Asset servicing has become a thriving business in Luxembourg’s financial sector thanks to the historic success of UCITS, a highly regulated European investment fund designed to protect the interests of retail investors. The ISIN code beginning with LU, which indicates funds issued from Luxembourg, is still very popular with investors from all over the world (Europe, Asia and Latin America). But as the saying goes, the past is no guide to the future..
Asset servicing for an investment fund is a set of tasks and activities carried out by a custodian bank and a central administration (as required by law) on behalf of pension funds, asset managers, insurance companies, etc required by law) on behalf of pension funds, asset managers, insurance companies, etc., while the product originator concentrates on the administration of the fund. while the originator of the product concentrates on the management and distribution of its investment vehicle.
In the absence of a competing label, the popularity of UCITS funds (primarily Luxembourg and Irish) – which have become a global brand – remains unchanged and is mainly due to their robust regulation and the professionalism of their staff. For an investor or manager, investing in a Luxembourg UCITS fund is a guarantee of security, associated with the jurisdiction of a stable country and bearing the rare ‘AAA’ label.
Claude Pech has worked in Luxembourg since the 1990s and joined Pictet 11 years ago. He is currently Deputy CEO of Pictet Asset Services. He remains optimistic about the future of funds in Luxembourg: “Luxembourg remains the epicentre for cross-border funds, but more than ever, innovation and adaptation are sine qua non conditions for maintaining the jurisdiction’s attractiveness,” he explains before answering our questions.
What is the current state of asset servicing in Luxembourg?
The sector is tending to consolidate further, but it continues to offer opportunities for more specialised asset servicing companies, particularly in the area of private assets. Some asset managers are looking for highly standardised and automated solutions, which can be described as ‘factories’, adapted to ‘vanilla’ investment funds.
However, in any over-concentrated business sector, there is always room for alternatives. Over time, customer requirements have evolved, and fund initiators require more personalised support. Luxembourg continues to attract customers from all over the world.
However, a Luxembourg fund does not mean that asset servicing is carried out in Luxembourg. Due to the erosion of margins, which has been the main cause of concentration in the sector in recent years, a number of administrative activities are now carried out in third countries where labour costs are lower and/or the workforce is more experienced. Regulation remains a safeguard against more massive offshoring strategies.
Isn’t there a danger that Ireland’s success will at some point do more and more harm to the place?
Ireland’s success is undeniable, and we can only applaud the dynamism of this financial centre. Ireland has positioned itself well in ETF funds (some of which are UCITS), which are enjoying resounding success as passive management becomes more popular. Above all, however, Ireland benefits from a major advantage: the double taxation agreement signed between Ireland and the United States, which allows for a reduced rate of withholding tax. This agreement is particularly attractive for funds that are heavily invested in the US market, an advantage that Luxembourg does not enjoy. Dublin’s expertise and reputation have also been built around hedge funds, in which it remains a specialist.
Today, what is the disadvantage most often pointed out by customers in Luxembourg?
For funds subject to CSSF approval, “time to market” is still too often mentioned by fund initiators as the main concern. Urban legend or not, this reputation is tenacious and is maintained in the circle of the world’s asset managers. These players in international asset management are influential clients of Luxembourg, and as in any business, you have to listen to your clients, whether they are right or wrong.
The procedure for obtaining the agreement of the CSSF is sometimes long and complicated.
Of course, the CSSF cannot be criticised for pursuing the noble objective of protecting the UCITS label and the Luxembourg financial centre, but what some have described as the “Luxembourg finish” will inevitably have to change if the Luxembourg label is to maintain its leadership.
We need to see how Luxembourg, in its number 1 position, can strengthen its influence at European level to ensure more pragmatism in fund regulation, which has become excessive.
I’ve often been told that the Irish regulator is more responsive because it’s pro-business, which certainly goes some way to explaining their success.
However, let’s not forget that the Luxembourg regulator, like an entrepreneur, was the architect of Luxembourg’s tremendous success as the obvious domicile for cross-border UCITS when the first European directive was passed.
The success of RAIFs is a clear sign that “time to market” has become an essential criterion. In this, the CSSF has responded to a request from the financial sector for a less regulated fund solution (the CSSF does not have to approve them), and we can only welcome the result.
More recently, the new government’s initiatives to once again become a pro-business partner to the financial sector and to boost the competitiveness of the financial centre are to be welcomed, as in Ireland and other European jurisdictions.
For example, some regulators in our large neighbouring countries – with their stubborn reputation for bureaucracy – have shown themselves to be particularly open to the development of the domestic financial sector, particularly in the context of Brexit.
Is there a way to speed up approval times?
One solution would be to place more trust in law firms or legal experts, who do a remarkable job upstream. After that, a cursory review of the files may suffice, with the exception of the more complicated cases.
AI is a well-known efficiency opportunity in the financial sector and could make it easier for the CSSF to review prospectuses and documents.
Finally, setting a maximum deadline for the review and/or an indication of the degree of progress would also be a step forward appreciated by the initiators.
It is important to understand that in asset management, there is a real stress involved in not being able to launch a product or open an account on time (which could lead to a loss of investors and revenues). An asset manager whose project is aborted because it takes too long to obtain the approval of the CSSF will obviously have a hard tooth against Luxembourg, and these perceptions unfortunately persist for a long time.
Finally, why not ask fund initiators for feedback? The CSSF, like any other administration concerned about the quality of its services, must ensure that it improves the “customer” experience and compares itself with the practices of other European Union financial centres.
Are there any competitors other than Ireland?
For cross-border UCITS, I can only think of Ireland, but in this day and age everything can change quickly, and we are not indomitable. Malta tried to make a breakthrough, but without really succeeding. But let’s not forget domestic UCITS and France, for example, which, with its strong market, could aim to promote French UCITS internationally.
Finally, we must not lose sight of the fact that the United Kingdom has left the European Community and could quite easily decide to legislate for funds competing with European UCITS, as Switzerland has done, for example, with the L-QIF, which is an obvious alternative to Luxembourg’s RAIF.
