07/07/2020

1. Context

By way of background, the circular letter 19/716 provided in the past some useful guidance on the terms and conditions to be complied with by third country firms more generally when providing investment services covered by the amended law of 5 April 1993 on the financial sector ("LFS") in Luxembourg.

As a reminder, until the first equivalence decisions will be rendered at EU level by the European Commission so that the EU wide third country regime can then fully deploy its effects, the provision in Luxembourg of investment services and ancillary services by third country firms will have to be assessed pursuant to the Luxembourg national third country regime (see Article 32-1 (1), paragraph 2 of the LFS).

Indeed, pursuant to such Article, third country firms may choose to provide such services to per se professional clients or eligible counterparties through a branch established in Luxembourg but may also provide these services on a mere cross-border basis, directly from the third-country, without having to establish a branch in Luxembourg (we refer to our Newsflash dated 18 April 2019), it being understood that the servicing in Luxembourg of retail clients or professional clients upon request will in any case require the establishment of a branch in Luxembourg going forward.

 

2. A territorial nexus to a service provision under the national third country regime

Since Article 32-1 (1), paragraph 2 of the LFS enacts a territorial link to such a service provision (due to the use of the terms “in Luxembourg”), the Circular now aims at further clarifying under which circumstances would a third country firm be presumed to be providing these investment services and ancillary services also on the Luxembourg territory.

Pursuant to the Circular, the service will indeed be presumed being provided in Luxembourg, according to the CSSF, where one of the following conditions is fulfilled:

  • the third country firm has a permanent establishment in Luxembourg (e.g. a branch);
  • the third country firm provides a service to a retail client established or located in Luxembourg; or
  • the “characteristic performance” of the investment service, i.a. the essential investment service for which a payment is due, is provided in Luxembourg.

Otherwise said, there may be a number of circumstances where, although an investment service is being provided by a third country firm to a client located in Luxembourg (other than a retail client or a professional client upon request), it would nevertheless not necessarily be considered as being provided on the Luxembourg territory, thereby discarding the applicability of such national third country regime and its (rather stringent) requirements.

Consequently, third country firms will then no longer have to worry about these requirements, in line with the situation where the investment service would have been provided on an own exclusive initiative basis to a Luxembourg client.

However, any relevant third country firm is invited by the CSSF to first carry out a detailed analysis of the various facts and circumstances at hand before concluding (with the necessary comfort) that it shall not be considered as providing any investment service on the Luxembourg territory to such a category of client, an assessment which one should also carefully document for future reference purposes.

 

3. A first list of equivalent third countries under Article 32(1), paragraph 2 of the LFS

Where the investment service is being considered as provided on the Luxembourg territory (pursuant to point 2. above) and the third country firm also chooses to provide such service on a pure cross border basis under such national regime, it will then in turn become subject to the requirements of Article 32-1 (1), paragraph 2 of the LFS and pursuant to which it will have, amongst others, to originate from a country being considered equivalent by the CSSF in terms of supervision and authorisation rules.

In this context, the Regulation has now provided for a first list of “equivalent” jurisdictions: i.e. Canada, Switzerland, the United States, Japan, Hong Kong and finally Singapore. The UK, due to the currently ongoing Brexit negotiations, has so far not yet been on boarded to such list but we expect that a position with respect to the UK will be adopted at EU or Luxembourg level prior to 31st December 2020.

In case you wish to receive some more detailed information, please feel free to directly contact the Arendt MiFID II team.

 

(1) Circular letter 20/743 (“Circular”) amending circular letter 19/716 on the provision in Luxembourg of investment services or performance of investment activities and ancillary services in accordance with Article 32-1 of the law of 5 April 1993 on the financial sector, as amended (the “LFS”)

CSSF Regulation n°20-02 (“Regulation”) on the equivalence of some third countries for the purposes of the national third country regime

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