Luxembourg strikes balance between stability and innovation

The tiny European country of Luxembourg has come to be the second largest funds centre in the world, overseeing more than €4tn in assets. This success is closely linked to its early adoption of Europe’s Ucits Directive on the cross-border marketing of funds, but the Grand Duchy continues to push boundaries and reinvent itself as a financial centre. 

Luxembourg has made great strides in areas such as alternative investments like private equity and real estate, sustainable investing is a major focus, while financial technology, or fintech, has also been identified as a great opportunity, with the government encouraging digital firms to set up in the country. 

Brexit is also providing an opportunity. Growing numbers of UK-based financial institutions including asset managers, banks and insurers needing to guarantee access to European markets, are either looking to establish a presence, or increasing their footprint. 

Law firm Ashurst sensed an opportunity in Luxembourg, in part because Brexit meant some of its clients were moving to the country. Having run a Luxembourg desk from its London office, in October 2018 it established an office in the country. 

Although the regulatory environment is more or less the same all over Europe, levels of expertise in Luxembourg make it easier for financial services firms to adapt to new legislation, says Isabelle Lentz, managing partner Luxembourg at Ashurst. 

“We have the expertise on the ground and we know how to adapt to the new environment and to new regulations,” she says.

Alternatives

This is especially true of alternative investments, where AIFMD,  the directive for alternative investments, has sparked interest in funds in this space.

“In recent years we have seen a huge development in alternative investments,” she says. “Our main asset management clients now set up their alternative investment funds under Luxembourg law or choose a Luxembourg alternative investment fund and put their platforms in place in Luxembourg. This is due to the very flexible regulation we have and the options we give to structure alternative investment funds here.”

Much as with Ucits, Luxembourg’s early adoption of AIFMD is proving to have been a wise move. 

“I think Luxembourg has always been able to innovate and been ready for new regulations and being the frontrunners,” says Ms Lentz. “They were the first ones to implement the alternative investment funds directive and did it brilliantly and with all the expertise they had, they were able to make sure that all the alternative investment funds set-up in Luxembourg.”

The growth in fund assets over the last two or three years has certainly been on the alternatives side, agrees Martin Vogel, CEO of the MDO Management Company, although he stresses that Ucits funds are also doing well.

“Because of low interest rates and fears or concerns about the performance of listed equities, a lot of money has gone into alternative investment funds. We see private equity, we see real estate, we see debt. We see all kind of different asset categories that are flourishing right now.”

Mancos

Luxembourg does not have any tax or regulatory advantages compares to other European jurisdictions, says Mr Vogel. Rather its growth as a fund centre has been down to its early realisation of the possibilities opened up by Ucits and then developing the necessary infrastructure around it.

To comply with all the rules and regulations, any investment fund domiciled in the EU must have a management company (Manco). They can either do this themselves, or can appoint a third party management company, and Luxembourg has plenty of these, such as MDO, who work with fund managers looking to distribute their products across Europe and beyond.

“On one side you could call the management company the police officer. It has to ensure that all the delegated parties, depository, fund administrator, portfolio manager are compliant with local laws and regulations,” explains Mr Vogel.

“At the same time, it is also the CEO of the management company. It must make sure that the prices are right, that they engage the right people, that they due diligence over all the parties involved in this fund structure scheme.”

A large asset manager would typically choose the in-house route, whereas smaller firms would be more likely to engage the services of a management company, says Britta Borneff, head of sales and marketing at MDO. “This allows them to focus on their core capabilities which are usually portfolio management or selling the fund to investors,” she says.

Management companies try to ensure that all activities are being carried out in the best interest of the investors, says Mr Vogel. 

“We cannot ensure that the fund is performing well,” he says. “But we can make sure all the players involved in the fund complex are, actually, behaving rightly according to the laws and the regulations.”

Fintech focus

Fintech is another growth area for Luxembourg as a financial centre, with the government offering incentives to firms to set up in the country. This often takes the form of young, agile start-ups, but established firms are also using the country as a hive of innovation.

BNP Paribas Wealth Management has established three innovation factories across the globe, in Geneva, Singapore and Luxembourg, from where it aims to create a better client experience.

“We launched our client experience programme in 2016, with the goal of completely rethinking the way we interact with our clients and designing a new digital client experience for them,” says Mariam Rassai, head of client experience and digital transformation, at BNP Paribas Wealth Management. “The idea was to deliver a personalised, seamless and secure experience to our wealth management clients.”

From these factories, the firm is trying to co-design these services with its clients, working with them to better understand their expectations and testing ideas, prototypes and their MVPs [minimum viable products] on them. 

The factories contain small, multi-skilled teams, which are empowered to design and develop digital initiatives, while BNP Paribas also partners with fintechs to gain access to specific technologies.

“There is a rich ecosystem of fintechs and start-ups in Luxembourg,” explains Ms Rassai. “As indeed there are in Singapore and in Geneva. In fact, that is one of the reasons why we chose these locations, in addition to the fact, of course, that they are three of the major locations for BNP Paribas Wealth Management.”

One of the recent tools developed in Luxembourg is My Impact, which is designed to allow investors to assess the impact of their investments from an ESG perspective. The tool was developed in both BNP Paribas’ Paris and Luxembourg headquarters.

“In Luxembourg, we have specialists that are available for advising clients on sustainable investments and philanthropy, and also we have quite a unique set up here, since we have clients that are part of our wealth management branch, but also local clients that have their residence here,” says Alice Martinou, head of positive impact in Luxembourg, at BNP Paribas Wealth Management.

The Be Advised smartphone app is another recent innovation, incubated in Switzerland and then moved to Luxembourg for testing and launch.

“We have to adapt to our architecture and more importantly to the local regulation and especially MiFID II,” says Rocco Bozzone, head of advisory digital solutions and product specialists in Luxembourg, at BNP Paribas Wealth Management. 

“Once it’s viable for the MiFID regulation, then you can implement in all the MiFID countries,” he explains.

Relocating

Not only will financial firms looking to set up shop in Luxembourg find all the services and providers they need, but there is also a deep pool of multicultural, specialised workers to choose from.

But there are advantages for individuals looking to move across too, believes Ashurst’s Ms Lentz. A Luxembourg native, she lived in London for several years before moving back to the Grand Duchy. 

“I have been very surprised how different it is, compared to when I left in 2011, she says. “I think Luxembourg has improved its cultural offering a lot.” 

Ms Lentz points to the international schools in the country, explaining how her daughter goes to a British school, and that the private sector provides plenty of solutions for those with families. 

“I think it will definitely be a shock for anyone who comes from London because it’s much more quiet. But, still, it has lots to offer. I think the quality of life is better.”