Denise Voss of ALFI explains that continuing its partnership with the UK post-Brexit is important, and although Luxembourg’s fund industry is in good shape, there are a lot of changing dynamics to deal with
How is Luxembourg faring in the current geopolitical climate?
I think it’s faring well; we’re one of the few countries with an ‘AAA’ rating. We just had that reconfirmed, and that reflects the social, economic and political stability in Luxembourg, which is one of the selling points I would say and one of the reasons why people are keen to set up here. Obviously, with Brexit and the UK leaving the EU, that changes the dynamics of the EU. How exactly? Well, we don’t know yet—we will see. But clearly within the EU, with the UK, one of the largest member states, no longer being there, that means we lose a natural supporter of free trade and of course financial services, which is also very important to Luxembourg.
Luxembourg has a long-standing relationship with the UK in many ways, but in the fund industry, about 17 percent of assets under management in Luxembourg are managed by UK asset managers. So continuing that partnership will be important to Luxembourg. We will have to work within the limits of the relationship negotiated by the EU and the UK, so I’d say from a stability point of view, Luxembourg is in good shape, but there are a lot of changing dynamics we need to deal with.
What would be the best outcome post-Brexit for Luxembourg?
The best outcome would be that we are allowed to continue to delegate asset management to UK asset managers, in the same context, with the same rules that we use today. Given the European Commission’s proposal on the European Supervisory Authorities’ (ESA) powers, we’ve moved beyond speaking about delegation to the UK to speaking about delegation to all non-EU countries. For most of us in the fund industry, it was surprising to hear the commission’s proposal, which is inspired by Brexit but goes far beyond Brexit.
The best case scenario for the European fund industry would be being allowed to work closely with the UK and to continue to delegate to experts in non-EU countries with no additional requirements.
What opportunities will 2018 bring for the Luxembourg fund industry?
One large focus is distribution and one of ALFI’s missions is to continue to open distribution markets around the world; we currently have investors registered in over 70 countries who hold a Luxembourg UCITS investment fund. Back in 2017, we opened up in Australia, as well as Thailand and Vietnam. In Thailand, for example, allowed local feeder funds were set up to invest in UCITS, but now that the Thai authorities have understood and accepted the UCITS framework they now allow foreign funds including UCITS to be set up directly for distribution in Thailand. Interestingly, once countries are opened up to UCITS it doesn’t mean that distribution of UCITS necessarily happens right away, as there is a lot of education and explanation as to how it all works. So it doesn’t mean we open up a market and move onto the next one as there is quite a bit of work to follow up. I’d say the other main distribution areas we are looking at in 2018 relate to Latin America. Many Latin American pension funds hold UCITS—Chile is the most known example—and we’ve been working with the Brazilian pension fund regulator to explain the UCITS framework. Brazilian pension funds can invest 10 percent outside of Brazil, but the mechanism to do so has been effectively impractical, however, fortunately, regulation has recently been introduced to allow it to be practical. With Brazil, with their population of over 200 million, it’s not a small opportunity for the fund industry, regarding the need for pensions.
The other market that is just as potentially interesting for the fund industry is Mexico. Again, we’ve been talking to the Mexican pension regulator for some years, and we hope that in 2018, that the legislation will be adapted to facilitate investment by Mexican pension funds into foreign funds, including UCITS.
Do you believe Luxembourg will benefit from the UK’s departure from the EU?
From a UCITS perspective many UK asset managers, as well as non-EU-asset managers who currently use the UK to access Europe, many of those asset managers already set up their UCITS funds destined for cross-border distribution in Luxembourg or Ireland.
So while some asset managers have had to set up UCITS and UCITS management companies on the Continent to prepare for Brexit, for many asset managers, it’s about increasing their existing footprint in Luxembourg or Ireland. These asset managers are adding substance to their management companies or are adding, for instance, a license to their existing business in Luxembourg to manage portfolios, looking forward to the future to manage separate account mandates, for example, that may not be able to be managed outside the UK, post-Brexit. From the alternative investment funds side, there are many more British asset managers who set up their alternative investment funds in the UK, so if they are to continue managing EU mandates post-Brexit, they will have to decide as to where on the continent they base themselves.
What regulations are causing the biggest challenge for the fund industry in Luxembourg?
The second Markets in Financial Instruments Directive (MiFID II) and Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs) were big regulations implemented at the beginning of January 2018. However, there is a lot of work still to be implemented, regarding automating some of the processes to make them more efficient, so that will take some additional time and money. Then we’ve got the General Data Protection Regulation (GDPR), which is the next big deadline in May, and the stakes are quite high if we get it wrong, regarding the sanctions. And then the big one is the commission proposal on the ESA powers, which as I mentioned earlier is a big one for the European fund industry.
How will that affect Luxembourg?
The EU Commission’s proposal on the ESA powers covers more than just the asset management industry; for example, its scope is also banking and insurance. Relating to the asset management history the most important element is the discussion about delegation and the proposed extra layer of review for the delegation that is outsourced to all non-EU countries. That extra layer would mean additional costs and additional time to get funds to market, and for what reason? There has been no demonstration of problems with the delegation in the fund industry, and the UCITS and Alternative Investment Fund Managers Directive (AIFMD) regulations allow for delegation with the requirement, of course, that delegated activities must be overseen. The delegation and oversight processes have been in place since the beginning of UCITS, 30 years ago, so we’ve been operating on that basis for a long time. So again, it’s not like there is any regulatory gap that needs to be filled. This proposal is a key concern for the fund industry, for Luxembourg of course, given it is the largest fund centre in Europe, but also for entire European fund industry.
What else is happening this year?
A continuing theme is demographics, including the ageing of the population and the need for individuals to take more responsibilities for their financial well-being including retirement. This is an opportunity for the fund industry in general, but we’ve got initiatives like the Pan-European Personal Pension Product (PEPP). While there are some challenges around that, I believe there is a will by the European Commission and the European Parliament to make the PEPP happen given we need as much as possible to help people save for their financial well being. It’s also a great opportunity for the fund industry because we are hoping that UCITS could be considered PEPPs. The PEPP is part of Europe’s Capital Markets Union (CMU) initiative. CMU is one of the reasons we have a problem with the EU Commission’s proposals on the ESA powers. We believe the element relating to delegation could potentially shrink the investment management industry in Europe, which goes against the goals of CMU in terms of promoting additional non-bank sources of financing jobs and growth in Europe, for example, investment funds.
We also have things like the sustainable finance action plan that has recently been issued by the EU Commission, as well as the other action plan that the commission issued on financial technology. Technology and financial technology are challenges for the fund industry, but they are excellent opportunities to make our businesses more efficient and effective, thinking about the younger generations, who are going to want to invest through mobile phones and other platforms as opposed to the more traditional ways. That is quite exciting but also challenging. We’d love to have a lot more time to deal with these new challenges, but we spend a lot of time and money on regulation, which unfortunately never seem to end.
