belonging to the same group of companies as the Luxembourg-based entity that receives the service. This exemption does however apply only to the extent that the entity providing the investment services does so exclusively on an intra-group basis; and
- the reverse solicitation exemption, where the client requests an investment service. This concept must be interpreted in accordance with ESMA’s MiFID II Q&As (available on its website). The location of the characteristic performance of the service, that was once used to determine whether Luxembourg licencing requirements apply (and that is still applicable for other banking and financial services), is no longer relevant with regards to investment services. The location of the client is pivotal. The Luxembourg financial sector regulator, the Commission de surveillance du secteur financier (the CSSF), recently provided guidance on the national regime for the cross-border provision of investment services (and ancillary services, to the extent relevant) by third country firms (where the latter cannot rely on one of the above exemptions) in a CSSF circular 19/7161 (the Circular).
1. Circumstances in which the national licensing regime is applicable
A third country firm may file for an Article 32-1(1) §2 authorisation:
- on a permanent basis, where the European Commission has not yet taken an equivalence decision pursuant to Article 47 MiFIR with respect to the third country in which that firm is established (i.e. whenever the EU third country firm regime under article 46 MiFIR is not available); or
- on a transitional basis, where the CSSF has taken an equivalence decision relating to the relevant third country and the European Commission takes an equivalence decision for the same third country at a later stage (in accordance with the MiFIR regime). In this case, the transitional regime applies up to three years following the European Commission’s decision.
To date, we are not aware of any national equivalence decision taken by the CSSF. In light of the Circular, it seems that the CSSF will take equivalence decisions in relation to third countries as and when a third country firm applies for a Luxembourg licence under article 32-1(1)§2 of the Banking Act 1993.
2. Conditions of the national regime for the third country firms
(i) Conditions relating to the third country firm The third country firm must be authorised, in its home jurisdiction, to provide the relevant MiFID II investment and ancillary services it intends to offer in Luxembourg.
(ii) Conditions relating to third country equivalence The third country firm must be subject, in its country of origin, to supervision and authorisation requirements that the CSSF deems to be equivalent to those set out in the Banking Act 19932.
A third country firm, intending to benefit from the national regime, will be required to provide the CSSF with all the information it needs to assess equivalence, including an independent legal advice on the equivalence to the Luxembourg authorisation and supervisory rules (where appropriate). The list of the equivalent third countries will be published on the CSSF’s website and regularly updated.
(iii) Conditions relating to the cooperation between the CSSF and the third country supervisory authority Cooperation between the CSSF and the authority(ies) supervising the third country firm must be ensured in the form of an agreement (either as a memorandum of understanding (MoU) between the CSSF and the relevant authority(ies) or by the signature of an addendum to an existing MoU).
3. Licensing application process
The Circular sets out the details of the application process. It states that the CSSF will issue its decision upon written application and after the examination of the request submitted to it.
Accordingly, an application form is appended to the Circular and shall be filled in by the third country firm to evidence that the conditions described above are complied with3.
4. Obligations of the third country firm upon obtaining an authorisation
(i) Limited scope of the national licence The Luxembourg authorisation does not grant a European passport to the third country firm. Therefore, it cannot access the whole EU market on the basis of this authorisation.
(ii) Obligations towards the CSSF The CSSF may request third country firms to provide statistical information or periodical reporting. Third country firms must notify the CSSF without delay in writing and in an exhaustive and understandable manner of any change in the information that has been provided to the CSSF to apply for the Luxembourg authorisation.
(iii) Obligations towards the Luxembourg clients Before offering any investment or ancillary services, a third country firm must inform its Luxembourg clients that it is not allowed to provide services to clients other than “eligible counterparties” and “per se professional clients” and that it is not subject to supervision in the European Union (pointing out also the name and contact details of its supervisory competent authority).
5. Third country regime vs. Brexit transitional regime
In the case of a hard-Brexit, UK-based firms providing investment services to Luxembourg clients will, in principle, be considered as third country firms and could therefore apply for the national cross-border regime described above.
However, it is worth noting that a specific Luxembourg (Brexit related) act dated 8 April 2019, has been adopted in Luxembourg to anticipate the consequences of the loss of UK firms’ passporting right and to ensure the continuity of existing contracts and the orderly functioning and the stability of the financial markets in the event of a hard-Brexit (the Brexit Act).
According to the Brexit Act, the CSSF may grant (a priori, on a case by case basis) a maximum period of 21 months, from the date of the withdrawal of the UK from the EU, a derogation from the provisions setting out the requirements applicable to third country firms wishing to provide, among others, investment services in Luxembourg with respect to UK authorised firms, which are currently providing their services in Luxembourg relying on their freedom to provide services.
This derogation in only temporary and will be applicable with respect solely to existing business relationships with Luxembourg clients (or to new contracts concluded with Luxembourg clients provided that they present a close link with existing contractual relationships).
With respect to new contractual relationships with Luxembourg clients or following the expiry of the transitional period, a UK firm willing to provide investment services to Luxembourg clients, will be subject to national regime outlined above.
1. To that end, the Circular expressly provides that the following third countries are, in principle, non-equivalent:
- third countries which are not signatories of the IOSCO Multilateral Memorandum of Understanding; or
- third countries which do not have adequate legislation and supervision with respect to the fight against money laundering and terrorist financing (AML/CFT). The CSSF will assess the condition of equivalence notably in light of the list of high-risk and/or non-cooperative jurisdictions established by the FATF (and its related assessments).
2. In particular, information must be provided on:
- the applicable legal framework (e.g. organisational requirements, conduct of business rules and AML/CTF rules);
- the third country firm’s plans in Luxembourg; and
- the investor protection arrangements from which the Luxembourg clients may benefit.
The application form specifies also the documentation that needs to be provided by the third country firm, which includes (without limitation) up-to-date articles of association, the last three audited financial statements (if available), a copy of the third country firm’s license and various written confirmations on the business.