The regulator’s perspective: a post-Brexit reality

25 June 2021

It’s been more than half a year since the end of the Brexit transition period. Financial services firms have shifted resources, operations and talent into the EU in preparation for this year and, for the most part, it’s gone fairly smoothly. We sat down with Isabelle Jaspart, Head of division – legal department, and Anne-George Kuzuhara, Deputy Head of the Banking Supervisory and SSM Coordination Department, to discuss the post-Brexit world from the CSSF’s perspective.

1. Brexit became a reality on 1st January 2021 and we have a new situation on the ground. What does this new situation mean for the businesses that the CSSF supervises?

Brexit was on the agenda (even though the agenda has admittedly been amended a few times) for more than four years. As a regulator, we made sure that the new situation on the ground did not happen overnight on 1st January 2021 and that businesses were ready to operate with no cliff effect despite the loss of their EU passporting rights.

The European Supervisory Authorities (such as ESMA and EBA), the European Central Bank, which is the competent authority in the EU supervising large significant banking groups, as well as the CSSF have extensively communicated on the need for impacted entities to continue to make progress on contingency planning, to finalise their full execution before the end of the transition period and to duly inform their investors and customers of the consequences of the termination of the transition period.
Extensive supervisory dialogues have taken place with the institutions under our jurisdiction (or in the case of large banking groups, under the jurisdiction of the European Central Bank) to ensure that they were effectively reorganising their operations in accordance with the supervisory expectations, such as, for example, the need to build up risk management capabilities and related infrastructure (IT, finance and operations) in the EU.
We have also made sure that Luxembourg firms active in the UK have duly applied for the UK temporary permissions regime. In the asset management industry, the CSSF communicated, at length, the expectations and has taken steps to ensure that the level of preparation was adequate.
In December 2020, a milestone in our Brexit work has been the release of the CSSF’s equivalence decision for UK firms providing investment services to certain clients in Luxembourg and the application of the third country regime to the UK, as permitted under the Market in Financial Instruments Regulation (MiFIR).
All in all, the transition has gone smoothly. From our perspective, thanks to the preparatory work during the transition period ahead of the January 1st deadline, business continuity has been ensured.
Our work does not stop here. We continue to monitor the situation, for example on the question of the equivalence of the UK, which is key under a number of European directives and regulations.

2. There has been a lot read into the Memorandum of Understanding on regulatory dialogue. Many see it as the next step in negotiations. Could you detail what exactly the MoU is?

The Trade and Cooperation Agreement signed on 24th December 2020 only briefly covered financial services. It sketched out some broad principles on financial services but has not established a mutual recognition or equivalence regime between the UK and the EU that could have mitigated the loss of passporting rights.

However, in the Joint Declaration published alongside the Trade and Cooperation Agreement, the UK and the EU committed to agree on a Memorandum of Understanding (MoU) or cooperation framework by March 2021, covering exchanges of views on regulation and ‘transparency and appropriate dialogue’ on equivalence-related processes.

The technical discussions on the text of the MoU were indeed concluded in March 2021. The MoU does not provide a mechanism for enabling immediate market access between the UK and the EU, but creates the framework for voluntary regulatory cooperation in financial services between the UK and the EU. The MoU establishes the Joint UK-EU Financial Regulatory Forum, which will serve as a platform to facilitate dialogue on financial services issues. The establishment of the Forum is a very positive evolution in that it will reduce uncertainty and identify potential cross-border implementation issues.
The actual recognition of the UK as an equivalent third country will be critical in the months to come. In this respect, in 2020, the European Commission initiated the equivalence assessment processes with the technical expertise of the European Supervisory Authorities such as ESMA and the EBA. So far, two temporary equivalence decisions have been made essentially for systemic reasons, one for central clearing and one for central securities depositories. The process will necessarily take some time as there are more than forty areas to be covered for financial services. The European Commission has also made clear that it will take a forward-looking approach when making the assessment on the equivalence of UK regulation taking into account the UK’s regulatory intentions for the future.

3. How do you see the cooperation between UK authorities and the CSSF evolving in the near to mid-term future?

Due to the interconnected nature of their markets, the CSSF and the British authorities have a long history of fruitful and efficient cooperation, mainly with the Financial Conduct Authority (FCA) for asset management and with the Prudential Regulation Authority (PRA) for all banking matters. We have excellent contacts at all levels of these authorities and have exchanged in the past whenever it was deemed useful or necessary to complete our respective missions.

In line with such continuous exchanges, we signed a memorandum of understanding in April 2019 with the PRA and the FCA, as well as the multilateral MoU prepared by ESMA.

A first conclusion on the current situation is thus positive. For example we can consider that cooperation condition within the framework of the third country regime for investment services, such as asset management, is already fulfilled.
Going forward, we are committed to maintain the dialogue between the UK authorities and ourselves for the supervision of the entities falling within our respective jurisdictions.

We will perhaps, in the future, need to learn to work together under a new regulatory framework, but there is no reason why it should not work, as the grounds are strong and as all parties are willing to cooperate in a forward-looking attitude.