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Luxembourg after Brexit

By - IIII Ltd

Q1/. How will Luxembourg entities (intermediaries and insurers) interact with UK clients and partners after Brexit ?

Over the last three years the UK and EU have been trying to agree transitional arrangements which would apply from the UK’s exit point (initially 29st March 2019, now 31st October) until that time the EU has stated those arrangements must cease (initially 31st December 2020).  Nothing is yet settled for the near or long term.

The fundamental problem is as follows; Theresa May established with the EU an agreement but the UK parliament kept rejecting it.  Commentator’s have talked of a Constitutional Crisis - the country is split. Whilst there might be a political consensus on what ‘not to do’ there is, as yet, no majority on what ‘to do’.

The impasse could continue for some while. Therefore, to best answer the question raised we need to look at the possible outcomes and then the potential impact upon Luxembourg practitioners.

Currently Luxembourg entities are able to passport their services into the UK under the EU FPS regime. Their activities are notified to the UK FCA (Financial Conduct Authority) but the FCA has no direct power of sanction. This passporting of services will continue where -
     -   there is agreement within transitional arrangements.
     -   if the UK adopts a ‘soft’ Brexit such as the ‘Norway’ model (in essence via EEA membership)
     -   if some political event determines that the UK does not leave the EU.
NB: Even if the UK crashes out of the EU with no deal (Hard Brexit) under the FCA Temporary Permissions Regime (TPR) Luxembourg entities will maintain existing permissions for up to 3 years (the availability of the TPR illustrates the FCA’s expectation of and pragmatic approach to the political void now seen).

However, if a Hard Brexit (no deal/Canada style arrangement) becomes the reality then once the TPR has elapsed Luxembourg businesses wishing to be active in the UK will require direct permission from the home regulator, the FCA.
NB: UK residents will remain free to transact with non-UK entities outside of the UK.

The importance of the UK as a market for Luxembourg institutions is difficult to assess in isolation.  Whilst the UK domestic population is well served for financial products, many European entities servicing the Continent’s Private Client community will have UK Resident Non-Domicile clients. These clients and their wider families are important to European Private Banks, Family Offices and other specialist intermediaries. London is a global hub. No matter what Brexit eventually delivers the UK will not disappear into the distance as far as the Luxembourg finance community is concerned. Practitioners will adapt as necessary.

Q2/.What will be the impact of Brexit upon the Luxembourg Life Insurance sector?

Despite not yet being able to describe what Brexit is and what impact it could have upon the industry we can dispel some common myths and misunderstandings as regards how HMRC views contracts issued in Luxembourg and their benefits for UK residents.

HMRC identifies and treats differently those policies issued within the UK and then those issued outside of the UK. Foreign policies, those issued anywhere outside of the UK, are all covered under one regime.  HMRC1 does not distinguish between contracts issued from within the EU (Luxembourg, Dublin, ...), within the EEA (Liechtenstein), from the Crown Dependencies (Jersey, Guernsey, Isle of Man), or the Overseas Territories (Bahamas, BVI,..). The fact that the UK and Luxembourg may no longer be part of the same trading body, the EU, will have no impact upon the taxation of contracts.
     -   existing Luxembourg contracts owned by UK residents will continue to be effective.
     -   contracts purchased between now and whenever Brexit occurs will continue to be effective.
     -   contracts purchased after Brexit will be effective.

The major impact of Brexit will not be upon the fiscal treatment of Luxembourg contracts owned by UK residents but rather upon the activities of Luxembourg regulated entities currently passporting into the UK.
If Luxembourg Insurers and Wealth Managers will no longer be able to passport services they will either 

  • create an FCA regulated entity
  • employ the services of an FCA regulated entity
  • work within any available transitional/run-off arrangements
  • respond to client initiated demands by services delivered outside of the UK
  • cease activity with UK residents

Whilst we can describe the general threats and opportunities of Brexit to Luxembourg insurers and Wealth Planners the ultimate impact of Brexit upon each business will vary;
     -   some will exit the market
     -   some will take advantage of the reduced competition
     -   some will augment and adapt their services

UK residents are well served with insurance solutions and will retain access to foreign life assurance no matter what happens with Brexit. Yet, the Luxembourg model of life assurance has particular strengths including – explicit investor protection, political & economic stability and internationally recognised and accepted contracts. The impact of Brexit upon the Luxembourg life insurance sector remains in part in the hands of the market players.

Q3/. A number of UK Non-Life Insurers have created Luxembourg entities since the Brexit referendum in 2016. This is not the case for Life-Insurers.  Can you say why?

The answer lies in the nature of the insurance industry serving the UK population. 
There is a large and well established domestic life insurance industry serving the local population. 
The market for pure protection plans (no investment element) is highly competitive; more so than in many EU states. Outside of niche market sectors foreign contracts have little potential advantage. However, few UK insurers have shown any inclination to expand into Europe. They did not do so before the prospect of Brexit and show no intention afterwards.

The market for investment based life insurance contracts is very different. All UK residents can take advantage of the inherent tax efficiencies available within Investment Bonds/Assurance Vie issued from tax neutral jurisdictions. UK insurance groups began establishing non-UK entities in tax neutral jurisdictions as far back as the 1980s. They did so then, initially in the Isle of Man but latterly in Dublin, so see no need to create additional entities now.

Those non-life insurers of the UK that have created Luxembourg entities since 2016, as a reaction to Brexit, can be characterised as specialist businesses.  

Q4/. Do you know of a UK company that has created an entity in Luxembourg since the Brexit referendum?  If “Yes” can you say why they moved to Luxembourg and give an opinion of their prospects for growth?

Yes, I do know of a UK insurer that has created a Luxembourg entity within the last 3 years as a direct result of Brexit. However, I prefer not to disclose their name. 
Regarding their motives for the Luxembourg operation I would offer the following;-
         If a UK insurer is establishing an entity to defend its position of passporting services across the EU after Brexit then it must be conscious of the choices available to it; i.e. Luxembourg’s competitors.  We can list Dublin, Frankfurt, Paris, Malta and many others. Dublin offers both a focused financial hub for business and an attractive location for relocating staff (if we ignore the weather). I am sure that Luxembourg ‘plc’ has tried to analyse why Lloyds of London established an entity in Brussels?
Luxembourg must play to its strengths;
     -   an international financial hub for Private Client services
     -   politically and financially secure at the heart of Europe
     -   safe and attractive for relocating families.

Regarding the UK business that I am referencing, I would suggest that they chose Luxembourg as it is a significant EU centre for Private Client services. Luxembourg has the relationship managers with direct client exposure.  

As regards the potential for growth of the new Luxembourg entity; 
Luxembourg is expensive. The operation I am referencing does not have a ‘skeleton’ crew but it is clear that the institution concerned will only place in Luxembourg what is essential from a practical and regulatory standpoint.  
Luxembourg cannot yet claim to be a global hub for ‘risk’ insurance but it has the potential for growth.

1 Her Majesty's Revenue and Customs is a non-ministerial department of the United Kingdom Government primarily responsible for collecting taxes and paying for certain services provided by the State, as well as for UK social security contributions.