ALFI
ALFI’s Corinne Lamesch discusses post-Brexit, a review of the UCITS framework and opportunities for the Luxembourg fund industry in 2020
How is Luxembourg faring in the current geopolitical climate?
If you look at the geopolitical climate, there are challenges which we need to take into account for the future. In terms of opportunities, the areas where we see the potential for future growth are sustainable finance and investment in alternatives.
What would be the best outcome post-Brexit for Luxembourg?
The best outcome would be to exit in an orderly manner with an agreement where we would have an adequate framework for the relationship between the UK and the EU.
For us, it is important that Luxembourg continues to have a good relationship with the UK, which should be designed in a manner that provides certainty surrounding economic factors, and for citizens as well.
We should definitely be able to build upon our mutual trust in order to deal with any disruption. We have a longstanding partnership with the UK and, after the US, it is the second-largest group of asset managers who are setting up funds in Luxembourg: some 18.3 percent of Luxembourg fund assets are managed by UK-based managers. They will remain active in Luxembourg across all asset classes. Consequently, we must maintain a good relationship with the UK.
Do you believe Luxembourg will benefit from the UK’s departure from the EU?
A big part of our industry is managed by UK managers, therefore the relationship between Luxembourg and the UK is important. Some UK managers have been looking to move their funds to Luxembourg so we have seen an increase in assets from UK managers – from 17 percent to, as previously mentioned, 18.3 percent.
On the whole, around 60 institutions across various sectors in the financial industry, including insurance and asset management, have chosen Luxembourg for their new EU market clients. This means that some have set up or increased their presence in Luxembourg for their international cross-border activities as the UK will lose its EU passport and hence cannot be the hub to enter the EU anymore. It is important that the UK remains a part of the ecosystem. We are looking at what we can do to maintain a good future relationship. Overall, Luxembourg’s industry is quite well prepared for Brexit whether it is a hard Brexit or not.
Most of the larger asset managers affected by Brexit are prepared as best they can. We have also seen a number of local players who have registered their funds in the UK make use of the temporary permissions regime that has been set up.
As a country, we didn’t aggressively poach UK business – we haven’t seen any promotional aggressive campaigns because, as highlighted, we have a very strong partnership, and Luxembourg felt that this was not the way to deal with partners on the other side of the channel.
What regulations are causing the biggest challenge for the fund industry in Luxembourg?
There is a programme of new regulation that is expected to be implemented over the next few years (such as sustainable finance, Alternative Investment Fund Managers Directive and UCITS reviews), which will be quite a lot of work over the next few years to come. Sustainable finance is an area of focus and also a big opportunity for assets to grow. We definitely see that there is a demand from investors to invest in companies that want to help the environment.
In fact, sustainable finance is something that is receiving a push from policymakers and regulators as well as investors, so this is definitely an area that we will work on over the next few years.
There will be a review of the UCITS framework but we do not yet know all of the details. If the aim is to make the market more efficient and improve things we will still need to be careful to ensure that the changes are not going to be too disruptive. UCITS funds are traded around the world in over 70 countries and we need to make sure that any changes we make to the framework do not heavily impact other countries too. Everything we do must be looked at carefully; it needs to be balanced and work in sync.
Additionally, ALFI believes that we should do more for the development of new products in the asset management space so we are working towards having a good framework. In addition, we are looking at pension products which are continuing to gain importance for investors and asset managers alike.
What opportunities will 2020 bring for the Luxembourg fund industry?
There is a continuous interest from industry players to use European products – preferably Luxembourg-domiciled products – combined with an increase in assets.
However that being said, we are quite aware of the challenging environment that we are facing: ongoing trade tensions and a changing global tax environment, fee compression and compression on margin, and we have to take into account all of those macro factors when we identify the opportunities for the years to come.
We are currently putting together our strategic paper for 2025, which will take into consideration all of those macro trends and it will also identify the challenges but above all the opportunities.
Our ‘toolbox’ may need further improvement to make sure it is still fit for purpose, and certain adjustments on margin may be necessary in order to remain relevant for our clients.
Further opportunities lie in expanding Luxembourg’s role as a leader in sustainable finance as well as a hub for alternatives.
