Article published in the IFC on 17/11/2021
Following the end of the transition period agreed upon between the United Kingdom and the European Union and the subsequent withdrawal of the UK from the EU on 1 January 2021, the provision of investment services in Luxembourg by UK entities is notably subject to the so-called “Luxembourg national third-country regime” [i] . In the absence of a decision which is yet to be rendered by the European Commission [ii] , this temporary national regime thus remains applicable to this day.
In this respect, on 10 June 2021, the CSSF [iii] published an updated version of its frequently asked questions (FAQs) on (i) the law of 17 December 2010 relating to undertakings for collective investment schemes, as amended (the 2010 Law)[iv] and (ii) the law of 12 July 2013 on alternative investment fund managers, as amended (the 2013 Law)[v]. These updated FAQs specify under which circumstances MiFID II [vi] , including the temporary national third-country regime, applies to investment fund managers (IFM), their third-party delegates and investment advisors. Even though the regime in itself is not new, this practical guidance has been welcomed by the industry, dissipating any remaining doubts on this regime.
The FAQs concentrate in particular on two investment services which are most often relied upon by IFMs: portfolio management and investment advice. But before detailing the guidance set out by the CSSF, it is worth briefly reminding the current regime applicable in Luxembourg to the provision of investment services by third country firms.
The Provision Of Portfolio Management Activities And Investment Advice To Luxembourg IFMs
A. National third-country regime
Under the currently available national third-country regime, the rules applicable to the provision of investment services or activities in Luxembourg by third-country firms differ depending on the type of clients to be serviced, according to the client classification set out under MiFID II.
An investment service or activity must be considered as provided in Luxembourg, i.e., on the territory of Luxembourg, where:
- the third-country firm has an establishment (e.g., a branch) in Luxembourg;
- the third-country firm provides an investment service to a retail client established or situated in Luxembourg; or
- the place at which the “characteristic service” is supplied, i.e., the essential service for which payment is due is Luxembourg [vii] .
In the above cases, the provision of investment services or activities in Luxembourg by third-country firms is subject to the following regimes:
- the servicing of retail or professional upon request clients is subject to the establishment of a branch of the third-country firm in Luxembourg;
- the servicing of per se professional clients or eligible counterparties may be done:
- through the establishment of a branch in Luxembourg; or
- from the third-country firm on a cross-border basis upon prior registration with the CSSF (provided that the country of origin of the third-country firm has been deemed as equivalent by the CSSF [viii] , which is the case for the UK).
It must be borne in mind that the above regime does not apply where an investment service or activity is provided at the own exclusive initiative of the client, regardless of its classification, under the so-called “reverse solicitation” exemption.
B. Portfolio management
In the updated FAQs, the CSSF clarifies that if, in principle, the management of collective funds by authorised IFMs does not qualify as an investment service under MiFID II (thus excluding IFMs from the scope of MiFID II when performing the functions included in the collective portfolio management), such exemption does not cover the carrying out of collective portfolio management activities by a third-party or another authorised IFM under a delegation agreement.
In this respect, the CSSF specifies that an IFM delegating the collective portfolio management activity to a third-party becomes the client of this delegated third-party. The relevant third-party performing this activity falls within the scope of MiFID II where all of the following cumulative conditions are complied with:
- the service rendered qualifies as an investment service or activity (Annex I of MiFID);
- the service relates to transactions on financial instruments (Section C, Annex I of MiFID); and
- the service is rendered by a third-party established in the EU or is considered to be provided in Luxembourg by a third party established outside of the EU [ix] .
As a consequence, UK-based entities carrying out collective portfolio management in their capacity as delegates of Luxembourg IFMs will need to carefully analyse beforehand the conditions under which they will be able to carry out such activities and whether they will be subject to the MiFID II third country regime [x] .
C. Investment advice
The CSSF specifies that since the service of investment advice is not included in the functions covered by the activity of portfolio management, third parties providing investment advice in relation to financial instruments to IFMs fall within the scope of MiFID II (subject, however, to any MiFID II exemptions, such as e.g., the group exemption).
Therefore, in the same manner, UK service providers providing investment advice to Luxembourg IFMs will need to give careful consideration as to the conditions pursuant to which they will be able to carry out their activities towards Luxembourg professionals [xi] .
Conclusion
Luxembourg-based IFMs should qualify as per se professional clients under the MiFID II client classification. Therefore, provided that the UK entity does not have a permanent establishment in Luxembourg, the provision of portfolio management or investment advice to Luxembourg-based IFMs by a UK entity should be subject to a prior registration with the CSSF only where such services would be considered as provided in Luxembourg under the “characteristic performance” test. This assessment should be carried out on a case-by-case basis and depending on the type of service provided.
Hence, UK entities which intend to provide services to Luxembourg IFMs need to be prudent and assess carefully whether the carrying out of their activities would trigger regulatory requirements. Whilst certain exemptions are available, in most cases the provision of these services will trigger the application of the Luxembourg national third-country regime and subject these entities to registration requirements. The process is rather straightforward and to be considered as merely temporary until the European Commission renders an equivalence decision on the UK.
