Global asset management quarterly - Europe

Developments and market trends in Europe

Publication September 2018

UK and European overview

Author: Richard Sheen

Over the last few months it has been hard to escape the growing concerns around Brexit. In particular, the prospect of a no-deal or “hard” Brexit has become a major issue for many asset managers. Fears for this scenario have undoubtedly increased with managers expressing concern that no deal will materially harm their ability to access investors. Reports suggest that a significant portion of asset managers are now planning for a hard Brexit and that such plans include relocating operations to Dublin, Luxembourg or other EU jurisdictions or re-balancing their fund assets into on-shore EU fund ranges.

Manager’s worries will not have been allayed by the political mood and the apparent barriers to achieving an orderly and consensual exit arrangement. Whilst the objective of the UK Government firmly remains to reach a comprehensive negotiated agreement with the EU, on August 23, 2018, it took the step of releasing over 20 sector specific guidance notices and an overview paper on how businesses and individuals should prepare for a “no-deal” scenario.

The sector guidance notice covering banking, insurance and other financial services largely re-iterates the UK Government’s previously articulated position including that in a "no deal" scenario, UK firms’ position in relation to the EU would be determined by the relevant Member State rules and any applicable EU rules that apply to third countries at that time. The notice also states that the UK will, in general, default to treating EEA Member States and EEA firms largely as it does other third countries and their firms. The notice suggests that there will be instances where the UK Government will diverge from this approach in order to maintain UK financial stability, for example the introduction of the temporary permissions regime.

Specifically, in relation to funds and managers authorised under EU legislation, the UK Government states that it is “ready to agree cooperation arrangements with their EU counterparts as soon as is possible, which is a technical exercise to bring the UK into line with other third countries”. It also adds that unless “the EU confirms it does not intend to put such arrangements in place, asset management firms can continue to plan on the basis that the delegation model will continue”. This latter statement has been met with a somewhat muted response from managers who have expressed concerns as to whether the commitment will be reciprocated by other European regulators – certainly the UK’s position does appear to be clearly contingent on the EU’s discretion. Whilst few will argue with the objective of the UK seeking to pursue regulatory co-operation agreements with EU national regulators, many asset managers will be unlikely to feel confident enough to plan on the assumption that delegation rights will continue after a no-deal Brexit.

Later in this edition, we focus our attention on Brexit commenting in detail on the “no deal” guidance notices, the UK temporary permissions regime and the UK Government’s White Paper on the future EU/UK relationship. In addition, in our section covering EU/UK regulatory developments we have added a new table focusing only on Brexit related regulatory developments, allowing asset managers to keep track of this important issue.

Elsewhere, the Competition and Markets Authority’s provisional findings, following their investigation into the investment consultancy sector, shied away from recommending any fundamental structural changes in the sector, whilst recommending a number of reforms, for example in relation to requiring pensions trustees to run competitive tenders in the selection of fiduciary managers.

In terms of corporate activity in the sector, a steady trickle of M&A deals have emerged over the past few months. In the context of the Brexit concerns outlined above, some European managers have been reported to be looking at acquiring UK firms, whilst smaller UK managers will be considering the future of sub-scale European operations in order to focus on the UK and other international markets.

Private fundraising activity has continued into Q3 2018 on the back of 2017’s record year. In the listed fund market, fundraising activity has fallen in 2018 so far against the same period last year. According to Winterflood Securities, 12 closed-ended funds have been listed in the UK this year raising a total of £1.1 billion (against £1.7 billion in the same period in 2017). The feeling is that increased market volatility and economic and political uncertainty has led investors to focus on existing well established funds rather than on new products and/or less proven investment managers.

Recent issues include the listing of Tritax EuroBox plc (continental European logistics real estate) on the Specialist Funds Segment and the Premium List IPO of Ashoka India Equity Investment Trust plc.

UK withholding tax: whether interest arises in the UK

Authors: Dominic Stuttaford and Greg Branagan


One of the hardest issues for any adviser looking at the structure for any borrowings by a non-UK entity to finance UK assets is whether the interest has a UK source and therefore whether the interest payments are subject to 20 per cent withholding tax in the UK. The Court of Appeal (CA) decision in Ardmore Construction Ltd. v HM Revenue & Customs [2018] EWCA Civ 1438 has looked again at the law in this area.


The taxpayer was a UK company which had a predominantly UK business and UK assets. It had borrowed money from a Gibraltarian trust pursuant to a loan agreement which was governed by Gibraltarian law and which gave the courts in Gibraltar exclusive jurisdiction in respect of any disputes. HMRC determined that the interest paid under the terms of the loan had a UK source and so the taxpayer should have deducted UK tax at a rate of 20 per cent.

The taxpayer appealed this determination to the UK’s First Tier Tribunal (FTT). The FTT applied a multi-factorial test and concluded that the payments had a UK source.

The taxpayer appealed to the UK’s Upper Tribunal (UT). The UT considered the submissions in light of the decision by the House of Lords in Westminster Bank Executor and Trustee Co (Channel Islands) Limited v National Bank of Greece SA (1970) 46 TC 472 (NBG) and upheld the FTT’s decision. In particular, the UT held that the correct approach was to apply the multi-factorial test as set out in NBG and that the residence of the debtor was a key factor when determining the source of the interest.

The taxpayer accepted that a multi-factorial approach was correct, but appealed to the CA on the basis that the location of the creditor should have been given greater weight in the decisions of the FTT and UT because the tax to be withheld was ultimately the tax liability of the creditor.


The CA upheld the decisions of the FTT and UT on the basis that the application of a multi-factorial test was correct and that it is necessary to have regard to the underlying commercial reality of the transaction being considered. The application of the test was stated to be “acutely fact-sensitive”.

In this specific case, the CA was of the opinion that

  • It could not criticise the conclusion of the UT that the residence of the creditor should not carry any significant weight.
  • The source of the interest should be viewed as a key factor and, as the business of the taxpayer was actively carried out in the UK and the funds generated from that business would be used to pay the interest, it was correct to view the source of the interest as being in the UK.
  • As there was no default, the Gibraltarian exclusive jurisdiction and governing law clauses were of limited importance and, in any event, all the assets which would have been used to meet any liabilities to the Gibraltarian lender were located in the UK.
  • As a matter of fact, the links to Gibraltar were insubstantial when compared to the links to the UK.


This decision maintains the current status quo in respect of the determination of whether interest has a UK source. The fact that the CA did not set out a narrower list of relevant factors to be considered may come as a relief to some, although this does mean that it will remain difficult to obtain any real certainty as to the application of the multi-factorial test. Although the judgment included comments on the relevant importance of certain factors (which may influence future decisions of the lower appellate courts). It is yet to be seen whether HMRC will use these comments in any further debate on whether interest has a UK source. In the meantime, particular scrutiny should be given to loans where the interest repayments are funded from UK income or which are secured on UK assets.

PRIIPs – 9 months on

Authors: Joe Bamford and Imogen Garner

On January 1, 2018, the Packaged Retail Insurance-based Investment Products (PRIIPs) Regulation came into force. The PRIIPs Regulation placed obligations on those firms that manufacture and distribute PRIIPs to provide key information documents (KIDs) to retail investors. The purpose of the PRIIPs Regulation is to allow retail investors, through the KID, to better understand the relevant product, and to compare the relevant risks, rewards and costs with other products in the market.

The PRIIPs Regulation has been subject to much criticism both, prior to, and following its implementation. In an unprecedented vote, the European Parliament voted by an overwhelming majority in 2016 to delay the original Regulatory Technical Standards (RTS) for the PRIIPs Regulation until certain issues were addressed by the European Commission (the Commission). Despite the 12 month delay, and amendments by the Commission to the RTS, the PRIIPs Regulation has still come under significant criticism, both from firms in the market and national regulators such as the FCA.

The key concerns and issues that have been identified by firms in the market, and even by regulators such as the FCA, in complying with the PRIIPs Regulation include the following

  • Scope of the Regulations.
  • Wider disclosure requirements for firms in the market.
  • Practical issues with the production of the KID.

The PRIIPs Regulation sets out a broad definition of what kind of investments are within scope of the regime. Despite guidance from the FCA on which type of investments are either in or out of scope, there remains a lot of uncertainty in the market as to the exact scope of the PRIIPs Regulation. In light of the penalties for non-compliance, and the potential for civil claims from retail investors, firms in the market have to date generally taken a conservative approach in assessing the scope of the regime for their products. This conservative approach is evidenced in practice by a recent study conducted by the European Supervisory Authorities (ESAs), which found that for some secondary markets up to 25% of products had been removed for sale to retail investors in order to limit any risk of non-compliance by the manufacturers or distributors with the PRIIPs Regulation.

Firms have also struggled with ensuring that their target market disclosures are consistent across their wider disclosure requirements (i.e. those requirements under the Prospectus Directive, MiFID II and the PRIIPs Regulation). This inconsistency largely appears to be between the typical investor identified by firms within their prospectus and the target market as identified within the KID. Such inconsistency appears to be either as a result of the historic nature of the prospectus, which firms are failing to update in line with their KID, or a failure to accurately mirror the target market initially identified for their product in the KID. Due to the obligation in the PRIIPs Regulation on firms to ensure that their KID (and the target market contained therein) is consistent with any other contractual or offer documents for that product (such as the prospectus), firms with inconsistent disclosures are at a high risk of non-compliance with the regime.

The main criticism of the PRIIPs Regulation from the market has been in the practical implementation of the standards set out in the RTS for the KID. Principally firms have identified issues most commonly with the risk disclosures, performance scenarios and transaction costs that must be produced for the KIDs.

Due to deficiencies in the calculations provided in the RTS, and a reliance on historical data for forward looking statements, many firms have stated that the outputs produced in their KIDs have been widely optimistic in some circumstances, and more generally, likely to be misleading. On the back of these issues, the FCA released a statement less than a month after the PRIIPs Regulation came into force, on January 24, 2018, permitting firms to provide explanatory materials alongside their KID to explain and provide context for misleading figures in the KID itself.

Following the identification of these issues, some of which were flagged to the Commission as early as 2010, the FCA, in July 2018, released its “Call for Input: PRIIPs Regulation – initial experiences with the new requirements” paper to further understand the concerns that firms have with both the scope and practical implementation of the regime. The Call for Input closes on the September 28, 2018, and the FCA expect to provide their feedback statement in Q1 2019.

Alongside regulators such as the FCA, firms, and trade associations (such as AFME, JAC and BVI) across the EU, from both the buy-side and sell-side have come together to ask for further clarity from the Commission on the PRIIPs Regulation. Added to this, the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA), and European Insurance and Occupational Pensions Authority (EIOPA), together as the ESAs, have also provided a letter to the Commission requesting further guidance on the scope of the PRIIPs Regulation.

The Commission is due to review the PRIIPs Regulation by December 31, 2018. This review shall take into account a general survey of the operation of the comprehension alert, the practical application of the rules, and consumer tests of the relevant outcomes achieved by the PRIIPs Regulation. It is hoped that this review will lead to further clarity from the Commission on the regime, and where necessary amendments to the PRIIPs Regulation and RTS.

However, the Commission has indicated that it is likely to delay its review of the PRIIPs Regulation by at least a year, in order to take account of the delay in its initial implementation. These plans have drawn criticism from trade associations across the EU, as it is now unclear as to when the Commission may conduct any review of the PRIIPs Regulation, and provide any consequential changes/guidance on the regime.

Whilst the FCA’s feedback statement in 2019 will be welcomed by the market as some form of clarity on the PRIIPs Regulations, it is hard to see how this guidance will be able to meaningfully cure the issues raised to date by firms across the EU. As such, it is likely that, following the same approach take to date, firms, trade associations, and regulators across the EU will continue to look for further guidance from the Commission on how to comply with the PRIIPs Regulation.

Brexit: the UK Government ''no deal'' guidance notices

Author: Simon Lovegrove


On August 23, 2018, the Secretary of State for Exiting the EU, Dominic Raab MP, gave a speech on planning for a "no deal" Brexit. The speech was followed by the UK Government issuing over 20 sector specific guidance notices on how businesses and individuals should prepare for a "no deal" Brexit plus an overview paper.

The speech

Mr Raab stated in his speech that “good progress on the outstanding issues” that need to be resolved on the Withdrawal Agreement had been made but as March 29, 2019 draws closer preparations for a "no deal" Brexit would have to be accelerated. The acceleration of preparations would be consistent with the statement issued by the UK Government after the Cabinet away day at Chequers earlier this year which stated:

“It remains our firm view that it is in the best interests of both sides to reach agreement on a good and sustainable future relationship. But we also concluded that it was responsible to continue preparations for a range of potential outcomes, including the possibility of ‘no deal’. Given the short period remaining before the necessary conclusion of negotiations this autumn, we agreed preparations should be stepped up.”

In addition to accelerating no deal preparations, Mr Raab said that it has now been agreed with the EU that there will be “continuous negotiations”, in order to “energise the final phase of the diplomacy and to reach a deal that is in both sides’ interests”. The UK Government already has more than 7,000 people working on Brexit and there is funding for an extra 9,000 staff to be recruited into the civil service, enabling the UK Government to accelerate its preparations as and when it needs to.

Mr Raab concluded by saying that his message was a pragmatic one – take note of the practical information the UK Government is providing, stay engaged with the UK Government on the detail and review any contingency planning.

The overview paper

The UK Government’s overview paper summarises the measures dealing with a "no deal" scenario. It also states that the guidance notices “set out information to allow businesses and citizens to understand what they would need to do in a ‘no deal’ scenario, so that they can make informed plans and preparations”.

The overview paper explains that in some of the guidance notices, the UK Government demonstrates where it is prepared to act unilaterally to provide continuity for a temporary period in a "no deal" scenario in order to minimise disruption to UK citizens and businesses – irrespective of whether the EU reciprocates. In terms of the financial services framework, the overview paper refers to the temporary permissions regime (see our earlier blog) which will allow firms and funds passporting into the UK to continue providing services in the UK for a temporary period after Brexit.

The overview paper also covers the EU’s approach. The European Commission has already published a significant number of Brexit preparedness notices (here). The overview paper comments that in a ‘no deal’ scenario the Commission has “indicated that they would intend to treat the UK as a third country for all purposes”. It adds that, the “EU has suggested they would apply regulation and tariffs at borders with the UK as a third country, including checks and controls for customs”. The guidance notices therefore set out for businesses how they will need to prepare for customs checks which would be applied if they currently only trade with the EU.

The overview paper states that clarity on what action the EU may consider taking to maintain stability for a temporary period “would provide reassurance to EU and UK businesses and citizens alike”.

Guidance notice – financial services

The guidance notice on banking, insurance and other financial services if there’s no Brexit deal covers much of what we already know. In summary, the key points include:

In a "no deal" scenario, UK firms’ position in relation to the EU would be determined by the relevant Member State rules and any applicable EU rules that apply to third countries at that time.

The UK will, in general, default to treating EEA Member States and EEA firms largely as it does other third countries and their firms. There will be instances where the UK Government will diverge from this approach in order to maintain UK financial stability, for example the introduction of the temporary permissions regime.

Similar temporary permissions regimes will be provided for EEA electronic money and payment institutions, registered account information service providers and EEA funds that are marketed into the UK.

In a similar vein, whilst the UK Government has already set out draft legislation that will establish a temporary permissions regime for central counterparties (CCPs), it will further deliver legislation for transitional arrangements for: central securities depositories, credit rating agencies, trade repositories, data reporting service providers, systems under the Settlement Finality Directive and depositories of authorised funds.

The UK Government will bring forward legislation, if necessary, to ensure that contractual obligations between EEA firms and UK-based customers that are not covered by the temporary permissions regimes can continue to be met.

If customers of financial services firms need to take action, then firms should communicate this to them at an appropriate time

  • For UK-based customers accessing services in the UK provided entirely by UK-based providers, there is unlikely to be any change as a result of Brexit. However, if UK customers are affected by a firm’s Brexit planning, then the firm should communicate this to them.
  • Some EEA firms provide deposit taking and retail banking services in the UK via a UK authorised subsidiary. There will be no change to the UK authorisation as a result of Brexit, and services can continue to be provided.
  • The UK Government is looking to align UK domestic payments legislation to maximise the likelihood of remaining a member of the Single Euro Payments Area as a third country;
  • The cost of card payments between the UK and the EU will likely increase, and these cross-border payments will no longer be covered by the surcharging ban.
  • For UK-based customers who access banking, insurance, investment funds and other financial services with EEA firms currently passporting into the UK, the temporary permissions regimes will allow such firms to continue providing services to UK customers for up to three years after Brexit.
  • In the absence of action from the EU, EEA-based customers of UK firms currently passporting into the EEA (including UK citizens living in the EEA), may lose the ability to access existing lending and deposit services, and insurance contracts due to UK firms losing their passporting rights. The UK Government gives the example that in the absence of EU action, EEA clients will no longer be able to use the services of UK-based investment banks, and UK-based investment banks may be unable to service existing cross-border contracts. However, the UK Government adds that it is committed to taking unilateral action to resolve issues as far as possible and is committed, for example, to continue to treat prospectuses that are valid in the UK before Brexit as valid for the remainder of the 12 months from their date of approval, including where that includes a period after Brexit.

In relation to funds and managers authorised under EU legislation, the UK Government notes that there are requirements for cooperation between supervisory authorities in the relevant EU Member State and the non-EU country concerned. The UK Government states that it is “ready to agree cooperation arrangements with their EU counterparts as soon as is possible, which is a technical exercise to bring the UK into line with other third countries”. It also adds that unless “the EU confirms it does not intend to put such arrangements in place, asset management firms can continue to plan on the basis that the delegation model will continue”.

In relation to financial market infrastructure (FMI) there are a number of messages

  • There will be no need for UK-based clearing members using UK CCPs to take any action as a result of Brexit.
  • For UK-based users of non-UK CCPs the UK Government is providing for a temporary permissions regime that will enable non-UK CCPs to continue to provide services to the UK for a period of up to three years.
  • For customers settling UK securities at the UK’s Central Securities Depository (CSD) there will be no change as a result of Brexit. If no action is taken by the EU and EU Member States, EU securities may no longer be able to be directly settled in the UK.
  • For UK customers of non-UK CSDs, the UK Government is bringing forward transitional provisions allowing such CSDs to continue providing services to the UK until equivalence and recognition decisions are made. Further details will be provided in September 2018.
  • For FMIs designated at the time of Brexit under the UK Settlement Finality Regulations (SFR), their designation in respect to UK insolvency will carry on.
  • The UK Government will bring forward legislation to continue protections granted by the SFR allowing designations of FMIs that are outside the UK. This legislation will also provide for a temporary regime that will allow certain non-UK FMIs to continue to benefit from UK protections currently provided by the EU Settlement Finality Directive.
  • Without action to designate UK FMIs, EU settlement finality protection for UK FMIs will cease. This will mean that EU customers will present higher risks to these FMIs and may no longer be able to access their services.

Our take on the guidance notices

The guidance notice on financial services reflects the position we expected: the UK is committed to a pragmatic approach under which EEA providers are offered a broad temporary permission regime in order to allow them to carry on providing services to the UK market. This covers the broadest possible ground for both currently authorised EEA firms operating under the passport and specialist infrastructure such as CCPs. The one exception is on trading venues where there will be a need for EU exchanges to get UK recognition, and there is a possible implication that EEA MTFs may also not have access into the UK market.

Overall, the guidance notice gives an honest assessment of the limits to which the UK can solve the problems alone by recognising that in many areas it takes two to tango. For example, EEA customers of UK firms may no longer be able to borrow or trade with them in a worst case scenario.

As always, the devil will be in the detail on all of this.

Brexit: the UK’s temporary permissions regime

Author: Simon Lovegrove


On July 24, 2018, HM Treasury published a draft of the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 (the draft Regulations) which provide for a temporary permissions regime enabling EEA passporting firms to continue operating in the UK for a limited period of time once the UK leaves the EU.

Whilst further details about the new regime will be published over the coming months, this note covers what we know so far.

Why publish the draft Regulations?

Simply put, the temporary permissions regime is a back-stop should the EU and UK not finalise the Withdrawal Agreement.

In December last year HM Treasury announced that, if necessary, the UK Government would legislate for a temporary permissions regime and both the PRA and FCA referred to it in their respective statements on Brexit preparation which were published at the same time. In its statement the PRA referred to the temporary permissions regime as a “fall-back” in a no deal, hard Brexit scenario.

At 11pm on March 29, 2019 (Brexit Day) the UK will leave the EU per Article 50 of the Treaty of the European Union. If the Withdrawal Agreement is ratified by both sides in accordance with their own procedures a transition period (also known as an implementation period) will take effect allowing market access on the current basis until December 31, 2020 (i.e. UK firms would have access to the EU Single Market, and EEA firms would have access to the UK market).

However, if the Withdrawal Agreement is not ratified before Brexit Day there will be no transition period and EEA firms would suddenly not be able to operate in the UK without UK authorisation and this may cause major disruption. Therefore, the temporary permissions regime is designed to mitigate the so-called “cliff-edge” effects of this scenario in the UK. Importantly it is only required in a no-deal scenario.

We already saw the FCA conduct preparatory work for the temporary permissions regime earlier this year. In March, it published a new page on its website asking UK inbound firms and funds to complete an online survey so that it could easily identify such firms.

Does the temporary permissions regime help UK firms operating in the EEA?

The short answer to this question is "no". The UK regulatory authorities have called on the EU authorities to reciprocate but so far they have not done so. Instead the EU authorities have issued statements concerning the need for UK institutions to submit their application for authorisation in the relevant Member State before the end of Q2 2018. In light of this UK firms have been conducting analysis as to whether their operations fall within the regulatory perimeter of the EEA state in which they operate and, if so, whether they need to seek authorisation.

Is temporary permission a novel thing in the UK?

A form of temporary or limited permission is nothing new in the UK financial services industry. For example, when the FCA took over the regulation of consumer credit from the Office of Fair Trading a couple of years ago it introduced a limited permissions regime for a set period of time. In addition, in its June consultation paper concerning its proposed regulation of claims management companies the FCA is also proposing a temporary permissions regime for those claims management companies that are currently regulated by the Claims Management Regulator.

What message does the temporary permissions regime send to EEA firms?

Essentially, the regime allows EEA firms to operate in the UK for a limited period of time after Brexit Day while they seek authorisation in the UK. By issuing the draft Regulations now, the UK Government is sending a message to EEA firms that they can plan on the assumption that full UK authorisation will not be needed by Brexit Day in the event of a no deal scenario.

Which EEA firms are eligible?

To be eligible for entry into the temporary permissions regime EEA firms must be authorised to carry on regulated activities in the UK under the EU passporting regime. This includes EEA firms passporting under the EU Single Market Directives who qualify for authorisation under Schedule 3 to the Financial Services and Markets Act 2000 (FSMA). So called “Treaty firms”, those who exercise EU Treaty rights to do business on a cross-border basis in the absence of passporting rights, who qualify for authorisation under Schedule 4 to FSMA, are also eligible for the temporary permissions regime.

Significantly, the temporary permissions regime does not apply automatically to the above firms. They must make the relevant notification/application to the relevant UK regulator (PRA for credit institutions, insurance firms and significant investment firms and FCA for all other firms) before Brexit Day (see below on when to apply).

What types of EEA firms are not covered by the regime?

The draft Regulations do not cover EEA payment institutions, electronic money issuers and EEA funds that are marketed into the UK. However, HM Treasury has said that it intends to provide for a similar temporary regime for these entities under separate pieces of legislation. It is not yet clear how regulated markets will be treated. This connects to the broader discussion on the UK overseas person exclusion.

What does it mean to be in the temporary permissions regime?

Once an EEA firm is in the temporary permissions regime the FCA and PRA will have the same powers in relation to them as if they were authorised under Part 4A of FSMA. Firms would be subject to the same obligations and supervisory framework as if they were a Part 4A FSMA authorised firm.

Membership of the Financial Services Compensation Scheme (FSCS) will be extended to all EEA deposit-takers and insurers in the regime with a branch in the UK. Firms in the temporary permissions regime without a branch in the UK will be outside the scope of the FSCS, with the exception of EEA insurers that currently operate in the UK via a passport but without a branch, which will retain their existing FSCS membership whilst in the regime. A consultation on the broader approach to FSCS protection will be published later this year.

The FCA has a page on its website called “The temporary permissions regime for inbound passporting EEA firms and funds – our approach”. On this page the FCA describes, among other things, the rules that will apply to firms in the regime. In addition to the FSCS, it covers the senior managers’ regime, client assets, status disclosure and the Financial Ombudsman Service.

The FCA’s starting point for firms is that they will need to comply with

  • All FCA Handbook rules and guidance which currently apply to them.
  • All FCA Handbook rules which implement a requirement of an EU Directive which are currently reserved to the home Member State (and which therefore the FCA does not currently apply to EEA firms). The FCA intends to accept “substituted compliance” in respect of these rules. This means that if firms can demonstrate they continue to comply with the equivalent home Member State rules in respect of their UK business they will be deemed to comply with the FCA’s rules and guidance. The FCA is not proposing to apply any home Member State rules which relate to capital and related requirements.
  • Certain additional FCA Handbook rules will be applied where the regulator believes it should provide appropriate consumer protection. Such additional requirements have not yet been specified.
  • HM Treasury intends to give the UK regulators power to grant transitional relief so that they can phase in their post-Brexit Day requirements to give firms some flexibility.

Senior managers’ regime

The extension of the senior managers’ regime to non-banking institutions is a significant regulatory reform in the UK. The new FCA rules come into force on December 9, 2019.

The FCA states that it will propose that, whilst in the temporary permissions regime, EEA firms with UK branches should continue to comply with the requirements in relation to Approved Persons that currently apply to them, and then comply with the requirements of the senior managers’ regime which are currently stated to apply to EEA branches when the new requirements come into force (December 9, 2019).

The senior managers’ regime already applies to banks operating in the UK with the PRA being the lead authority for most senior management functions. However, the PRA has not yet said how this development may affect it.

When to apply?

The FCA states that firms do not need to do anything now other than complete its online survey. It adds that the notification process will be an online process and it expects to open a “notification window” in early January. The notification window will close prior to Brexit Day.

The PRA states that firms may either make a notification to it (if the firm has not submitted an application for authorisation before Brexit Day) or make an application for authorisation which is submitted before Brexit Day (applications submitted before the draft Regulations are finalised would also be sufficient).

What about applications for authorisation?

The temporary permissions regime will be in place for three years, starting when the UK leaves the EU (i.e. Brexit Day). HM Treasury has the power to extend the regime by up to one year at a time.

The draft Regulations temporarily extend the statutory time limits for the UK regulators to process authorisation applications from EEA passporting firms from six and twelve months for complete and incomplete applications respectively to three years from Brexit Day.

The FCA states that it will allocate firms a “landing slot” within which they will need to submit their application for authorisation. Landing slots will be confirmed after Brexit Day and the regulator expects the first one to be October to December 2019 and the last to be January to March 2021.

What about EEA firms with top up permissions?

Incoming EEA firms with top-up permissions (firms with UK regulatory permissions in addition to their passported activities) will be able to continue to operate under their current scope of permissions during the temporary permissions regime. As they already have some UK regulatory permissions, they will need to submit a Variation of Permissions application rather than an application for authorisation.

Which regulator should an EEA firm approach?

The PRA is the lead regulator for EEA credit institutions, significant investment firms and insurers and therefore these types of firms should contact it. However, the FCA is the lead regulator for conduct matters for these firms (hence they are known as dual regulated) and therefore the materials that it produces will also be important. There is one important exception to this in respect of EEA credit institutions that do not accept deposits in the UK; such firms will need to approach the FCA. All other incoming EEA firms will need to approach the FCA.

When can we expect to see further information?

The FCA and PRA expect to issue consultation papers in the autumn setting out further details on the changes they propose to make to their Handbook/Rulebook including the level of fees to be paid by firms in the temporary permissions regime. The FCA has said that following the consultation it will publish the final rules “early next year”.

And finally, what about CCPs and financial market infrastructure?

HM Treasury has also published a draft of The Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (the draft CCPs Regulations). The purpose of the draft Regulations is to ensure that the regulatory regime for central counterparties (CCPs) established by the EU Regulation on over-the-counter derivatives, CCPs and trade repositories (EMIR) functions effectively after Brexit, once EMIR has been retained in UK law.

Essentially the draft CCPs Regulations

  • Transfer the European Securities and Markets Authority’s functions relating to the recognition of third country CCPs to the Bank of England and amend Part 18 of FSMA where necessary.
  • Give the Bank of England powers to receive applications and assess and make decisions on the recognition of non-UK CCPs before exit – with those decisions taking effect on Brexit Day as if they were made under Article 25 of EMIR.
  • Create a temporary recognition regime which enables third country CCPs to continue their activities in the UK for a limited period after Brexit Day if they are currently able to provide those activities in the EU under EMIR, and have notified the Bank of England (before Brexit Day) that they intend to continue doing so in the UK.
  • Enable the Bank of England to charge fees from non-UK CCPs that are providing services to the UK.

In relation to the temporary recognition regime, the Bank of England confirms that to enter into it non-UK CCPs will need to inform the Bank of England before Brexit Day. They can either do this by a notification or by submitting an application for recognition before Brexit Day. CCPs in the temporary recognition regime will be deemed to be recognised to provide clearing services in the UK for a maximum of three years, extendable by HM Treasury in increments of twelve months. CCPs that have not already submitted an application for recognition must do so within six months of the start of the temporary permissions regime.

In terms of financial market infrastructure it is worth noting that on July 24, 2018, the Bank of England published a Dear CEO letter setting out how it envisages the future UK framework for settlement finality designation of EU systems. This includes a temporary designation regime.

Brexit: the UK’s White Paper on the future EU/UK relationship

Author: Simon Lovegrove


On July 12, 2018, the UK Government published its long anticipated White Paper on the future relationship between the UK and EU. The headlines concerning financial services (plus the relevant reference in the White Paper) are set out below.

Financial services highlights

  • The UK recognises that the Single Market is built on a balance of rights and obligations, and that the UK cannot have all the benefits of membership of the Single Market without its obligations [chapter 1, para 6].
  • The UK can no longer operate under the EU passporting regime, as this is intrinsic to the Single Market [chapter 1, para 60].
  • The EU equivalence regime is not sufficient to deal with a third country whose financial markets are as deeply interconnected with the EU’s as those of the UK are [chapter 1, para 62].
  • The UK would seek a new economic and regulatory arrangement for financial services [chapter 1, para 49].
  • Given the importance of financial services to financial stability, both the UK and the EU will wish to maintain autonomy of decision-making and the ability to legislate for their own interests. The decision on whether and on what terms the UK should have access to the EU’s markets will be a matter for the EU, and vice versa. However, a coordinated approach leading to compatible regulation is essential for promoting financial stability [chapter 1, para 61].
  • The new economic and regulatory arrangement would be based on the principle of autonomy for each party over decisions regarding access to its market, with a bilateral framework of treaty-based commitments to underpin the operation of the relationship [chapter 1, para 64];
  • As the UK and the EU start from a position of identical rules and entwined supervisory frameworks, the UK proposes that there should be reciprocal recognition of equivalence under all existing third country regimes, taking effect at the end of the implementation period [chapter 1, para 66].
  • Whilst future determinations of equivalence would be an autonomous matter for the UK and EU, the new arrangement should include provisions through the bilateral arrangement for: (i) common principles for the governance of the relationship; (ii) extensive supervisory cooperation and regulatory dialogue; and (iii) predictable, transparent and robust processes [chapter 1, para 67].
  • In terms of common principles for the governance of the relationship, the approach would be based on an evidence-based judgement of the equivalence of outcomes achieved by the respective regulatory and supervisory regimes. The UK and EU would set out a shared intention to avoid adopting regulations that produce divergent outcomes in relation to cross-border financial services [chapter 1, para 68].
  • In terms of extensive supervisory cooperation and regulatory dialogue the UK and EU would commitment to a framework that supports collaboration and dialogue. In terms of regulatory dialogue this includes the UK and EU being able to comment on each other’s proposals at an early stage through a structured consultative process of dialogue at political and technical level [chapter 1, para 69].
  • In terms of predictable, transparent and robust processes the UK envisages that some of these would be bilaterally agreed and treaty-based whilst others would be through autonomous measures of the parties. In terms of processes these would include: (i) a transparent assessment methodology for assessing equivalence which would make use of industry consultation and possibly expert panels; (ii) a structured withdrawal process which has clear timelines and notice periods which are appropriate for the scale of change before it takes effect; and (iii) long term stabilisation with each side trying to avoid future changes that assess equivalence in new ways that could destabilise an established relationship [chapter 1, para 70].
  • Where disputes arise between the UK and the EU on binding treaty-based commitments, institutional arrangements (described in chapter 4) apply [chapter 1, para 71].

Our take on the White Paper

Whilst the White Paper is not the commitment to a mutual recognition regime that many in the City wanted, it takes the discussion further in a lot of ways. It hits the EU’s point that there can be no replication of the passport: if you leave the single market then that is what you are doing. However, set against this, it sets out an ambitious programme of what may be described as “managed autonomy” and “enhanced equivalence” at least for the wholesale market. This means that both the EU and UK will run their own regimes. Mutual access will be what it says on the tin: each side will grant access to the other on equal terms which is a significant potential shift from the UK’s historic open borders policy for wholesale business coming in. In return for that, there will be mutually agreed principles to guide regulation on the two sides and a managed process of mutual equivalence assessment which seeks to give certainty of process and appeal mechanisms whilst allowing an ultimate freedom to make changes.

Of course, two big questions are left unanswered. If the whole package were to be agreed but the UK chose not to move away from the EU regime would this not look like a form of mini-passporting and, secondly, will there be any appetite from the EU side to engage on the substance? That said, the policy arguments in favour of a rational managed autonomy approach are strong and leaving the politics out of it the idea that it is good for the EU and for the UK to keep as liquid and deep a market in both London and the EU financial centres is hard to argue with. Minds should also be concentrated by the spectre that if global business moves it is not likely to be to EU centres but to other global hubs.

Ireland update

Author: Donnacha O’Connor from Dillon Eustace

Revised Central Bank of Ireland UCITS Q&A

In July, the Central Bank of Ireland (Central Bank) published a revised version of its UCITS Questions & Answers. In it the Central Bank provided additional guidance on its requirements where a UCITS invests in a non-UCITS collective investment scheme, noting that in order to be eligible for investment by an Irish UCITS, the Central Bank now considers that the target fund must either

  • Be subject to requirements in its jurisdiction of domicile which are equivalent to UCITS investor protections.
  • The constitutional document or offering document of the target fund must impose requirements of the same effect.

This marks a departure from the previous guidance under which the Central Bank did not insist on such investor protections being expressly imposed under the laws applicable to the target fund or being stated in the target fund’s documentation provided that the UCITS could satisfy itself that the target fund was in practice operating in a manner which complied with such requirements. The Central Bank has advised that all UCITS funds should comply with this revised guidance as soon as possible taking into account the best interests of investors and in any event no later than October 5, 2018. This will be of relevance not only to Irish UCITS and their managers but also to non-UCITS funds whose investor base includes Irish UCITS.

Revised Central Bank of Ireland AIFMD Q&A

The Central Bank published a revised version of its AIFMD Questions & Answers in May, in which it revised its existing guidance on obligations of loan originating funds to report certain information to the Central Bank pursuant to the Credit Reporting Act 2013 which has established an Irish credit register for the purposes of determining the level of indebtedness of Irish resident borrowers.

Central Bank of Ireland’s fund management company guidance

All existing Irish fund management companies and self-managed investment companies (UCITS and internally managed alternative investment funds (AIFs)) who had benefitted from the transitional implementation of the Central Bank’s 2016 “Central Bank's Fund Management Company Guidance (which essentially comprises the Central Bank’s requirements in relation to the governance of fund management companies and self-managed funds with a particular emphasis on the oversight of delegates) were required to be fully compliant by July 1 last. This included an obligation to appoint an independent director of the firm to discharge an “organisational effectiveness” role who will be responsible for ensuring that the relevant firm has the appropriate resources and organisational structure. In July, the Central Bank published a notice in which it advised that in assessing how firms have implemented the new requirements introduced under the guidance, it will place specific emphasis on the assessment work carried out by the director responsible for organisational effectiveness and in particular, how the board of directors have implemented any proposals to improve organisational effectiveness.

The Central Bank has also confirmed in a notice published in June that any directors of a fund management company or self-managed investment company who proposes to act as a designated person for that entity must now be subject to a separate approval process under the Central Bank’s Fitness and Probity regime.

Money market funds

The European Union (Money Market Funds) Regulations 2018, which entered into operation on July 21, 2018, were signed into law in order to give full effect to the Money Market Fund Regulation (MMF Regulation). These Regulations designate the Central Bank as the competent authority in the State for the purposes of the MMF Regulation and gives it the power to withdraw authorisation of a money market fund (MMF) for failure to comply with certain provisions of the MMF Regulation as well as allowing the Central Bank to invoke its administrative sanctions regime for any contravention of the MMF Regulation on the part of an Irish MMF or its manager.


The Central Bank issued a statement on July 31 welcoming the publication of the European Supervisory Authorities’ opinions on the impact of the UK withdrawing from the EU, reminding financial institutions of the need to ensure that appropriate contingency arrangements are put in place to minimise the impact of Brexit on their investors and the markets, including in the event of a hard Brexit arising on March 30 next year.

As set out in a previous bulletin, Article 46(4) of the Markets in Financial Instruments Regulation (MiFIR) allows individual Member States to allow third-country (i.e. non-European Economic Area) firms to provide investment services or perform investment activities together with ancillary services to eligible counterparties and professional clients in their territories in accordance with national regimes in the absence of a European Commission equivalence decision in accordance with Article 47(1) of MiFIR or where such decision is no longer in effect. By virtue of Regulation 5(4) of the European Union (Markets in Financial Instruments) Regulations, 2017 (Ireland’s MiFID II Regulations), Ireland will allow third country firms to provide investment services or perform investment activities together with ancillary services to eligible counterparties and per se professional clients in Ireland without having to establish a presence in Ireland or be subject to the requirement to seek authorisation in Ireland if

  • The firm is subject to authorisation and supervision in the third country where the third-country firm is established and the third-country firm is authorised so that the competent authority of the third country pays due regard to any recommendations of the Financial Action Task Force in the context of anti-money laundering (AML) and countering the financing of terrorism (CTF).
  • Co-operation arrangements that include provisions regulating the exchange of information for the purpose of preserving the integrity of the market and protecting investors are in place between the Central Bank and the competent authorities where the third-country firm is established.

As required by Regulation 48(1) of Ireland’s MIFID II Regulations, third-country firms wishing to provide investment services or perform investment activities together with any ancillary services to retail clients or opt-up professional clients must establish a branch in Ireland.

In relation to (b), the Central Bank is remaining tight-lipped on progress being made in that regard, but the expectation is that a bilateral co-operation arrangement will be in place between the FCA and the Central Bank shortly.

Central Bank of Ireland anti-money laundering bulletin

The Central Bank published its fourth issue of its Anti-Money Laundering Bulletin on May 30 last which focuses on the findings of the Central Bank’s supervisory engagements with investment firms. The Central Bank’s findings focused on three areas, being AML and CTF risk assessments, politically exposed person screening and transaction monitoring and resourcing and training.

Central Bank of Ireland second consultation on corporate governance requirements

The Central Bank published a second consultation paper (CP 120) on the corporate governance requirements for investment firms and market operators outlining proposed amendments to its existing regime in order to mitigate against corporate governance deficiencies resulting in investment firms being exposed to increased risks. This consultation period has now closed.

Central Bank of Ireland proposes consolidation of market abuse and transparency rules

The Central Bank also published a consultation paper (CP 121) on the proposed publication of a set of Central Bank (Investment Market Conduct) Rules which will consolidate its existing transparency rules and market abuse rules subject to certain additions and amendments.

Data Protection Act 2018

The Data Protection Act 2018 was signed into law on May 24 last which gives further effect to the General Data Protection Regulation, transposes Directive EU 2016/680 (commonly referred to as the Law Enforcement Directive) into Irish law and provides for the establishment of the Data Protection Commission.

Criminal Justice (Corruption Offences) Act 2018

The Irish Criminal Justice (Corruption Offences) Act 2018 was signed into law on June 5 last which forms part of the Irish Government’s White Collar Crime package announced in 2017 and criminalises corruption both in the public and private sectors. It replaces seven existing Irish anti-corruption laws and constitutes a single comprehensive statute which introduces new offences and stronger penalties.

Luxembourg update

Author: Manfred Dietrich, Partner Norton Rose Fulbright Luxembourg

Luxembourg – a growing Top financial centre for asset management – CSSF issues its annual report 2017

As mentioned in our last update, Luxembourg once again ranked as one of the top 3 financial centres in the EU, is the largest investment fund domicile in Europe (second to the United States globally) and hosts more than 139 banks from over 28 countries. The financial centre is committed to leading the drive towards digital financial services and is playing a pioneering role in sustainable finance.

On August 29, 2018, the Luxembourg regulator (CSSF) issued its annual report for the year 2017 containing additional market analytics, statistics and details as well as certain positions of the regulator and may be downloaded from the CSSF here.

Market trends in Luxembourg

The recent growth in establishing alternative investment funds (AIFs), which are not subject to specific regulatory approval, includes increasing interest for the “reserved alternative investment fund” (RAIF). On the other hand, the interest for the “specialised investment fund” (SIF) persists, in particular in cases where the success of (previous) funds has relied on this structure or for entities which are not AIFs, such as fund vehicles reserved for a pre-existing group of investors, i.e. a family (please refer to the definition provided by ESMA). The main asset classes in these fund structures are typically private equity, venture capital, infrastructure, clean technology (and similar), real estate and debt. In addition, demand for UCITS funds is holding up well, in particular those having alternative strategies or investing in more “exotic” markets.

The other big theme in Luxembourg at present is the increasing intensity of the discussion around the relocation of additional asset managers, financial institutions and insurance companies regarding relocation or re-domiciliation of all or parts of their business (e.g. their foreign investment funds or management companies/AIFM) to Luxembourg, in particular as Brexit” nears. Preparations for Brexit remain challenging in an environment where the outcome of the political negotiation as well as the content of the future legal relationship between the UK and the EU is uncertain and many market participants are considering a range of different scenarios in their planning in order to be well prepared, based on the best knowledge currently available. In this context, the CSSF has helpfully clarified certain matters in both its new Circular 18/698, regarding its regulatory approval process as well as organisational and substance requirements for fund management companies, and its new Circular 18/697, regarding organisational requirements for non-UCITS fund depositaries, both issued on August 23, 2018. Further details regarding these two CSSF Circulars are set out below.

Relocation or re-domiciliation of all or parts of the business – Brexit

Investor demand, coupled with uncertainties as to the implementation of a third-country AIFM-passport, and limitations of reverse solicitation for attracting investors, has resulted in us seeing clients planning and executing numerous re-domiciliation or next product domiciliation projects in Luxembourg involving both regulated and non-regulated funds.

On the one hand, the ability to transfer a foreign investment fund’s registered office to Luxembourg with the continuation of its legal personality is very attractive for asset managers wishing to raise assets in the European Union. This process allows the foreign fund to preserve its full corporate history, including track record, and to resomicle in a manner which is generally completely tax neutral. On the other hand, Luxembourg offers a broad range of legal structures (for example, the special limited partnership = SCSp or SLP) allowing product manufacturers to design appropriate solutions for the next generation of investment funds. We are also seeing increasing interest in using Luxembourg for parallel funds structures. Both of these trends are proving attractive to UK asset managers looking to keep the benefits of EEA passporting for their fund ranges following Brexit; an increasing number of asset managers are announcing the launch or expansion of their Luxembourg operations in order to manage their business following Brexit. In addition, a steadily increasing number of UK asset managers establishing and licensing management companies as UCITS management companies and regulated AIFMs (so-called Super ManCo’s) in Luxembourg.

A number of financial institutions and insurance companies have also expressed their intention to either increase their existing operations in Luxembourg or to establish newly formed entities to relocate business as a result of Brexit. The CSSF has alerted market participants of the need to take action as fast as possible in order to ensure a proper set-up and receiving a license in time.

*New CSSF Circular 18/698 on approval process and organization of fund management companies in Luxembourg and strengthening of substance requirements

On August 23, 2018, the CSSF issued its Circular 18/698 (the Circular) relating to the approval process for, and organisation of, UCITS management companies, alternative investment fund managers (together, the Investment Fund Managers), self-managed UCITS and self-managed AIFs (repealing circular 12/546, which was only applicable to UCITS management companies). The content of the Circular closely follows ESMA’s opinion of July 13, 2017 on the relocation of UK entities to the EU member States as a result of Brexit.

The Circular sets out detailed rules and requirements regarding

  • Shareholders of fund management companies
  • Own funds.
  • Corporate bodies of such entities.
  • Central administration and internal governance.
  • Internal controls.
  • Fight against money laundering and terrorist financing.
  • Delegation of key functions, including portfolio management, the administration and valuation functions.
  • Management companies providing discretionary portfolio management services on an individual basis.
  • Management companies providing services on a cross border basis or wishing to prevail of the European passport for the establishment of branches within the European Union.

Among the provisions that are of particular interest, it is worth noting the following substance requirements which the CSSF states must be retained

Board of Directors

  • Requirement for a majority of board members of the fund management company not to be executive members (managers) of the fund management company at the same time.
  • Requirement that boards of funds in company/partnership form managed by a fund management company are not composed in majority of persons being board members of the fund management company at the same time.
  • Maximum number of working hours for a Board member set to 1920 hours per annum.
  • Maximum number of mandates for a Board member set at 20 (mandates in SPVs belonging to the same fund and mandates across different funds belonging to the same fund promoter can however be counted as a single mandate, subject to certain conditions).
  • Thresholds subject to proportionality principle depending on the size and complexity of each fund.

Required staff

Notwithstanding the application of the proportionality criteria, three full-time equivalents (FTEs) are required on the ground in Luxembourg, including senior management (conducting officers) and other staff members.

Senior managers (dirigeants)

  • At least two senior managers (dirigeants) permanently resident in Luxembourg or in a location that allows them to travel to Luxembourg every day.
  • A threshold of 1.5 billion of AuM has been set, above which substance and delegation requirements are increased.
  • Below the threshold: (i) senior managers may only have up to two roles with investment management firms; and (ii) one of the senior maangers may, subject to a derogation from the CSSF, not be permanently in Luxembourg if he is able to come regularly in Luxembourg and there are sufficient additional staff in Luxembourg to support the activities of the manager in question.
  • Above the threshold: (i) senior managers may have only a single role with an investment management firm; (ii) at least two of the senior managers must be permanently resident in Luxembourg; and (iii) if there are more than two senior managers, the additional manager(s) do not need to reside permanently in Luxembourg (subject to CSSF derogation) if they are able to come into Luxembourg regularly and there are sufficient additional staff in Luxembourg to support their activities.

Detailed delegation requirements are described in the Circular with a particular emphasis on initial and ongoing due diligence requirements of delegates.

Among the general conditions for delegations are

  • No letter box entity: delegation must not be so substantial that it would result in the Investment Fund Manager becoming a letter box entity within the meaning of the AIFM delegated regulation (subject to the proportionality principle).
  • Prior notification to the CSSF, amongst other things, of an updated business plan detailing the delegated functions, identity of delegates and their supervisory authorities and the procedures being put in place to monitor the activities of the delegates.
  • Written delegation agreement including among other things: (i) the ability for the Investment Fund Manager to give further instructions to the delegate at any time and to withdraw the delegation with immediate effect when this is in the interest of investors;(ii) a right of access of the Investment Fund Manager on demand to the transactions carried out by the delegate and data relating to the UCIs; (iii) a right of the Investment Fund Manager to conduct on-site visits to perform due diligence in particular in relation to registration agent and AML functions; (iv) a contingency plan; and (v) provisions governing compliance with conduct of business rules.
  • Initial and ongoing due diligence policies and procedures relating to the selection and monitoring of the delegate must be documented, which documentation must be made available to the CSSF on demand.

Among the additional conditions for portfolio management delegation are

  • Delegates must be authorised or supervised for asset management activities and subject to regulatory supervision.
  • Cooperation arrangements must be in place between supervisory authorities for "third country" delegates.
  • No conflict of interests: no delegation of portfolio management to the depositary or any undertaking which might give rise to a conflict of interest with the AIFM/ManCo or investors.
  • Delegation agreement must incorporate the investment policy/restrictions to be complied with by the delegate.

The Circular enters into force with immediate effect and repeals the CSSF Circular 12/546. Existing fund management companies may need to make appropriate changes to their current set-up and procedures. Companies applying for a fund management company license must also now take into account the requirements of the Circular in their applications with immediate effect.

As for all items but here in particular:

Please do not hesitate to contact Manfred Dietrich, Partner Regulatory/Funds, Norton Rose Fulbright Luxembourg, should you have any query in relation to any potential need for adjustment of your current or future set-up or in case of any query relating to the understanding, practical application and background of a requirement.

*New CSSF Circular 18/697 on Organisational arrangements applicable to fund depositaries, which are not subject to Part I of the Law of December 17, 2010 relating to undertakings for collective investment, and, where appropriate, to their branches;1

On August 23, 2018, the CSSF also issued its Circular 18/697 (Circular (2)) on the governance and organisation of AIF (non-UCITS) depositaries. Circular (2) completes the existing legal framework for depositaries, supplementing the AIFM Law and the Commission delegated regulation (EU) 231/2013, following from the UCITS V directive and the CSSF Circular dedicated to its implementation.

Circular (2) sets out, amongst other things, rules relating to

  • The eligibility criteria to be an AIF depositary, the authorisation procedure and specific requirements relating to outsourcing and delegation.
  • Governance and organization, including conflict of interest procedures required where the depositary has a relationship with relevant third parties.
  • Segregation of assets.
  • The responsibilities of the depositary along the chain/over the network of (sub)-custody or delegation.
  • The obligations of the depositary in relation to different types of assets (real estate, target fund-of-funds, non-listed companies, intangible assets such as patents or trademarks, tangible assets, financial derivatives) in terms of the verification of ownership and reconciliation.
  • Assets offered as collateral to a third party or by a third party to the benefit of the fund from a depositary standpoint.

The rules set out in this new circular will enter into force on January 1, 2019 (and from such date Chapter E. of the IML Circular 91/75, as modified by CSSF Circular 05/177, is repealed).

Also as at such date the scope of application of CSSF Circular 16/644 is extended to undertakings for collective investment subject to part II of the Luxembourg law of December 20, 2010 on undertakings for collective investment, as amended (the 2010 Law) which are allowed to market to retail investors in Luxembourg. This applies also to Annex I of CSSF Circular 16/644 being replaced by Annex I of Circular (2).


Even though not particular to Luxembourg (as opposed to the EU as a whole), please note that ESMA and the European Commission have issued updated versions of their FAQ applicable to UCITS, available here.

New questions and answers have been included in July 2018 concerning Section I – General Question 5: Issuer concentration, Question 6: UCITS investing in other UCITS with different investment policiesand Question 7: Supervision of branches and in Section X – Depositary Question 1: Depositaries as counterparties in a transaction of assets that they hold in custody. Already in May 2018 (after our last update) Section IX – Remuneration Question 1: Application of disclosure requirements on remuneration to delegates has been updated

ESMA has issued an updated version of its FAQ, Questions and Answers on the implementation of the Regulation (EU) No 648/2012 of the European Parliament and of the Council of July 4, 2012 on OTC derivatives, central counterparties and trade repositories (EMIR)- ESMA70-1861941480-52 - July 12, 2018

Some minor adjustments have been made in General Question 1: Funds, counterparties as well as some adjustments and the adding of three sub-questions and answers under TR Question 40 LEI changes due to mergers and acquisitions. Update of identification code to LEI changes have been made.


A draft bill of law has been introduced in Luxembourg on December 6, 2017 to implement the fourth Anti-Money Laundering Directive dated May 20, 2015 (the AML Directive) into Luxembourg Law. This legislation will establish a register of beneficial owners (registre de bénéficiaires effectifs = REBECO) . However, the parliamentary procedure is still ongoing so the bill has not yet been adopted although, as a general rule, it should enter into force the first day of the month following its being voted into law.

In summary, the new legislation stipulates that, for every ultimate beneficial owner (UBO) holding directly or indirectly more than 25 per cent in an entity (the so called Registered Entity), the following information will need to be provided to the REBECO

  • Date and place of birth.
  • Nationality.
  • Private or professional address of residence.
  • UBO’s nature and extent of beneficial interests held in the relevant entity.
  • National identification number (Luxembourg or foreign).

Access to the information stored in the register is, in principle, restricted to self-regulatory bodies (such as the Luxembourg Bar, the Notary Chamber or the Order of Accountants) and specified entities set out in the AML Law (obliged entities, for example credit institutions, insurance undertakings, UCITS management companies and AIFMs). Such access is limited to partial information only and not to the supporting documents that have been filed. The electronic access of these self-regulatory bodies may only be used within the strict context of their supervisory functions, whereas the electronic access of “obliged entities” may be used only where such entities are required to carry out “know your customer” due diligence.

Only national competent public authorities, including but not limited to the Prosecutor, the CSSF, the Commissariat aux Assurances (CAA) and the tax administration will have unfettered access to the REBECO, which will be made available to them electronically.

Finally, limited access to the REBECO will be granted to any person or organisation that: (i) can demonstrate a legitimate interest; (ii) is resident in Luxembourg; and (iii) has made an official written and reasoned request in this respect. Any such access will be subject to the prior approval of a Commission to be created by the Minister of Justice. At this stage it remains to be seen what the authorities might consider a “legitimate interest” for these purposes but, in any event, such access will not include personal information such as an individual’s date and place of birth or their address.

For further information, please refer to the previous edition of Asset Management Quarterly (May 2018).

Update CSSF FAQ concerning the Luxembourg Law of July 12, 2013 on alternative investment fund managers as well as the Commission Delegated Regulation (EU) No 231/2013 of December 19, 2012

On August 14, 2018, the CSSF issued an update of its Frequently Asked Questions (FAQ) in connection with the AIFM Law. A new FAQ aims to clarify the situation for AIFs, which have issued a UCITS KIID, with respect to the PRIIPs Regulation requirements. For ease of convenience please see below the extract taken from the relevant updated CSSF FAQ

23.b) Can Luxembourg AIFs the units of which are being advised on, offered or sold to retail investors benefit from the exemption provided under article 32(2) of the PRIIPs Regulation if they have issued a UCITS KIID? (August 14, 2018)

Yes. Such AIFs may issue a UCITS KIID in order to be exempted from the obligations of the PRIIPs Regulation until December 31, 2019, provided that the following conditions are complied with

  • The UCITS KIID to be issued under the Law of 2010 should comply with articles 159 to 162 of the Law of 2010, as well as with the provisions of Commission Regulation (EU) n° 583/2010;.
  • The UCITS KIID should be issued for each retail share class of the sub-funds of the relevant Luxembourg AIF.
  • The offering document of the Luxembourg AIF in question should be amended in order to reflect the distribution of a UCITS KIID to all retail investors contemplating an investment in the AIF. The offering document should also mention that the UCITS KIID shall be published on the website of the Registered or Authorised AIFM of the Luxembourg AIF and that it shall be available, upon request, in paper form.

Asset Management Regulation knowledge hub

Authors: Imogen GarnerIona Wright and Simon Lovegrove

Whilst the global financial crisis may have receded, the asset management industry continues to assimilate significant regulatory change – Brexit, AIFMD review, FCA Asset Management Market Study – to name but a few.

We have recently published a new Asset Management Regulation hub that houses all of all knowledge materials in this area including our AIFMD surveys, our global asset management quarterly updates, AIFMD and UCITS insight resources and relevant Brexit related materials.

To access the hub, which is registration only, please contact either Imogen Garner, Iona Wright or Simon Lovegrove.

EU/UK Regulatory Roundup

Author: Simon Lovegrove

A round up of recent regulatory developments in the EU and UK. To receive daily or weekly updates on regulatory developments subscribe to our blog,

Title Date Comment
ESMA letter to EIOPA on interpretation of AIFMD 07.08.18 On August 7, 2018, the European Securities and Markets Authority (ESMA) published a letter regarding the interpretation of the Alternative Investment Fund Managers Directive (AIFMD). The letter addresses three queries raised by European Insurance and Occupational Pensions Authority.

The first query is broken down into two parts concerning whether
  • Alternative investment funds (AIFs) that use borrowing arrangements pursuant to Article 6(4) of Commission Delegated Regulation (EU) No 231/2013 (the Regulation) are considered "leveraged" under the AIFMD? ESMA takes the view that AIFs using borrowing arrangements which comply with the conditions of Article 6(4) of the Regulation should be considered unleveraged.
  • AIFs that use derivative instruments pursuant to Article 8(7) of the Regulation are considered "leveraged"? ESMA notes that the AIFMD does not include formal legal definitions of the notions "leveraged AIFs" or "unleveraged AIFs". ESMA explains that to gain a complete picture of the use of leverage under the Regulation, information about the exposure of AIFs should be provided to Member State competent authorities and investors both on a gross and on a commitment method basis and all AIFMs should therefore calculate exposure using both the gross and the commitment method (as per recital 11 of the Regulation). Pursuant to Article 8(7), financial derivative instruments used for currency hedging purposes are excluded from the calculation of exposure under the commitment method provided that they do not add any incremental exposure, leverage or other risks.
The second query concerns whether AIFs that are managed by alternative investment fund managers (AIFMs) as defined in Article 3(2) of the AIFMD (often referred to as “registered” or “sub-threshold” AIFMs) should be considered as AIFs as defined in Article 4(1)(a) of the AIFMD. ESMA states that AIFMs below the thresholds set out in Article 3(2) of the AIFMD are subject to registration with the home Member State competent authority and shall provide the information set out in Article 3(3) AIFMD. However, a Member State’s domestic rules may impose stricter requirements like full AIFMD authorisation. Notwithstanding this, all collective investment undertakings managed by these managers should be considered as AIFs provided that they meet the definition set out in 4(1)(a) of the AIFMD.
Updated MiFID II TTCs for equity derivatives, equities and equity-like instruments 06.08.18 ESMA has updated its transitional transparency calculations (TTCs) for equity derivatives, equity and equity-like instruments, and the tick size band assessment under MiFID II/MIFIR. Further detail on the calculations can be found in section E of ESMA’s FAQs on MiFID II transitional transparency calculations.
ESMA data for MiFID II SI calculations 01.08.18 ESMA has published data for the systematic internaliser (SI) calculations under MiFID II. The data on the total volume and number of transactions executed within the EU has been published to help market participants in the performance of the SI test under article 4(1)(20) of MiFID II. The published data includes only aggregated EU-wide data for equity and equity-like instruments and bonds. For all other asset classes, the mandatory SI-assessment will only apply after the first publication of the data for those asset classes on February 1, 2019.
ESMA peer review on guidelines on ETFs and UCITS issues 30.07.18 ESMA has published a final report concerning its peer review on the guidelines on exchange traded funds (ETFs) and other UCITS issues.

The peer review assessed six national competent authorities from Estonia (Finantsinspektsioon), France (Autorité des Marchés Financiers), Germany (BaFin), Ireland (Central Bank of Ireland), Luxembourg (Commission de Surveillance du Secteur Financier) and the UK (FCA). Based on the guidelines, besides identifying some good practices, ESMA found deficiencies in the national supervision of UCITS engaging in efficient portfolio management techniques.

A table on page 11 of the final report summarises the compliance level per jurisdiction. A further assessment table per jurisdiction can be found on page 28.

A summary concerning the findings for the UK can be found in pages 19 to 20. Among other things the final report notes that in the area of fees and costs, the FCA carried out a thematic review on securities lending by authorised fund managers in 2015 but there was no follow-up work. Moreover, the FCA does not provide any further guidance on fees, costs and revenues nor does it have an internal policy in this area to ensure adherence with the ESMA guidelines in a consistent and systematic manner.
ESMA updates AIFMD and UCITS Q&As 23.07.18 ESMA has updated its Q&As on the application of the UCITS Directive and the AIFMD. The new UCITS Q&As relates to issuer concentration, UCITS investment, supervisory responsibilities of competent authorities, and depositaries. The new AIFMD Q&As concern the supervisory responsibilities of competent authorities.
ESMA template for MiFID II SI calculations 20.07.18 ESMA has released a template to be used to publish the first set of figures necessary for investment firms to assess whether they are systematic internalisers in specific financial instruments. This follows numerous requests in advance of August 1, 2018, to make the template available to allow stakeholders time to adapt to the way ESMA will provide the systematic internaliser information.
ESMA letter to European Commission on implementation of MMF Regulation 20.07.18 ESMA has published a letter from its Chair, regarding the implementation of the Money Market Funds (MMF) Regulation, and the compatibility of the reverse distribution mechanism, often referred to as "share cancellation".

In the letter, ESMA calls upon the European Commission to make clear to the public, the opinion of the Legal Service of the Commission on the compatibility of the reverse distribution mechanism with the MMF Regulation, to ensure clarity to market actors and investors on the issue. Given that the MMF Regulation came into force on 21 July 2018, ESMA has requested the opinion is issued swiftly.
ECON draft report on proposed Omnibus Regulation and proposed Regulation amending ESRB Regulation 18.07.18 The European Committee on Economic and Monetary Affairs (ECON) has published draft reports on the proposed
The draft reports contain draft European Parliament legislative resolutions which provide suggested amendments to their respective instruments.
FSB report on crypto-assets 16.07.18 The Financial Stability Board (FSB) has published a report describing international work on crypto-assets. The report follows a letter that FSB Chair Mark Carney sent to G20 Finance Ministers and Central Bank Governors in March noting that crypto-assets raise a host of issues around consumer and investor protection, as well as their use to shield illicit activity and for money laundering and terrorist financing. At the same time, the technologies underlying them have the potential to improve the efficiency and inclusiveness of both the financial system and the economy.
Commisison adopts AIFMD and UCITS Delegated Regulations clarifying depositaries’ safe keeping obligations 12.07.18 The European Commission has published
Both Delegated Regulations clarify that assets of UCITS, alternative investment funds and other clients can be commingled at the level of the first custodian provided that they are initially held by the same depositary (or are initially held by the same custodian where the latter further delegates the custody of assets down the custody chain).

The next step is for the Delegated Regulations to be considered by the European Parliament and the Council of the EU.
ESMA updates EMIR implementation Q&As 12.07.18 ESMA has updated its Q&As on the implementation of the European Market Infrastructure Regulation. The updated Q&As concern funds and counterparties; legal entity identifier changes due to mergers and acquisitions; and reporting transaction scenarios to trade repositories.
Institutional Disclosure Working Group – recommendations 05.07.18 On July 5, 2018, the FCA updated its web page on the Institutional Disclosure Working Group (IDWG) stating that recommendations had been made concerning
  • Templates for data collection and disclosure.
  • What arrangements need to be in place to ensure the templates are maintained.
  • How to encourage providers to offer information using the template.
  • How to encourage more users to request information in this format from their providers.
A summary of a report concerning the IDWG’s recommendations has been published together with an FCA response. However, the FCA states that the full report, including the templates themselves, will be released in full “once a new body or group is convened in Autumn 2018 to curate and update the framework as needed in the future”.
FCA releases near final rules on SMCR extension to the rest of the FS industry and confirms implementation date 04.07.18 The FCA has published their near final rules on the extension of the Senior Managers’ and Certification Regime for those firms regulated by the FCA only
PRA Dear CEO letter – Existing or planned exposure to crypto-assets 28.06.18 The PRA has published a letter reminding CEOs of banks, insurance companies and designated investment firms of their obligations under PRA rules, and to communicate the PRA’s expectations regarding firms’ exposure to crypto-assets.
FCA Dear CEO letter: Crypto-assets and financial crime 11.06.18 The FCA has published a Dear CEO letter concerning crypto-assets and financial crime. In particular, the Dear CEO letter covers good practice for how banks handle the financial crime risks posed by these products.
ESMA updates UCITS Q&As 25.05.18 ESMA has updated its Q&As on the UCITS Directive. The Q&As include a new question and answer on the application of remuneration disclosure requirements to staff of the delegate of a UCITS management company to whom investment management functions have been delegated.

Brexit regulatory update

Author: Simon Lovegrove

A round up of recent Brexit related regulatory developments. To receive daily or weekly updates on regulatory developments subscribe to our blog,

Published guidance for financial services industry in the event of a ‘no deal’ Brexit 23.08.18 On August 23, 2018, The Department for Exiting the European Union published guidance papers for the financial services sector to prepare for the ‘unlikely’ event of a ‘no deal’ Brexit.
Dominic Raab issues speech on planning for a ‘no deal’ Brexit 23.08.18 The Secretary of State for Exiting the EU, Dominic Raab MP, has given a speech on UK planning for a "no deal" Brexit.
UK Government issues Brexit papers on ‘no deal’ planning 23.08.18 The UK Government has issued over 20 sector specific guidance notices on how businesses and individuals should prepare for a ‘no deal’ Brexit as well as an overview paper.
UK Government – Framework for the UK-EU partnership in financial services 20.08.18 On August 20, 2018, the UK Government published a presentation setting out its views on the framework for the UK-EU partnership in financial services. The presentation follows the UK Government’s White Paper on the future EU/UK relationship.
ECB supervisory expectations on booking models 20.08.18 The European Central Bank (ECB) has published a presentation which introduces its views on “empty shells” and booking models.
HM Treasury publishes SIs concerning Brexit and financial services 21.08.18
HM Treasury has published a number of draft Statutory Instruments (SIs) to maintain the legal framework of the financial services sector after exit day. These draft SIs are intended to prevent, remedy or mitigate any failure of EU law to operate effectively after the UK leaves the EU. The draft SIs are not intended to make policy changes. Other than those necessary to reflect the UK’s new position outside the EU.

These include a draft of the
FCA Dear CEO letter on cross border booking arrangements 08.08.18 The FCA has published a Dear CEO letter concerning cross-border booking arrangements. The FCA explains that it is open to a broad range of legal entity structures or booking models. This includes those making use of back-to-back and remote booking, providing their associated conduct risks are effectively controlled and managed. The FCA’s starting point is not to restrict business models but to understand the principles and practice involved and how the conduct risks that arise from them are managed.
UK regulators set out approach to temporary permissions regime 24.07.18 The FCA has published its approach to the temporary permissions regime for EEA firms that inwardly passport into the UK. The Bank of England has also published a web page setting out its approach to the regime.
Commission communication on preparing for the UK’s withdrawal from the EU 19.07.18 The European Commission has published a further communication on preparing for the UK’s withdrawal from the EU. The text of the communication calls on Member States and private parties to step up preparations and follows a previous request by the European Council to intensify preparedness at all levels and for all outcomes.
Government publishes White Paper on the future UK/EU relationship 12.07.18 The UK Government has published its White Paper on the future relationship between the UK and the EU. Chapter 1 of the paper includes comprehensive coverage of the future intended relationship of the UK/EU with regards financial services.
ESMA reminds UK-based regulated entities about timely submission of authorisation applications 12.07.18 ESMA has issued a public statement seeking to raise market participant awareness on the importance to prepare for the possibility of a no agreement scenario in the context of the UK withdrawing from the EU.

ESMA urges UK entities wishing to relocate to the EU27 to submit their application for authorisation as soon as possible to allow it to be processed before March 29, 2019. ESMA adds that some EU27 national competent authorities have stated that, unless an application is received in June/July, there is no guarantee that authorisation will be achievable before March 29, 2019.

ESMA also reminds entities that the time required to analyse an authorisation request depends primarily on the quality of the application file and encourages entities to be complete and accurate in their filing for authorisation.
UK supervisory bodies publish approaches to Brexit legislation 27.06.18 In anticipation of financial services related Brexit legislation, HM Treasury, the Bank of England, and the FCA have each respectively published their approach to Brexit SIs legislation under the European Union (Withdrawal) Act 2018 (the Act).

Key points in the FCA statement include
  • The FCA is preparing for a range of scenarios, including one in which the UK leaves the EU on March 29, 2019 without a Withdrawal Agreement and implementation period having been ratified between the UK Government and the EU.
  • The FCA will be amending its Handbook to ensure that it is consistent with the changes the Government is making to EU law. In the run up to March 2019, the FCA will limit Handbook changes unrelated to Brexit to those identified as core priorities in its Business Plan as well as other essential items.
  • The FCA plans to consult on the Brexit related changes to its Handbook in the Autumn. It also plans to consult on the rules concerning the temporary permissions regime.
  • Firms and funds that are regulated solely in the UK by the FCA will need to notify the FCA before Brexit of their intention to use the temporary permissions regime. This notification will not require the submission of an application for authorisation. The survey that the FCA issued for inbound firms in March 2018 is intended to help it identify the firms and funds for which a temporary permission may be relevant and inform the design of the regime.
  • HM Treasury’s approach to on-shoring the EU acquis will not rely on any new, specific arrangements being in place between the UK and the EU after exit and that, as a general principle, EU27 Member States will be treated as third countries (although this general approach may be deviated in some instances to ensure a smooth transition). The FCA will be taking the same approach.
  • The FCA will continue to progress important initiatives, such as the high-cost credit review, the implementation of the senior managers’ and certification regime and the next steps from the Asset Management Market Study.
Key points in the HM Treasury paper include
  • Inbound firms that are currently permitted to operate in the UK without UK authorisation or recognition may plan on the assumption that UK authorisation or recognition will not be needed before the end of the implementation period.
  • The Government has confirmed its intention to bring forward a new Bill – the Withdrawal Agreement and Implementation Bill – to give effect to the major elements of the Withdrawal Agreement in UK domestic law.
  • HMT, working closely with the FCA and PRA, has undertaken a review of EU and UK domestic financial services legislation to identify deficiencies that will arise when the UK leaves the EU. HMT is drafting statutory instruments to fix these deficiencies and will begin laying these under the Act.
  • HMT will be introducing a temporary permissions regime per the announcement made in December 2017. This regime will allow EEA firms to continue operating in the UK for a time-limited period after the UK has left the EU. The regime will provide sufficient time for firms to make an application for full authorisation from the relevant UK regulators.
  • In addition to the temporary permissions regime HMT intends to introduce further specific transitional regimes for entities operating cross-border and outside of the passporting framework.
  • Information about how HMT proposes to allocate responsibilities between the UK financial services regulators can be found in the draft Financial Regulators’ Powers (Technical Standards) (Amendment etc) (EU Exit) Regulations 2018.
  • In addition to statutory instruments published, further statutory instruments will be laid over the Autumn into early 2019. HMT plans to lay these statutory instruments in groups, with some of the first relating to prudential regulation and capital markets. Drafts of these will be published over the summer to allow for industry engagement.
Key points in the Bank of England statement include
  • The BoE intends to consult, in coordination with the FCA when appropriate, on proposed changes to on-shored EU binding technical standards (BTS) and rules this Autumn. The BoE plans to do this following HM Treasury’s (HMT) publication in draft, or laying before Parliament, of statutory instruments relating to most of its regulatory remits.
  • The changes set out in HMT’s statutory instruments, and the BoE’s changes to BTS and rules, would largely only come into force on March 29, 2019 in the eventuality that the implementation period is not put in place.
  • The BoE does not expect firms providing services within the UK’s regulatory remit to have to prepare now to implement the changes given that HMT intends to provide the UK regulators with powers to grant transitional relief.
  • If the implementation period does not take effect on March 29, 2019, HMT will bring forward legislation under the Act to create temporary permissions and recognition regimes for a time-limited period after the UK has left the EU.
  • during the implementation period the UK would continue to be treated as part of the EU’s single market in financial services. EU law would continue to apply to UK firms during this period, from March 29, 2019 to December 31, 2020. UK firms should plan on the assumption that requirements arising from new EU legislation that come into effect during this period will apply to UK firms and financial market infrastructures.
FMLC report on continuity concerns in legacy contracts post-Brexit 06.08.18 On August 6, 2018, the Financial Markets Law Committee (FMLC) published a paper, U.K. Withdrawal from the EU: Issues of Legal Uncertainty Arising in the Context of the Robustness of Financial Contracts.

An important question that has been raised in the context of a hard Brexit scenario is whether the performance of existing – sometimes called “legacy” – financial contracts would continue or whether Brexit would make their performance illegal, impractical or impossible in some way. The FMLC paper looks at this question and highlights the legal uncertainty which will arise if there is no clarity as to the future of the UK/EU relationship post-Brexit.

The FMLC concludes in its paper that, for the most part, it agrees with the European Commission’s communication of July 2018 and considers it unlikely that Brexit will give rise to issues of contractual continuity in a general sense and so far as it is a matter of English law and jurisdiction. However, the FMLC explores in the paper the potential consequences where authorisations are lost without adequate alternatives (chapter 4) and how these issues may be mitigated (chapter 5).



and on (full name):

Amendment to Circular CSSF 16/644 regarding the provisions applicable to credit institutions acting as UCITS depositary;

Amendment to Circular IML 91/75 (as amended by Circular CSSF 05/177) regarding the revision and remodelling of the rules to which Luxembourg undertakings governed by the Law of March 30, 1988 on undertakings for collective investment (UCI)

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