VIEW FROM THE TOP: BREXIT – IS LUXEMBOURG THE ANSWER?
After the UK’s fate had been decided on the 23rd June 2016, it was only a matter of time before there were several European cities being enthusiastically touted as the logical beneficiaries of the possible division of the spoils from London’s financial nexus. How many of these predictions will be borne out is still yet to be seen, but one country that already appears to be benefitting from the referendum result is the 51-mile-wide Luxembourg, which has had a long association with the financial services industry, and whose significance only seems to be growing since the decision last year.
Luxembourg has had a favoured reputation amongst asset managers since the 1980s and today has almost $4 trillion of assets domiciled there, according to the Association of the Luxembourg Fund Industry (ALFI), the local representative of the investment fund industry. In the last 12 months alone, some of the largest financial institutions, including banks, asset managers and even insurers, have developed plans either to set-up entirely new offices in Luxembourg or to add additional personnel to their already established teams. These include the likes of Blackstone, AIG, JP Morgan, Citigroup, Carlyle Group, RSA and 3i.
What are the benefits of moving to Luxembourg?
Luxembourg has the almost unique attribute of being centrally located amongst the western European countries, and thus amongst their investors, with over 70% of the European Union’s wealth lying within 700km. From this serendipitous location, it has developed over many years into a long-standing nexus of the global financial industry, with a well-established and highly sophisticated fund services network, far beyond what one might imagine for a country of its size and population. As a consequence, it is not only Europe’s largest fund centre, but the largest international centre for fund distribution, with more than 75% of the world’s cross-border funds domiciled in Luxembourg.
The country has an experienced regulatory body, a legal framework ideally suited for creating or restructuring funds, fund administrators well-versed in working across multiple locations, and a favourable tax regime. Crucially it also boasts a strong local workforce, dedicated to serving in these various specialist capacities, and usually fluent in several relevant languages.
All of these industry-specific attributes, along with excellent quality of living, have made Luxembourg for many years as close a rival to the UK as Europe could muster for the fund management community, but only in a minority of cases have they proven more tempting than the offering to be found back in London. With the impetus of impending Brexit, however, a previously intriguing prospect has become a uniquely compelling one, due to proposed changes to regulations surrounding selling investment products inside and outside the European Union. Prior to the referendum, UK-based fund managers could rely upon UCITS vehicles to open them up to the significant capital base of continental European LPs, but all indications now suggest that a fund must be registered within the EU, in order to be allowed to be sold there. With the extensive provisions already in place there, the country’s international community, and it’s ideal geographical positioning, it would seem that registration in Luxembourg is by far the most attractive alternative to relative isolation in the UK market.
So why has every fund not migrated to Luxembourg?
Whilst a considerable number of financial institutions are already in the process of setting up Luxembourg entities, applications are by no means always successful. A major factor in this is the intricate process and stringent requirements to be granted approval by la Commission de Surveillance du Secteur Financier (CSSF), the local regulator. The CSSF are now in a position where they can pick and choose those fund managers with the most efficient infrastructure, and are therefore putting more and more funds under scrutiny. Despite the claim of Nicolas Mackel, CEO of Luxembourg’s financial development agency, Luxembourg for Finance, that the Grand Duchy has been “laid back”, taxes and regulations have not been changed at all, and no applications to the CSSF will be fast-tracked. The pressure to submit applications is thus in no way going to relent for those financial institutions interested in setting up offices.
Another issue is that currently there are circa 60,000 financial services jobs based in Luxembourg, but an additional 3,000 such positions are anticipated to be created there over the next two years, and there will be more to follow. With only a certain number of skilled professionals in the market, managers run the additional risk of missing out on the highest quality staff, especially if they play the waiting game before making a move. In some cases, such as with the role of Conducting Officer – a prerequisite from the CSSF for any fund – a less than adequate hire would not be merely inconvenient for an investment firm, but could spell disaster for their attempt to establish a presence in Luxembourg. The crucial position of Conducting Officer is usually deemed too complex to be undertaken by a less experienced staff-member or a secondee from the UK, without running the risk of approval being denied by the regulator, so as the volume of fund applications for Luxembourg entities continues to increase, that shallow pool of capable candidates will be fought over all the more fiercely.
Brexit of course is not the only current factor that has the potential to change the European financial industry irreversibly. AIFMD and the new regulations for management companies mean Luxembourg is attracting even more attention from firms seeking to meet these new rulings, creating yet more competition to win regulatory approval and successfully hire key professionals in the region.
What is the answer?
Luxembourg undoubtedly provides an excellent choice as a location for a European office, although evidently not without a number of caveats. Despite the potential complications mentioned above, and the as yet unanswered questions around possible tightening of regulations pertaining to so-called ‘delegation’ by investment houses, fund managers have so far been voting with their feet. David Aird, Managing Director of UK Business Development at Investec Asset Management, stated when asked about whether he had a Brexit issue, “no, far from it.” Why? “I’ve got a range of funds sitting in Luxembourg that is fully developed”. Other big names are following suit; M&G Investments, who were the first British asset manager after the referendum to announce concrete plans to set up an office in Luxembourg, have since proposed that an additional £6bn in assets be moved to this new entity, which the CSSF has now approved. Chief Executive Anne Richards explained that this was to “minimise disruption for our investors”, and thus obviously an opportunity that the £281.5bn* asset manager could ill afford to miss. However, while it is clear that there are huge benefits to having a presence in the country, preparation, planning and timing will be vital to any fund considering setting up there, as it seems likely that a moment will come when capacity is reached and Luxembourg closes its doors.
*as of 30th June 2017
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