Luxembourg Funds and Brexit: Update to UK Managers

With the transition period coming to an end by the end of 2020, many UK managers are questioning the implication of Brexit to the fundraising and management of Luxembourg-based funds. As forecasted in our previous market insights, the CSSF issued a press release today (available here) clarifying the future of UK AIFMs managing Luxembourg funds.

As from the end of the transition period, UK managers will be subject to the following set of new rules and regulations:

(i) The Brexit transition period ends at 11pm (GMT) on 31 December 2020. From this point, the UK will be, in all respect, a non-EU jurisdiction and UK managers will be considered as non-EU managers. Information on options currently available to non-EU managers launching Luxembourg funds can be found here.

UK AIFMs/Lux Funds

(ii) UK AIFMs notifications of cross-border management of funds made under the AIFMD will be terminated on 31 December 2020 and the passport rights of UK AIFMs will lapse. All Luxembourg funds currently managed by UK managers will therefore need to appoint an EU-27 manager (and to make new notifications in accordance with the procedure of the member state of the newly appointed manager) in order to maintain their EU passporting rights.

(iii) Luxembourg AIFs will be allowed to continue to be managed by their current UK managers if, before 31 December 2020 (a) the manager notifies the CSSF (details about the information to provided were stated in the CSSF press release 19/48; please refer to our previous communications on this here, and here); and (b) the investors vote to approve the continuation of management by the UK AIFM in line with majority requirements as they apply under the fund’s constitutive documents.

Secondments

(iv) It will be possible, for any UK firm to place at the disposal of a Luxembourg AIFM a natural person involved in regulated services. Such secondments of staff, provided they comply with all applicable requirements and that the AIFM ascertains appropriate supervision over the secondees, are acceptable. Amongst the requirements, there is notably the requirement of a physical presence in the premises of the Luxembourg AIFM of the seconded staff, being understood that travels for professional purposes are accepted. In the specific context of Brexit, it will be necessary to reorganise certain functions and more specifically the marketing function, if such function is staffed with secondees from the UK not being always physically present at the premises of the Luxembourg AIFM. Such reorganisation of the impacted functions in principle needs to occur prior to 31 December 2020, having regard to the COVID-19 situation.

Delegation of Portfolio Management

(v) On 1 February 2019, ESMA and the FCA entered into a multilateral memorandum of understanding allowing the FCA and member states’ regulators to share information relating to, amongst others, market surveillance, investment services and asset management activities (more information can be found here). Under this memorandum, it will be possible to delegate investment management/portfolio management and/or risk management activities from a Luxembourg AIFM to a UK firm after the end of the transition period if the undertakings are (a) authorised or registered for the purpose of asset management, and (b) subject to prudential supervision.

As a Consequence:

(i) If a UK manager wants to keep benefiting from an EU marketing passport for its Luxembourg fund, it must appoint an EU-27 AIFM (and it may be then possible to have some management functions delegated to the UK manager);

(ii) If a UK manager does not need to benefit from EU passporting rights, it may be allowed to keep managing the Luxembourg fund if it notifies the CSSF and get investor approval before 31 December 2020.