How is Luxembourg faring in the current geopolitical climate?
Luxembourg is well placed as a hub for UCITS funds. It was the first European country to implement the UCITS regulation and, as a small country, it was a good fit as we have obviously had to look outside for business.
There was a lot of early take-up, and Luxembourg developed a cross-border fund business with investors and distributors, first in the various EU member states and, since the late 1990s, outside of Europe, notably in Asia, Latin America and the Middle East. It has been 30 years since the beginning of UCITS, and the funds industry has only continued to grow.
The Luxembourg UCITS structure allows for one legal entity with many investment strategies. That makes it a one-stop shop for investors, and that’s one element of diversification that meant we managed to cope fairly well during the global financial crisis.
We have a diversified group of investors—we now have investors resident in 70 countries and asset managers from nearly 70 countries—and many of those asset managers have different business models with regards to setting up Luxembourg funds. They also bring a diversified set of investment objectives.
This diversification means that, for example, when investors in Taiwan are selling, those in Italy might be buying. When things are not going well in emerging market equity, fixed income in the US might be doing better. If you have exposure to a lot of different markets, when one is doing badly, another is likely to be doing well.
During the global financial crisis, as was the case in all financial centres, we took a hit because market prices were generally decreasing. But, because of Luxembourg’s diversification on so many levels, the hit wasn’t too bad and didn’t last too long. There has been volatility recently, and that will continue as a result of recent geopolitical events, but we should be OK.
Finally, Luxembourg’s financial centre is important for the country in terms of its economy and budget, and so the government is quite supportive of it. Luxembourg has an AAA rating, reflective of its political and economic stability.
Even when the parties in power change, it remains stable and the government continues to support the financial centre. Small is beautiful in that sense.
On the other hand, we are not an island, and we’re certainly subject to the same potential challenges in terms of volatility to markets.
Could Luxembourg stand to benefit when the UK departs from the EU?
Brexit is something that many jurisdictions in continental Europe hope to gain from. But, Luxembourg and the UK are long-standing partners—around 17 percent of assets in the Luxembourg funds industry are managed by British asset managers.
In fact, from an asset management point of view, Brexit does not seem to be particularly drastic, as most British asset managers set up their UCITS distribution to the rest of the world by establishing their UCITS in Luxembourg or Ireland, and their distribution to local investors is set up through UCITS established in the UK.
Generally, they’re already well-organised in that respect.
There may be a need for a post-Brexit strategy, however, around firms regulated under the Markets in Financial Instruments Directive (MiFID) and the upcoming MiFID II, which are usually based in the UK.
There is little to no MiFID asset management activity, that is, segregated account management, in Luxembourg—or in Ireland for that matter. That will likely change for those segregated accounts invested by institutional investors on the continent, as some require, either by law or by preference, a continental MiFID-specific manager.
The potential solution to this is something that is currently being discussed within a lot of companies. It’s an evolution, and a new business that Luxembourg is well placed to pick up.
However, we still strongly believe that London will continue to be a very large global financial centre, and Luxembourg is positioning itself in a way that takes that into account.
ESMA chair Steven Maijoor suggested recently that, in light of Brexit, the authority will focus on ‘supervisory convergence’—how important is this?
Supervisory convergence is nothing new. Maijoor said that the European Securities and Markets Authority (ESMA) will be looking into it in the near term, but I think Brexit has simply bumped that project up in priority.
The key is that regulated companies are complying with EU laws, rules and regulations. This exercise is actually largely designed to identify where member states are gold-plating. The convergence piece is not primarily focused on member states not doing enough, it is on those requiring more—those where compliance costs more because of extra reporting, or because they require a local management company to be set up. This is not in the spirit of the law.
Regulation is agreed upon by the European member states through the regulatory process and through agreement on the standard.
What are the most pressing issues in the regulatory space at the moment?
We are dealing with MiFID II and the Regulation for Packaged Retail and Insurance-based Investment Products (PRIIPs), and there are also lingering elements of the European Markets Infrastructure Regulation (EMIR), which is in progress.
Europe sets the gold standard, globally, for a lot of financial regulation, and many regulators around the world are upping their game at the moment as well, notably Singapore and Hong Kong. And regulators talk to each other—Asian regulators are discussing the same issues as we are in Europe.
Then, of course, there is the US, where the Trump administration brought the promise (or threat, depending on which side of the ocean you’re on) of deregulation.
The Dodd-Frank Act was the US response to the global financial crisis, in terms of ensuring financial products are regulated, and it was already lighter than Europe’s Alternative Investment Fund Managers Directive. It’s hard to say at the moment what will happen to Dodd-Frank now.
The US Department of Labor’s fiduciary rule was also in the process of being implemented when Trump came into power. Some have taken the view that they can stop working on it now, but others are planning to continue, because this is what investors want.
It is awkward to say you’re going to implement something to improve the fiduciary role of the asset manager or service provider and then to go back on that in such a bold fashion.
We will have to watch this space carefully, as will the regulators and the European Commission.
Europe is a very different place to the US, but we don’t want to create a fortress where our regulatory framework is way ahead of theirs, so it’s a case of ‘watch this space’ at the moment.