2016 was another good year for Luxembourg domiciled REIFs as the population continued to expand, ALFI writes in the 10th edition of its annual Real Estate Investment Funds (REIF) survey that has been published today.
These joint recommendations have been prepared by representatives of ALFI and ILA’s working group specifically dealing with VAT on the remuneration of directors of UCIs and their management companies. The working group comprises independent directors, representatives of management companies, audit firms and law firms. ALFI and ILA hope that this document will serve their members as a reference document.
These recommendations deal exclusively with considerations on VAT for the remuneration of directors of UCI management companies. They do not address any other regulatory obligations and other tax obligations that directors of UCI management companies may be subject to. These recommendations do not address the situation of vehicles other than UCIs benefiting from VAT exempt management services pursuant to article 44.1.d) of the Luxembourg VAT law, i.e. pension funds and securitisation vehicles.
Download the document here.
With 3,701.076 billion EUR of assets under management as at 31 December 2016, an annual growth of 5.56%, Luxembourg reports another new record of assets under management in investment funds domiciled in Luxembourg. Luxembourg is well-known as a UCITS fund hub, however since the introduction of the Alternative Investment Fund Managers Directive (AIFMD), the Association of the Luxembourg Fund Industry (ALFI) has seen increasing interest from asset managers of Private Equity, Real Estate and Hedge funds.
Commenting on the figures, Denise Voss, Chairman of ALFI (photo), said: “These record figures and the strong net sales that we continue to see demonstrate that Luxembourg remains a preferred global fund hub. We were particularly pleased to receive recognition of this by being awarded “Best Centre for Fund Administration” in the Investment Week Fund Services Awards 2016.
She continued: “2016 was a challenging year in many respects. First the UK vote to exit the EU has brought uncertainty to cross-border distribution in Europe, with the possible loss of both fund and fund manager passports for UK asset managers. Second we have seen the threat of US protectionism with the election of Donald Trump.
“However, these challenges can bring opportunities. UK asset managers, and those asset managers from other non-EU countries who currently use the UK to access investors in Europe will, once the UK leaves Europe, have to domicile their funds in an EU member country. Luxembourg continues to be one of the most sought after EU countries for setting up investment funds and fund management companies and clearly this will continue throughout the Brexit process. We have already had confirmation that M&G, one of the largest UK asset management firms, is seeking permission from the Luxembourg authorities to launch a new UCITS fund. We understand other firms will make public similar plans in the next weeks and months.
“We are also seeing opportunities brought by digitalisation and the growth of fintech companies. Online investment is slowly but surely continuing to grow, robo advice is developing and, as a result, we have to change our way of working, not only to facilitate these new technologies and distribution platforms but to take advantage of the efficiencies digital technologies can offer our industry.”
ALFI has continued to support the industry in the face of all this change, by continuing to promote the Luxembourg domicile and global fund hub. In 2017 ALFI has another ambitious schedule of roadshows, in Asia, Australia, the USA and Latin America. ALFI is also setting up a working group which will promote increased collaboration and closer relationships between the fund management centres in Luxembourg and Singapore. In Australia, ALFI has successfully negotiated an exemption, for financial services providers regulated by the CSSF, from the obligation to hold an Australian license to provide financial services in Australia. This relief will enable Australia’s institutional investors, including superannuation funds, to get easier access to Luxembourg UCITS.
ALFI will continue to focus on product innovation to attract more asset managers to Luxembourg by introducing new products like the RAIF, the Reserved Alternative Investment Fund, as well as focussing on the SRI sector by promoting impact investing and climate finance funds.
Ms Voss concludes: “Looking forward, we continue to see challenges and opportunities, driven by geopolitical changes, technological developments and regulatory initiatives, but as always Luxembourg will adapt its products and services to ensure that it continues to be the preferred choice for cross-border asset managers and for investors in Luxembourg funds, who are resident in over 70 countries around the world.”
On 10 February 2017, ALFI responded to the FSB Task Force on Climate-related Financial Disclosures consultation.The FSB Taskforce on climate related financial disclosures published its report ‘Recommendations of the Task Force on Climate-related Financial Disclosures’. It includes four recommendations on governance, strategy, risk management and metrics & targets that are applicable to organisations across sectors and jurisdictions. The Taskforce launched a consultation on these recommendations in December.
Download the ALFI response here.
Ten years after having established its very active Representative Office in Hong Kong, the Association of the Luxembourg Fund Industry (ALFI) has now extended its presence in South East Asia by launching a new working group which will promote increased collaboration and closer relationships between the fund management industries in Luxembourg and Singapore.
The working group, based in Singapore, will focus its efforts on South East Asia where the Luxembourg fund industry is already well established. According to a survey on global fund distribution, 69% of all foreign funds sold in Singapore are domiciled in Luxembourg.
The working group aims to improve the Luxembourg fund industry professionals’ understanding of the investment fund market in Singapore and South East Asia, its laws and regulations, local investment culture and management techniques, as well as distribution challenges and opportunities. In addition, the group will explore ways to further develop the Luxembourg investment fund centre as a hub of excellence for professional services for Asian-based investment funds and their sponsors.
Mrs. Ching Yng Choi, Head of ALFI’s Asia Representative Office in Hong Kong, commented: “The working group will also be instrumental in proposing and preparing promotional activities and trade missions in the region, and will be setting up a knowledge base to share insight with local industry players. This launch is further testament to the commitment ALFI has towards Asia, and follows the opening of our Hong Kong office in 2010.”
The ALFI Singapore Working Group is chaired by Mrs. Valérie Mantot, Head of MENA and South East Asia at Sanne Group, and Mrs. Ching Yng Choi, Head of ALFI’s Asia Representative Office in Hong Kong.
With Asia remaining one of the key focuses in 2017, ALFI has planned a series of initiatives in the region following a successful roadshow in Hong Kong, Taipei and Tokyo in January. The Association will bring a delegation, led by H.E. Pierre Gramegna, Luxembourg’s Minister of Finance, to Asia and Australia in March to further strengthen the relationship and facilitate knowledge sharing between this region and Luxembourg. The programme of this roadshow will include seminars in Singapore on 10 March and in Sydney and Melbourne on 13 and 14 March, respectively.
On 2 February 2017, ALFI responded to the EBA discussion paper entitled “Designing a new prudential regime for investment firms”
From 10 to 13 January 2017, ALFI held its annual roadshow to Taipei, Tokyo and Hong Kong, a well acclaimed opportunity for senior professionals from Luxembourg and Asia to discuss cutting-edge issues affecting the asset management and investment fund industry.
In Tokyo and Hong Kong, the delegation of industry players and representatives of the Luxembourg financial regulator CSSF was joined by H.E. Pierre Gramegna, Minister of Finance of the Grand Duchy of Luxembourg who made a keynote address on 2017 as a game changing year for Europe and the world economy. The local regulators – the Financial Services Agency of Japan (FSA), the Securities and Futures Commission of Hong Kong (SFC) and Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF) – then presented their top priorities for 2017.
Another conference highlight was the asset flow panel focusing on key markets, emerging distribution channels, new products “Made in Luxembourg” and related structuring. The most recent key developments in the area of regulation and taxation (PRIPS, MiFID II and UCITS V) were on the agenda as well.
Moreover, in Taipei, an investment fund market review was presented by a local data intelligence agency, and in Hong Kong, a local economist shared with the audience an interesting outlook on future developments in Asia and their likely impact on Europe.
Topics covered in all the three cities were a multi-layered approach for investor protection and FinTech, with namely a presentation on BlockChain.
Launched on Monday, 5 December, the Shenzhen-Hong Kong Stock Connect provides international investors with another direct link to access China’s domestic A-shares market and especially the stocks listed on the tech-heavy Shenzhen market. This further opening of mainland China’s capital market gives Luxembourg investment funds access to new asset classes.
The Shenzhen-Hong Kong Stock Connect (“Shenzhen Connect”), the link between the Shenzhen and the Hong Kong stock exchanges, was launched on Monday, 5 December. Shenzhen Connect is another milestone in deepening mutual access between the capital markets in China's mainland and Hong Kong. Shenzhen Connect is the second link of its kind to boost the opening up of the mainland China's capital market after a similar link between the Shanghai and Hong Kong exchanges was launched in 2014. The market infrastructure arrangements under Shenzhen Connect replicate those provided for under the original Shanghai-Hong Kong Stock Connect (“Shanghai Connect”) pilot programme.
The Shenzhen Connect is aimed at giving global investors access to stocks in the tech-heavy Shenzhen market via Hong Kong Stock Exchange (“HKEX”), it provides access to China’s new economy. A total of 417 stocks on the HKEX are eligible for trading, and 881 stocks are eligible on the Shenzhen Stock Exchange (“SZEX”). The list of stocks that are eligible for Northbound trading is available in the Stock Connect section of the HKEX website and will be updated daily.
Before Shenzhen Connect went live, HKEX has completed three rounds of connectivity testing and market rehearsals to ascertain technical readiness of the market infrastructure and operational readiness of market participants. One hundred forty-two China Connect Exchange Participants (CCEPs) are expected to be eligible to participate in the two Stock Connect programmes from 5 December 2016, while other Exchange Participants (EPs) can also apply to become CCEPs later upon satisfaction of relevant requirements.
Luxembourg investment funds have traditionally been exposed to the Chinese capital markets through different schemes and channels. Marc-André Bechet, Director Legal & Tax at the Association of the Luxembourg Fund Industry (ALFI) outlines that “China has emerged as one of the world’s leading economies following decades of growth that has hovered around 10% annually. The Shenzhen Connect provides international investors with another direct link to access China’s domestic A-shares market outside of the existing route of getting a foreign investor license through the Qualified Foreign Institutional Investor (QFII) and Renminbi QFII (RQFII) programmes. Practically, Stock Connect allows managers to increase their China A-Shares exposure via an alternative channel without having or using their own QFII or RQFII license or quota. Stock Connect also allows managers without a QFII or RQFII license to increase their China A-Shares direct exposure without having to rely on more expensive China A-Shares access products.”
Luxembourg acts as China ́s gateway to Europe and vice versa and is one of Europe ́s leading centres for international RMB business. In April 2015 the People's Bank of China granted a 50 bn RMB RQFII quota to Luxembourg. Subsequently, increasing numbers of international asset managers are choosing Luxembourg as the domicile for their funds ranges that invest into China.
Access to a new asset class
Luxembourg UCITS are marketed in up to 70 different countries, so setting up a UCITS which invests in China through the Stock Connect links or through RQFII gives access to not only an asset class but re-inforces the interest of an international investor base for Luxembourg products, which is extremely beneficial regarding distribution. Luxembourg was the first European jurisdiction to authorise the use of an RQFII quota in the context of a UCITS fund back in 2013. After the launch of Shanghai Connect in November 2014 a Luxembourg UCITS fund has become the first to receive authorisation to use the Stock Connect programme and since that time over 125 additional UCITS have received authorisation. Supported by the continuous engagement by ALFI, the Luxembourg fund industry embraced the new access link and the first UCITS funds used Shenzhen Connect from the beginning. The CSSF confirmed that it accepts the new programme on a similar basis as the Shanghai Connect programme two years ago.
A number of Luxembourg UCITS have already seen the opportunity offered by this second link and sent their applications to the supervisory authority or are about to update their investor information and where necessary the legal and contractual documentation.
Factors to consider by Luxembourg funds
There are a number of factors which require careful consideration and appropriate solutions for those Luxembourg UCITS funds considering accessing this market through the Shanghai or Shenzhen Connect. The Luxembourg UCITS fund, the management company and depositary designated by the fund must give due consideration to a number of factors and ensure that their risk management procedures adequately cover them. These factors include:
- accounts opened by the depositary of the UCITS with a sub-custodian in Hong Kong are segregated at the level of the UCITS' sub-funds or structured as UCITS client assets omnibus accounts of the Luxembourg depositary with that sub-custodian;
- broker models limiting counterparty risk are to be preferred;
- the prospectus, and most particularly the KIID, will contain a specific disclosure to inform investors of the specific legal risks linked to compulsory requirements of the local CSDs, HKSCC and ChinaClear for custody of securities on a cross-border basis.
Furthermore, as the market infrastructure arrangements under Shenzhen Connect align with those provided for under the original Shanghai Connect pilot programme, launched in November 2014, most of the disclosures needed for implementing Shanghai Connect are still valid and will also similarly apply for the Shenzhen Connect.
Moreover, as a general rule the prospectus shall provide an indication to which extent the new programme will reflect the investment strategy of a UCITS compartment or whether the new programme is simply added as one additional way of investing in Mainland China.
Given that Shenzhen Stock Exchange gives access to corporates of small and medium size and operating in other economic sectors than the entities listed on Shanghai Stock Exchange, the investment policy of the UCITS intending to invest through Shenzhen Connect must ensure that investor information is in line with this specific asset class and sector.
Finally, as a general principle, the UCITS, its management company, the appointed portfolio managers, its depositary must undertake and maintain their usual due diligence and suitability testings on the additional market framework and practices, on the assets to be invested as well as on the settlement and custody processes before considering investment. In particular, procedures for identifying and monitoring specific risks that may imply these investments must be in place or adapted accordingly before using the Shenzhen Hong Kong Stock Connect.
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The Association of the Luxembourg Fund Industry (ALFI) held its annual European Alternative Investment Funds Conference between November 22 and 23. A number of major issues affecting alternative funds were discussed, but what were the core points?
Alternatives in Luxembourg
AuM in alternative investment funds continue to grow, as investors look for new avenues to identify yields in the current low interest rate environment. “As a fund centre, Luxembourg is second only to the US. Luxembourg continues to lead Europe with a 36% share of AUM by UCITS funds. In the alternative sphere, Luxembourg represents 10.5% of the European market, or 568 billion euro. 235 AIF Managers have been authorised by the country’s regulator – the Commission de Surveillance du Secteur Financier (CSSF) and 605 AIFM’s have registered with the CSSF. Luxembourg is also more and more a centre of fund administration for non-Luxembourg funds, including alternative funds established in other European and non-European countries, especially for real estate and private equity.
The pan-EU marketing passport provided under AIFMD has been taken up with interest by fund managers and this is something that will benefit Luxembourg’s many thriving third party AIF and UCITS management companies,” said Denise Voss, Chairman of ALFI.
Denise Voss, Chairman of ALFI
Brexit presents huge challenges for UK-based UCITS or AIFMs, who risk being unable to market to EU investors post-Brexit. Potentially devoid of single market access and passporting rights, UK managers of UCITS or AIFs selling to EU investors need to consider how their businesses are structured going forward. The most logical immediate response – given all of the vagueness and ambiguity surrounding any Brexit outcome – would be for fund managers to ensure they retain market access whatever the result. This can be achieved by working with a third party management company, an entity which can legally manage the fund but will delegate portfolio management back to the manager itself. Such ‘Mancos’ are in abundance in Luxembourg, having successfully serviced the UCITS industry for many years, so they are well positioned to help AIFs.
“On Brexit, Luxembourg considers London to be an important partner. When I visited the UK in July, my message was that I did not want to take business away from London, but rather ensure that it continued. I believe Luxembourg will provide a platform that will be necessary for UK managers to access the single market,” said Pierre Gramegna, Minister of Finance for Luxembourg. Despite the post-Brexit market upheaval, Luxembourg is on sound footing to deal with any fall-out.
Pierre Gramegna, Minister of Finance for Luxembourg
The Alternative Investment Fund Managers Directive (AIFMD) is widely credited with creating an industry-leading regulatory framework for non-UCITS. It is believed AIFMD can create a brand on a par with UCITS, a point made by Camille Thommes, Director General at ALFI. Brexit, however, has had a ripple effect throughout the EU policymaking apparatus and AIFMD is not exempt. The European Securities and Markets Authority (ESMA) has evaluated the regulatory regimes of 12 third countries and given a positive advice on five of them. Some of these markets were told that their regimes were equivalent to AIFMD but passporting will only be realised once approved by the European Commission, the European Council and MEPs.
Regulators across Europe, speaking at ALFI, said Brexit was probably going to result in the European Commission demanding greater reciprocity from third countries. At a very minimum, it will lead to delays in AIFMD passport extensions. Matthieu Lucchesi, Head of Asset Management Regulation at the Autorité des Marchés Financiers (AMF) in Paris, said it was likely that AIFMD equivalence discussions will be reopened with third countries and reciprocity would be on the agenda. Some doubt passporting rights will be granted at all.
Matthieu Lucchesi, Head of Asset Management Regulation at the Autorité des Marchés Financiers (AMF)
The European Commission will evaluate the status of AIFMD in 2017, but should we expect major changes from this review? This answer is probably no. Having enacted huge swathes of regulation post-financial crisis, many feel the authorities are at a saturation point. There is a general recognition that AIFMD is working well, and substantive changes are not necessary. Fund managers will be disappointed to learn that remuneration rules are unlikely to be tweaked in this review. IOSCO and FSB provisions around liquidity risk management and leverage will probably be on-boarded by the European Commission in any future iterations of AIFMD, added Lucchesi.
But AIFMD is only one component of the regulation that has impacted fund management. One of the biggest challenges faced by fund managers is dealing with conflicting regulatory initiatives or reporting requirements. “We have reporting requirements under AIFMD’s Annex IV, but also Form PF with the Securities and Exchange Commission (SEC). There is a degree of overlap and similarities but there are also divergences. It is particularly challenging for firms when they have to report similar information on their funds at different times to different regulatory bodies. The information is constantly changing and we have to regularly adjust our data sets,” said Martin Parkes, Director at Blackrock. However, it is clear that the regulatory reporting is having a disproportionately harsh impact on small to mid-sized firms, adding to their barriers to entry, a point made by Paul Carr, Chief Executive Officer at East Capital Asset Management.
Martin Parkes, Director at Blackrock
Fund Structures and Innovations
The introduction of the Reserved Alternative Investment Fund (RAIF) is another complement to Luxembourg’s range of fund structures. The RAIF must be managed by an authorised AIFM that can be located in Luxembourg or in another EU country. The fund itself is not subject to regulatory approval and is indirectly supervised via its manager.
“The RAIF will enable fund managers to launch their products and get to market in a shorter time-frame,” said Jérôme Wittamer, Chairman of the Luxembourg Private Equity & Venture Capital Association (LPEA) and Managing Partner at Expon Capital. Dr Angelina Pramova, Head of Business Development at GAM in Luxembourg, agreed. “The RAIF’s main advantages are its flexibility and its brief time-to-market,” she confirmed.
Jérôme Wittamer, Chairman of the Luxembourg Private Equity & Venture Capital Association (LPEA) and Managing Partner at Expon Capital
In addition to its flagship UCITS, the EU has created a number of fund products including the European Long Term Investment Fund (ELTIF), the European Venture Capital Fund (EuVECA) and the European Social Entrepreneurship Fund (EuSEF). Their success has not yet rivalled UCITS, said Silke Bernard, Partner at Linklaters in Luxembourg. “Only 28 EuVECAs and four EuSEFs have been launched. There is no publicly available information on ELTIFs, but we estimate there to be four in operation,” she said. The objective of these funds is to enable the transfer of non-bank capital into the real economy. ELTIFs, for example, are heavily focused on investing in infrastructure. But this has not yet translated into investor appetite.
Silke Bernard, Partner at Linklaters
Part of this inertia is due to their structure and investment criteria. Dr Marc Wicki, Managing Director and Co-Head of Structuring Services at Partners Group in Zug, acknowledged the high investment thresholds and ELTIF aggregate exposure limits discouraged retail investors from putting their money into these funds. Others said it was too premature to write off ELTIFs. “We certainly have not written off ELTIFs and we are looking at them closely,” said Parkes of Blackrock.
Fintech comes in many guises and its impact will be thoroughly felt in asset management. Automation is being embraced by alternative asset managers as a means by which to streamline regulatory reporting and tired operational processes. “The real estate industry continues to rely on operational processes that are customised and hands-on. It would be good if the industry could automate some of these processes, such as expense authorisation instead of sourcing data from spreadsheets. This would help us make decisions more quickly,” said Michael Fitsum, Director – Head of Operations – at M&G Real Estate in Luxembourg.
Digitisation and automation could also make regulatory reporting more palatable, a process which is renowned for being data heavy. “Digitisation should make it easier for firms to report to regulators, and provide more accurate data,” said Jean-Marc Goy, Counsel for International Affairs at the CSSF.
Blockchain was also a prominent topic of discussion. The implications this technology could have on reconciliations and regulatory reporting are huge, and if adopted by service providers and fund managers, could incur cost savings. However, enabling blockchain technology is not entirely plain sailing, and this is recognised by the industry.
“There are no business standards around Blockchain. The lack of standards is a hurdle for Blockchain and smart contracts. Furthermore, firms need to recognise that replacing technology with Blockchain could add to costs in some cases, and this is obviously not welcome. Identifying standards and the correct business uses for Blockchain is critical,” said Olivier Roucloux, Head of Product Marketing at Finoryx.
The times are critical for the funds industry. It faces challenges, but also opportunities. Dealing with Brexit will keep the industry busy for a while. While regulation has challenged the industry, rules such as AIFMD have clearly presented opportunities and fund managers are leveraging this. Digital innovation, new product and other developments - the asset management industry is proving once again its ability to embrace change and adapt.
“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!”