“Will Luxembourg be the domicile of choice for London based international cross-border fund management groups reassessing their business models in light of Brexit?” was the central question at ALFI’s recent Leading Edge conference on the potential implications of the UK’s planned withdrawal from the European Union.
Fund industry experts from both Luxembourg and London agreed that Luxembourg does indeed have a lot to offer to UK asset managers, including:
- the quality of the ‘Luxembourg brand’ - whether for UCITS or alternative funds - and its worldwide recognition
- its unequalled cross-border fund distribution footprint
- the country’s political and economic stability
- the entire, comprehensive fund industry ecosystem
- the sophisticated product toolbox, including the ‘Société en Commandite Spéciale ScSP’ (Limited Partnership) and the newly created Reserved Alternative Investment Fund (RAIF)
- extensive risk management expertise
- and much more.
Speakers agreed that the number of Luxembourg domiciled investment funds and management companies set up by UK asset managers are very likely to grow in the years to come. The Luxembourg regulator, the CSSF, confirmed by video message that they have been approached on this topic by industry players from the UK.
“As soon as the CSSF hears about UK firms’ interest in Luxembourg, we invite them to meet and discuss their plans,” says Claude Marx, Director General of the CSSF.“ The most important topic these meetings cover is delegation or outsourcing back to the UK.”
Indeed, asset management firms or banks that want to establish operations in Luxembourg in the context of Brexit do not necessarily wish to move a large proportion of their operations and staff out of the UK. Delegation and outsourcing therefore are important subject matters. The CSSF does allow outsourcing back into the group both within and outside the EU. However, there has to be some substance within Luxembourg: the authorised management e.g. must be in Luxembourg, key functions must be in Luxembourg, and there must be a developed IT system in Luxembourg that produces daily balance sheets. People who can answer questions regarding the accounts should also be onsite in Luxembourg.
The CSSF also applies proportionality, meaning that, when firms start to set up operations in Luxembourg, less substance is required. Substance needs to develop according to an agreed plan as the business develops in Luxembourg.
Participants in the discussion at the conference did not envisage a massive flow of financial sector employees from London to Luxembourg, although, as was discussed in detail, Luxembourg’s infrastructure does allow the accommodation of additional workforce in substantial numbers.
However, the Brexit process is only at its very beginning. Two agreements will have to be reached: First of all, the UK and the EU will have to agree the terms upon which the UK will withdraw from the European Union, and in a second step, an agreement has to be found regarding the future relationship between the UK and the EU.
Whilst a number of scenarios can be imagined with more or fewer concessions for the UK as regards the basic principles of the common EU market and accordingly, with more or less preferential treatment of the UK after Brexit, it is widely understood that there will most likely be no direct ‘passporting’ for UK domiciled funds. This means that financial products directly exported from the UK to the EU have no predictable future.
Bilateral negotiations between the UK and other EU countries on future relations however are just as unpredictable. The uncertain outcome of the upcoming elections in major EU countries France and Germany further increase the general uncertainty.
Denise Voss concludes: “Altogether there is a lot of uncertainty – which is poison for business! Asset managers can’t – and won’t – wait and see before contemplating their future operating model. In order to eliminate uncertainty, they are moving … and they’re moving now!”