Legislative framework and key obligations for Professionals of the Financial Sector (PSF)
- Definition of PSF
- Legal requirements
- Professional obligations, prudential rules and rules of conduct
- Reorganisation, winding-up and penalties
Definition of PSF
PSF are defined as those persons “whose regular occupation or business is to exercise a financial sector activity or one of the connected or ancillary activities referred to in sub-section 3 of section 2 of [Chapter 2, part I of the Law] on a professional basis”, to the exclusion of credit institutions and those persons contemplated in paragraph (2) of Article 1-1 of the Law (hereinafter the ‘Law’).
PSF can thus be defined as regulated entities providing financial services which are not solely reserved for credit institutions, i.e. the receipt of deposits from the public.
The category of Professionals of the Financial Sector (PSF) encompasses 3 sub-groups, classified and defined depending on the type of business conducted and the nature of services provided.
Although PSF are not commercial entities like others, they are nonetheless governed by the modified law of 10 August 1915. They are, however, also governed by the Law on the financial sector, which is completed by a multitude of national rules, CSSF circulars or other laws governing all aspects of the very diversified activities carried on by PSF.
Modified law of 5 April 1993
The Law forms the basis of rules governing players in the financial sector and transposes into Luxembourg law many European directives applicable to the financial industry and particularly the banking sector.
This Law sets forth in particular the regulation on access to the financial services industry, professional obligations and other prudential rules and rules of conduct, prudential supervision, proceedings for the reorganisation and winding up of financial sector professionals, as well as deposit guarantee and investor compensation schemes.
Professional obligations, prudential rules and rules of conduct
The Law specifies, particularly in part II, the professional obligations and rules that PSF and credit institutions must meet or observe. It should be noted that among these core requirements, some are only applicable to investment firms.
Applicable to all PSF
KYC and combating money laundering and terrorist financing (Art. 39 of the Law and Art. 3 to 5 of the modified law of 12 November 2004)
Pursuant to the modified law of 12 November 2004 and to CSSF regulation 12-02 PSF are subject to a set of rules necessary to combat money laundering and terrorist financing, giving rise to obligations in terms of due diligence in relation to their clients, appropriate internal organisation and cooperation with authorities.
Obligation to cooperate with authorities (Art. 40 of the Law and Art. 5 of the modified law of 12 November 2004)
In anti-money laundering and the fight against terrorism matters, PSF must cooperate with the Luxembourg authorities through their representative, managers and employees. The representatives, managers or employees report by means of a declaration, as soon as possible and spontaneously, any suspicion of money laundering or terrorist financing to the State Prosecutor at the Luxembourg District Court. Similarly, they provide the State Prosecutor with all information necessary for procedures to be applied.
In such a case, the PSF must not perform any transaction it considers suspicious and it must not inform the client or the third party involved of the investigations in progress.
Professional secrecy (Art. 41 of the Law)
In the same way as credit institutions and other specific players in the financial sector in Luxembourg, natural and legal persons subject to the supervision of the CSSF, as well as all directors, members of management and supervisory bodies, managers, employees and other persons working for the PSF or natural and legal persons involved in the liquidation of PSF and all the persons designated, employed or appointed for any duty as part of a liquidation procedure, are required to keep secret any information confided to them in the context of their professional activities or appointment9. Disclosing such information covered by professional secrecy is punishable by the penalties laid down in Article 458 of the Penal Code which makes provision for a prison sentence of between eight days and six months as well as fines from €500 to €5,000.
Applicable only to investment firms
Organisational requirements (Art. 37-1 of the Law)
Even though all PSF are subject to organisational requirements, Article 37-1 strengthens these organisational obligations for investment firms since they provide investment services and operations for third-party clients who must be protected by sound and standardised management structures.
Conflicts of interest (Art. 37-2 of the Law)
Anticipating the existence of a residual risk in spite of the measures described above relating to the organisational or administrative arrangements to be made to prevent and manage conflicts of interest, the Law advises investment firms to clearly inform their clients of the general nature and sources of conflicts of interest before undertaking business on their behalf.
Rules of conduct when providing investment services to clients (Art. 37-3 of the Law)
The overall aim is to ensure that the investment firm has sufficient and adequate structures to serve clients appropriately, openly and in line with the client’s risk profile. As part of the investment activities and services provided to clients, investment firms must act fairly and honestly in the best interest of the client.
Best execution (Art. 37-5 of the Law)
Through an efficient system applying an order execution policy known and approved by clients, investment firms must achieve the best possible result for clients when executing orders, given the relevant parameters, i.e. price, cost, speed, likelihood of execution and settlement, size and nature of the order.
Client order handling (Art. 37-6 of the Law)
Investment firms authorised to execute orders on behalf of clients must implement procedures which provide for the prompt and fair execution of client orders, relative to other client orders or their own trading interests. These procedures provide for execution depending on the date orders are received by the investment firm.
Reorganisation, winding-up and penalties
Here we examine the legal framework applicable to certain PSF suffering serious financial difficulties, as well as the penalties applied to PSF and more especially their managers, before focusing on the details of the authorisation procedure.
Reorganisation procedure (Art. 60 of the Law)
Like the next section on winding-up, the reorganisation procedure or suspension of payments only applies to PSF responsible for managing third party funds: commission agents (Art. 24-2), asset managers (Art. 24-3), professionals trading for their own account (Art. 24-4), underwriters of financial instruments (Art. 24-6), distributors of units in UCIs which accept or make payments (Art. 24-7), transfer agents or registrars (Art. 25), professional depositaries of financial instruments (Art. 26) and professional depositaries of assets other than financial instruments (Art. 26-1).
Suspension of payments, which may only be sought of the Court by the CSSF or the PSF in question, may occur in the following cases:
- The PSF finds itself in an insoluble liquidity crisis
- The entire ability of the PSF to meet its commitments is compromised
- The PSF’s licence has been withdrawn but the withdrawal decision has not yet become final
Appointed by the judicial authorities, the administrator is responsible for managing the reorganisation measures, and as such must authorise in writing any act or decision made by the PSF under penalty of it being null and void. The scope of the transactions subject to this authorisation procedure may be adapted. In this management role, administrators partake in the governance of the PSF and make proposals that are submitted to the company’s decision-making bodies.
Legal winding-up proceedings
A PSF may only go into voluntary winding-up if it informed the CSSF at least one month before calling the general meeting to decide on the winding-up. This voluntary winding-up decision shall not preclude the CSSF or the State Prosecutor from asking the Court for an order declaring the procedure for judicial winding-up applicable.
The dissolution and winding-up of the PSF in question occur when:
- The suspension of payments system is obviously not sufficient to remedy the situation
- The PSF’s financial situation is such that it can no longer meet the commitments to all of its debtors, obligees and holders of participatory rights
- The authorisation has been withdrawn and the withdrawal decision has become final
When ordering the winding-up, the Court shall appoint an official receiver and one or more liquidators. Please refer to the details of the modified law of 18 December 2015 on the failure of credit institutions and certain investment firms in Article 129 for a description of the manner in which the winding-up is to be carried out.
Administrative and criminal penalties (Art. 63 and 64 of the Law)
The persons responsible for the administration and management of PSF supervised by the CSSF may
be fined from €250 to €250,000 in the event that:
- They fail to comply with applicable laws, regulations, or statutory provisions
- They refuse to provide accounting documents
or other requested information
- They have provided documentation or other information that proves to be incomplete, incorrect or false
- They hinder performance of the CSSF’s powers
of supervision, inspection and investigation
- They contravene the rules governing the publication of balance sheets and accounts
- They fail to act in response to injunctions of
- They act such as to jeopardise the sound and prudent management of the PSF concerned
In the event of more serious acts, criminal sanctions are provided for that combine a prison sentence of between eight days and five years and a maximum fine of €125,000.