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Brexit Update: 10 September 2019

Posted on 10 Sep 2019

Brexit September

After last week’s parliamentary sessions, the outcome of Brexit remains uncertain as ever, leaving the two following scenarios for our clients considering product distribution between the UK and EU:

  • If there is a deal, a ‘transitional Brexit’ should mean certain permissions remain unaffected for a couple of years to ensure the orderly functioning and stability of the financial markets, although after a transitional period it is not yet known what will apply.
  • If there is a ‘no-deal Brexit’ which will result in the UK leaving the EU without any transition agreement, regulated firms in the UK will not be able to rely on passporting rights.

While current forces in Parliament are seeking to prohibit a no-deal Brexit from occurring, it is understood that the UK government will seek to sail against the wind and push for the most limited legal interpretation of legislation designed to block no-deal, effectively keeping it as an option on the table. There may also be a further extension to Article 50 to allow more time, however this would require EU members' permission.

Given the current climate, if a ‘no-deal Brexit’ occurs any UK-based permissions for distribution may not permit activities inside the EU. In fact, many of our US-based clients using some form of EU regulatory cover to act in the EU will now have to cease and take stock of any activity relying on a UK base. From the view of the European Securities and Markets Authority (“ESMA”)’s former pronouncements and those of other jurisdictions such as France, we expect extreme oversight from EU members towards firms acting seemingly from the UK. ESMA had notably already delivered guidance on supervision among EU regulators in the context of Brexit. The ESMA requires National Competent Authorities to ensure that substance requirements are met and to give special attention to the incorporation of letter-box entities in the EU.

To solve this, Laven has set up a new company in Luxembourg called Lumen Distribution SARL (“Lumen”) which will act as a tied agent of Fuchs & Associes Finance S.A. – a MiFID Firm authorised and regulated by the CSSF (“Fuchs MiFID”). UK based firms will be able to meet the following substance requirements should they opt to work with Lumen which will have its own staff in Luxembourg:

  • Physical location and communications:  UK firms would be able to second a specialist consultant (“Consultant”) to Lumen in connection with the relevant products to be distributed, assisting Lumen in its duties to carry out the distribution activities within the EU. These activities with EU clients/prospects (“EU Clients”) must be conducted from within the EU. If the Consultant wishes to communicate with EU Clients whilst in the UK, they will need to make use of Lumen’s employee in Luxembourg who will facilitate a "chaperoning arrangement" whereby they share emails and cover phone exchanges between the Consultant and EU Clients. In the event the Consultant has already established dialogue with EU Clients, these conversations cannot happen whilst in the UK if the UK leaves the EU without a deal, as there is no grandfathering consideration.
  • Meetings: The Consultant is able to meet investors in the EU subject to appropriate disclosure that they are acting on behalf of Lumen. Lumen will require evidence of travel and provide best practice advice to its consultants which it will monitor as per CSSF requirements.

We believe that notwithstanding the above, contact from the UK can still be made for unregulated activities such as market research. Guidelines will be given to avoid confusing regulated and unregulated activity connected to advising or arranging in relation to financial instruments.

It is also worth saying that reverse solicitation which is recognised by AIFMD would also be applicable in certain EEA countries for MiFID investment services but only at the exclusive initiative of the investor. Therefore, in the event where a prospect is approaching a distributor or a fund manager, for instance, this should be acceptable subject to retaining evidence in this regard.

If you would like to speak with the Brexit team please do not hesitate to get in touch via email, brexit@lavenpartners.com or call us on +44 (0)20 7838 0010.