“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!”
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.
Net assets stood at EUR 3,602 billion, a 1.02% increase in comparison with July, due to both financial markets and positive net sales.
ALFI has successfully negotiated an AFS licence relief for financial services providers regulated by the CSSF.
The Association of the Luxembourg Fund Industry (ALFI) has announced that it has successfully negotiated an exemption from the obligation to hold an Australian financial services (AFS) licence to provide financial services in Australia. The exemption applies to Chapter 15 Management Companies and UCITS Self-Managed SICAV regulated by the Luxembourg financial supervisory authority Commission de Surveillance du Secteur Financier (CSSF).
This relief will enable Australia’s institutional investors, including superannuation funds, to get easier access to Luxembourg UCITS.
As a rule, a foreign financial services provider (FFSP) needs to hold an Australian financial services (AFS) licence to provide financial services in Australia, unless relief is granted.
The Australian Securities and Investments Commission (ASIC) can exempt a foreign financial services provider from this requirement on the twofold condition that the financial services are provided to wholesale (institutional) clients only and that these financial services are regulated by an overseas regulatory authority.
The regulatory regime overseen by the relevant overseas regulatory authority needs to be ‘sufficiently equivalent’ to the Australian regulatory regime and effective cooperation arrangements must also exist before relief is granted. ASIC and the CSSF have signed such an MoU on mutual cooperation and the exchange of information related to the supervision of regulated entities in September 2013.
An application for a licence relief has to be made through an industry association, such as ALFI, for a group of FFSPs regulated by a particular overseas regulatory authority. When granted, the relief will then apply to all these financial services providers. In this case, the relief will cover all CSSF regulated Chapter 15 Management Companies and UCITS Self-Managed SICAV.
Welcoming this development, ALFI Chairman Denise Voss explains that ALFI has launched the negotiations on behalf of its members in light of their growing interest to do business with Australian institutional players.
“This relief is a further step in strengthening the relations between our two financial centres”, Denise Voss says. ”ALFI is currently planning a roadshow to Australia next March. We intend to organise seminars in Sydney and Melbourne and will travel with a delegation from our member firms. It will be a good occasion for Luxembourg and Australian players to meet and build even stronger relations.”
Download the press release in English.
About the AFS licence relief:
The Australian financial services regulator, the Australian Securities and Investments Commission (ASIC) has issued ASIC Corporations (CSSF Regulated Financial Services Providers) Instrument 2016/1109 which sets out the conditions of this AFS licensing relief. It enters into force on 16 November 2016. A copy of the Relief Instrument is available here.
On 24 October 2016, ALFI responded to the EU Commission consultation “Review of the EU macro-prudential framework”.
ALFI limited its response to the following question: “Would you consider it appropriate to expand the macro-prudential framework beyond banking?”. ALFI pointed out that asset management and fund related activities do not entail structural vulnerabilities and that the sector is already highly regulated by regulations such as the UCITS Directive, AIFMD, Solvency II, MiFID, EMIR or the Securities Financing Transactions Regulation, dealing with both transparency of information and supervision of the asset management industry. Moreover, ALFI stated that investment funds contain characteristics that differentiate them from banks. Therefore, ALFI believed there should be little distress to the wider financial system in the event of the default of an individual asset manager given the high degree of competition and substitutability within this sector. Overall, ALFI was of the view that it is inappropriate to expand the macro-prudential framework beyond banking to asset managers and investment funds.
On 17 October 2016, ALFI responded to the IOSCO Consultation Report on Good Practices for the Termination of Investment Funds. Topics addressed in this paper are among other the disclosure at time of investment and treatment of “non contactable investors”, the need for a termination plan and the communication to investors throughout the termination process.
To access the ALFI response please click here.
ALFI identified the main barriers to cross-borders distribution.
On 7 October 2016, ALFI responded to the public consultation on cross-borders distribution of investment funds issued by the European Commission in June this year.
ALFI has identified and has drawn the attention of the Commission to the main barriers to the cross-borders distribution of investment funds as follows:
- Marketing requirements and marketing documentation
For products which are already subject to strictly harmonized EU rules, mainly UCITS and to some extent AIFs, one may question the rationale of the host member States continuing to be competent for defining the scope of marketing activities and the content of marketing documents. ALFI supports the introduction of common EU rules on marketing through a single rule book issued by ESMA to which national regulators, asset managers and practitioners could refer to. Such a single rule book should provide clarification with regards to what constitutes a common definition of marketing or distribution for both UCITS and AIFs as well as what constitutes reverse solicitation.
- Introduction of new rules for distribution or marketing to professionals
ALFI supports the introduction of the possibility to market investment funds, both UCITS and AIFs, to professionals in any language, as defined by the investment fund or its management company and accepted by professional investors so that the need for multiple versions of marketing documents in several different languages could be avoided. Professional investors are sufficiently skilled and experienced and would therefore not need the same high level of protection as retail investors.
- Local paying agent and local representative requirement
Member States have defined a wide range of requirements in respect of local agents to be appointed before an investment fund may be distributed on a cross-border basis into the territory of the host State. ALFI understands that the objective of the legislators and competent authorities in each Member State is to protect investors. However, these requirements are not always clearly justified and most of these facilities could be provided on a cross-border basis without compromising investor protection. ALFI therefore calls for a core/single set of common rules applicable across the EU. Such rules should also contemplate the removal of the requirement to appoint a local paying agent or a local representative where it cannot be justified by any value added for local investors.
- Centralization of notification processes
Significant barriers to cross-border marketing are embedded in the form of different approaches to filing requirements in the case of updating an existing notification or in the case of market exit. ALFI would support a streamlining of notifications at an EU level as well as a centralization of notifications at the ESMA level. In addition, ALFI would call for a streamlining and harmonization of the regulatory fees invoice processing at an EU level.
- Digital investor passport
ALFI supports the introduction of a digital investor passport that would allow a consumer to open accounts or purchase other investment services with more providers and individually manage his/her digital account in a consolidated manner.
- Withholding taxes and tax reporting regimes
Withholding taxes on income received by investment funds: Dealing with withholding taxes on income received by investment funds remains a delicate exercise that triggers significant costs. ALFI supports a common, standardized reclaim form for all Member States and an agreement on the simplification of the related tax documentation.
ALFI further supports the idea to limit withholding tax rates applicable to income received by investment funds from EU source countries to the standard rate of 15% in order to significantly reduce the costs triggered by applications for refunds or exemption.
Tax reporting regimes applicable in investors’ countries of residence: Cross-border distribution of investment funds entails dealing with different tax reporting regimes having different levels of complexity and a high level of application and management costs. ALFI supports the introduction of an EU-wide common standard set of tax reporting rules for all EU Member States provided it does not encourage Member States to introduce new tax reporting requirements.
- Cross-border distribution of AIFs - Introduction of a definition of semi-professional investors
ALFI would welcome the opening of the AIF market to a larger number of investors. This may be achieved by opening the AIFMD passport to a new category of investors i.e. semi-professional investors, including, for example, well informed investors and high net worth investors, in line with articles 31 and 32 of the AIFMD.
- Private Placement Regimes (“PPRs”)
ALFI supports the work of ESMA and calls for an extension of the National PPR deadline, with Member States consent, until an adequate EU PPR will be defined and applicable, taking into consideration reciprocity, as there is a need to ensure that EU funds / EU managers are not put at a disadvantage compared to non-EU funds / non-EU managers.
Also, ALFI supports ESMA’s work assessing the potential application of the AIFMD passport to certain non-EU AIFMs and AIFs on the basis of the list of criteria (including the effectiveness of cooperation arrangements; investor protection; market disruption; obstacles to competition; and monitoring of systemic risk). ALFI would support the application of the AIFMD passport to non-EU AIFMs and AIFs and consideration should be given to the option of interconnecting not only national but also regional initiatives, such as the UCITS and AIFMD passport in Europe, the ASEAN framework for cross-border offering of collective investment schemes and the intended mutual fund recognition between Hong Kong and mainland Chinese fund products. This would take global fund distribution to a new level.
For detailled information, please download
Luxembourg was awarded “Best Centre for Fund Administration” at the Investment Week Fund Services Awards 2016, held in London on 4 October. The Awards are designed to celebrate cutting edge services and solutions in the fund management industry.
Marc-André Bechet, who collected the award on behalf of the Association of the Luxembourg Fund Industry, said: “This award is a great honour for us and recognition of the work we are doing to support asset managers. Luxembourg’s fund centre is committed to helping asset managers to grow their business globally and we continually look to ensure that we offer leading-edge support. This year, for example, we have set up the "ALFI FinTech Forum" to identify and analyse the effect of digital and financial technologies on the industry and to identify challenges and opportunities for the fund management industry.
“Investment Week’s award is welcome recognition of the work we are doing in Luxembourg and indeed globally to support the industry.”
Marc-André Bechet, Legal & Tax Director at ALFI collecting the award.
©Photo by Investment Week
The very first edition of the TA & Asset Servicing seminar in Hong Kong was a great success! More than 150 fund industry professionals gathered to exchange on matters focusing on the Fund Distribution Operations value chain.
Speakers at the event
Peng Choy, Vice Chairman, Board of Directors, Harvest Global Investments
Keith Hale, CEO, Multifonds, Luxembourg
Aaron Ng, Senior Product Manager, Asia Pacific Fund Services, HSBC, Hong Kong
Olivier Portenseigne, Managing Director & Chief Commercial Officer, Fundsquare, Luxembourg
What are the key take-aways from the event?
The panel highlighted different distribution strategies into key markets in the Asian region. A close attention was paid to the mutual recognition of funds between Hong Kong and Mainland China, as well as on the current development of passporting schemes. It was reported that these schemes are still challenging to reach economy of scale and therefore UCITS products remain the most widely distributed product. However UCITS is not always perfect and sometimes it has to be combined with a local domiciliated product in order to target specific type of clients.
For new managers entering the markets, it is fundamental to have a clear understanding of each jurisdiction of the Asian region, as the strategy applied by existing managers may not be easily replicated.
KYC / KYD
The industry needs to overcome some difficulties before reaching real efficiency :
- Long TA onboarding process, including document collection and translation;
- lack of harmonization of documents requirements;
- heavy management of both local regulation requirements and asset managers’ requests vs experienced onboarding staff assessing the investor / product risk.
There are several market initiatives currently under discussion focusing on risk assessment and document collection. Consistency & inclusion of all entity types is key e.g. non institutional investors, which enables all data / documentation to be obtained from a central source. This will be an important milestone to ensure that a successful model is created that can be used globally and within Asia.
PRIIPs, Fatca, CRS, Mifid 2 : This session aimed at demonstrating how these regulations are changing the current market environment and distribution services. The next four years will shape and cement how the future of the asset management industry develops.
The panel key word was “Disruption”. An analogy with the evolution of retail and music distribution models set the scene: giant innovators like Amazon and iTunes changed the overall distribution landscape and killed the previous distribution models.
The asset management industry is reaching its limits with tightened regulation and back office complexity. However, the future is shaping: block chain and big data are two of the major models arising to reduce cost of manufacture and delivery. The need to become digital / fintech focused is key in attracting new investors. An open & forward thinking market is also essential. Fund Promoters / Managers / banks & system vendors must move forward in the digital space, otherwise other players will do it for them e.g. Google / Alibaba
On 23 September 2016, ALFI responded to the Call for evidence on asset segregation and custody services issued by theEuropean Securities and Markets Authority (ESMA) in July this year.
In the meantime, ESMA has published the responses received to the Call for evidence on asset segregation and custody services.
Download the document here.