Financial regulators in Luxembourg and the Netherlands reach agreement with UK FCA in preparation of a no-deal Brexit

On 1 February 2019, the Luxembourg regulator, the Commission de Surveillance du Secteur Financier announced that the European Securities and Markets Authority (ESMA) and the European securities regulators have agreed memoranda of understanding (MoUs) with the United Kingdom (UK) securities regulator, the Financial Conduct Authority (the FCA). These MoUs are in preparation of a no-deal Brexit, i.e. the case in which the UK would leave the European Union (EU) without any withdrawal agreement in place. In that scenario, UK financial institutions will immediately lose their rights to have direct access (on the basis of a European passport) to the markets within the countries of the European Economic Area (EEA). The MoUs will only take effect in case such no-deal Brexit is indeed happening.

The first MoU has been concluded between ESMA and the FCA and regulates the exchange of information in respect of supervision of credit rating agencies and trade repositories.

The second MoU has been concluded between the securities regulators of the EU/European Economic Area and cover inter alia supervisory cooperation, enforcement and information exchange between the EU regulators on the one hand and the FCA on the other hand, relating to amongst others, investment services and asset management activities. ESMA announced that, based on this MoU, UK based entities may continue to perform activities in respect of fund manager outsourcing and delegation on behalf of counterparties based in the EU/EEA. This is of particular importance for EU/EEA based alternative fund managers (AIFMs) who, on the basis of article 20 of Directive 2011/61 (AIFMD) (as this article has been implemented in Luxembourg and Netherlands law) have delegated or sub-delegated (part of) their asset management activities to UK based financial institutions.

Amendment to the Netherlands Exemption regulation Act on the financial supervision

On 4 February, the Netherlands Ministry of Finance announced that, in anticipation of a no-deal Brexit, it will amend the exemption regulation promulgated under the Netherlands Act on the financial supervision (Vrijstellingsregeling Wft, the NL Exemption Regulation). Currently, article 10 of the NL Exemption Regulation exempts investment firms based in the United States, Australia and Switzerland, from the license requirement under the Act on the financial supervision (Wet op het financieel toezicht the AFS) insofar (i) they are subject to supervision from their home state regulatory authority (ii) their investment services in the Netherlands are performed to professional clients (as defined in Directive 2014/65 MiFID) only and (iii) they have registered themselves with the Netherlands regulatory authority, the Authority for the Financial Markets (Autoriteit Financiële Markten, the AFM). On the basis of the exemption, no license requirement will apply and most of the rules laid down in the AFS in respect of market conduct supervision and prudential supervision do not apply.

A no-deal Brexit will cause discontinuity in the provision of services to Netherlands professional clients (among which activities in respect of ongoing derivative contracts) insofar UK investment firms have not yet obtained a full license for performing their activities in the Netherlands. In order to avoid adverse consequences of a no-deal Brexit, article 10 of the NL Exemption Regulation will be amended as to cover UK based investment firms as well.

This means that, once a no-deal Brexit will happen, UK based investment firms who provide their services to professional clients only and who are subject to supervision by the FCA, will be in the position to register themselves with the AFM after which they can continue servicing their professional clients in the Netherlands, albeit with some, relatively small, Netherlands regulatory implications in respect of market conduct supervision and prudential supervision.

The AFM charges a one-time fee of EUR 4,400 for the application. The amendment will not take effect other than in case of a no-deal Brexit. The amendment is of a temporary nature and will apply (as now foreseen) until 1 January 2021.

This newsletter gives a brief overview of the current status of regulations in the financial sector in relation to Brexit. The lawyers of Buren Avocats S.à r.l. in Luxembourg and of Buren N.V. in the Netherlands, can be of help and assistance in respect of the issues mentioned above.

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