The CSSF has set out in a press release of December 7 the implications for the fund industry of the end of the UK’s 11-month transition period following its withdrawal from the EU on January 31.

Up to now EU law and regulations have continued to apply in the UK and British-domiciled  entities have been able to provide services in Luxembourg under EU single market passporting rights, but these will expire at the end of the year (December 31, 2020) .

The CSSF notes that this change will affect all UK managers on a cross-border basis of  UCITS and alternative investment funds domiciled in Luxembourg, regarding passporting rights for cross-border marketing of UCITS and AIFs in Luxembourg and throughout the European Economic Area. The loss of passporting rights will also apply to entities established in Gibraltar.

Loss of passporting for cross-border management of Luxembourg funds

All Luxembourg funds currently managed by a UK manager will need to appoint an EU-domiciled manager in order to maintain EU passporting rights. Existing regulatory notifications of cross-border management of EU funds from the UK under the UCITS and AIFMD regimes will expire at midnight on December 31.

Successor notifications must be carried out according to the applicable laws in the home member state of the newly appointed EU manager. The CSSF must be informed of a change by a Luxembourg-domiciled fund to a manager in the grand duchy or in another EU jurisdiction.

Under limited circumstances Luxembourg alternative investment funds (AIFs) under supervision of the CSSF and whose direct or indirect investors are defined as professional investors may continue to be managed by existing UK managers, although they will no longer benefit from the manager’s passporting rights. This must be notified to the CSSF at the latest by December 31; investor approval is required unless the constitutive or information documents already provide for measures to be taken in the event of Brexit.

Luxembourg investment fund managers seeking to continue currently managing UK funds or operating in the UK through a branch must apply for the UK’s Temporary Permissions Regime and inform the CSSF that they have done so. Luxembourg managers of UK UCITS must be authorised by the CSSF to continue to do so after December 31 because the funds will no longer be covered by the UCITS regime and will henceforth be treated as AIFs in Luxembourg and the EU, as long as they meet the AIFMD criteria.

End of passporting for cross-border distribution of funds in Luxembourg

UK fund managers losing passporting rights for cross-border distribution of funds into Luxembourg must issue a notification to withdraw from cross-border distribution under the current regime applicable and submit a new notification or request for authorisation, depending on the new fund management arrangements, such as a cross-border notification for distribution into Luxembourg through the home regulator of an EU manager replacing a UK entity.

Loss of passporting rights also applies to European Venture capital (EuVECA) funds , European social entrepreneurship (EuSEF) funds and European Long-Term Investment Funds (ELTIFs) managed in the UK and marketed in Luxembourg.

In cases of so-called de-notification, the CSSF must be informed whether the fund or any sub-funds will retain Luxembourg investors and whether a new notification for post-transition marketing will be submitted.

Any fund subject to a marketing de-notification that will continue to have Luxembourg investors after the end of the transition period but will not conduct further marketing in the grand duchy must be registered with the CSSF and provide ongoing reporting to the regulator as long as it retains Luxembourg investors. This does not apply to UK AIFs with an EU management company that undertake no further marketing after December 31.

New notifications or requests for authorisation for cross-border marketing into Luxembourg must be made under the 2010 investment fund legislation or the AIFM law, taking into account the required distinction between marketing of AIFs to professional and retail investors. Marketing of UK funds automatically qualifies as marketing of third-country AIFs in Luxembourg, and UK managers are considered third-country managers from January 1.

Marketing in Luxembourg to professional and retail investors

Marketing to professional investors in Luxembourg after December 31 must take place mainly under the provisions of Article 37 of the AIFM law, covering the marketing in Luxembourg of UK AIFs managed by an EU AIFM, or Article 45, covering the marketing of EU or third-country AIFs with a UK manager. Notification to the CSSF under Article 45 must be made before the start of the marketing in Luxembourg, and automatically triggers de-notification under the pre-Brexit regime. Notification under Article 37 is required only when active marketing in Luxembourg will take place or continue after December.

The CSSF also notes that Luxembourg AIFMs currently managing UK AIFs and that have issued notification of marketing to professional investors in other member states will need to review marketing requirements for the funds after January 1, which are subject to the provisions in each country on marketing of third-country AIFs.

Marketing to retail investors in Luxembourg will require authorisation under the 2010 legislation for UK or non-UK funds other than closed-ended vehicles managed by a UK manager or for UK funds managed by a EU manager; only regulated funds can be marketed under these provisions. The procedural details regarding requests for authorisation for marketing in Luxembourg under the 2010 law will be published by the CSSF later.

Delegation of portfolio or risk management to UK entities

The CSSF notes that Luxembourg’s fund legislation permits delegation of investment fund manager functions including investment or portfolio management and risk management to entities outside the EU as long as the delegate entities are authorised or registered for asset management and are subject to prudential supervision, that supervisory co-operation is in place between the CSSF and the entity’s home regulator – in this case UK’s Financial Conduct Authority (FCA).

On February 1, 2019 ESMA, EU national securities regulators and the FCA signed a multilateral memorandum of understanding covering supervisory cooperation, enforcement and information exchange between EU national regulators and the FCA, allowing them to share information in areas including market surveillance, investment services and asset management. The agreement, confirmed on July 17, 2020, allows activities such as the delegation of fund management functions to continue to be carried out by UK entities on behalf of investment fund managers in the EEA.

Compliance with investment policy and eligibility issues

After the transition period, any non-compliance with investment rules or policies triggered by the withdrawal of the UK from the EU will be considered active breaches. The CSSF highlights provisions related to structures such as a UCITS feeder fund in Luxembourg investing in a UCITS master fund in the UK, given that UK UCITS will henceforth be considered ‘other UCIs’ under the 2010 law, and investments in them may not in aggregate exceed 30% of the assets of the Luxembourg UCITS.

In addition, the EU’s 2017 Money Market Funds Regulation states that deposits with a credit institution with a registered office in a third country is an eligible investment by a money market fund only if the institution is subject to prudential rules considered equivalent to those in the EU. Currently this will not be the case from January 1, 2021 for banks whose registered office is in the UK.

Secondment of staff

Under UCITS and AIFMD subsidiary legislation, investment fund managers in Luxembourg may use seconded staff in the provision of portfolio management services, and the CSSF says this remains acceptable, as long as the secondees comply with applicable requirements and the fund manager ensures they are appropriately supervised. The requirements include secondees’ physical presence in the premises of the Luxembourg manager, although travel for professional purposes is admissible. The CSSF must be notified in advance of any use of secondments.

The regulator also underlines the need for market participants to reorganise certain functions and specifically the marketing function, if it is staffed with secondees from the UK that are not always physically present in Luxembourg because of business travel. Reorganisation of affected functions should in principle take place before December 13, with regard to the  Covid-19 pandemic.

The CSSF’s full press release 20/26 on the changes to the rules governing funds, managers, delegation and investment policy can be viewed here.