The Luxembourg government deposited a bill of law1 with Parliament on 3 July 2017 (Bill),2 which will transpose MiFID II3 (Directive) and implement MiFIR4 in Luxembourg. For further information regarding MiFID II, please refer to Dechert OnPoint, MiFID II: Key Considerations for Asset Managers.
Among other provisions, the Bill introduces three new financial sector professionals to implement the newly regulated approved reporting mechanisms: providers for approved publication arrangement (APA); providers for approved reporting mechanism (ARM); and consolidated tape providers (CTP). The Bill also contains stricter rules on product governance and higher organizational requirements for the management of investment firms, with an aim to enhance investor protection and strengthen the market against systematic risks. The sanction authority of the Commission de Surveillance du Secteur Financier, the Luxembourg supervisory authority for financial services (CSSF), has also been strengthened.
The main part of the implementation will be achieved by amending the Luxembourg Financial Sector Law5 and introducing other amendments through lower-level legislation and regulation6.
As of the date of this publication, neither the Finance and Budget Commission (Commission des Finances et du Budget) (Commission), which considered the Bill, nor the State Council (Conseil d'Etat) has provided an opinion on the Bill.
The timeline for the implementation – with a deadline of 3 January 2018 – seems extremely tight, bearing in mind that: (i) the implementation for MiFID I took more than eight months; (ii) the Directive is even more complex; and (iii) implementation includes delegated national acts that will depend on the final law.
Luxembourg's Stance on Provisions where Discretion is Left to Member States
The following are examples of areas in which Luxembourg has exercised its discretion where matters have been left to member states.
Third Country Regime
The Directive introduces a third country regime, which – depending on the circumstances – provides “equivalence” to investment firms from third countries when such firms provide investment services and conduct activities in the EU. The impact of this regime on such firms depends on: (i) the type of client (eligible counterparties and clients known as “per se professional clients” in the context of MiFID on the one hand, and clients known as “opt-up professional clients” in the context of MiFID and retail clients on the other); (ii) how services are provided (through a branch or the freedom of services within the EU framework); (iii) whether an equivalence decision has been made by the Commission (in which case, the equivalence decision will take precedence over the national regimes); and (iv) whether a member state has exercised its discretion to allow activities by third country firms.
The Directive provides that certain conditions must be met if a member state requires that services be provided through a branch. Luxembourg exercised the option to require third country firms to establish a branch when providing services to retail clients and opt-up professional clients, pursuant to the Project Law7, which in turn requires the existence of a cooperation agreement between Luxembourg and the home member state of the investment firm. However, Luxembourg has been less strict with respect to eligible counterparties and per se professional clients – services to these clients may be provided through a branch or via cross-border services, provided the Commission has not made a decision on equivalence.
An investment firm may appoint an entity or natural person known as a “tied agent”, which acts on behalf of the investment firm within the context of that firm’s authorization and under its full responsibility. The Directive changes, or provides the option to change, points in the regime to which the tied agent is subject. Much is left to the member states’ discretion.
The Bill expressly states that Luxembourg does not intend to opt to allow investment firms to register tied agents in a self-regulation mechanism, but that the tied agent must instead (as previously) be registered with the CSSF. Luxembourg has been less strict on the other points – for example, it has not proposed legislation covering whether tied agents registered in Luxembourg may be authorised under the Project Law to hold money and financial instruments of clients.