Funds and fintechs find Luxembourg an attractive base

“A number of our clients have strong home market products and want to compliment that with strong foreign distribution and this is where Luxembourg comes in,” says Marty Dobbins, head of the Luxembourg office at State Street. 

Like rival custodians, the US bank has enjoyed strong revenues for the last 25 years from setting up funds for asset managers under the Ucits directive for marketing investment products across European borders and beyond.

“Opportunity to gather assets and target customers globally is what our clients are looking for,” he says.

One of the key challenges presented by a presence in the Grand Duchy is the increasing cost of doing business, especially with the proliferation of regulation including the US Fatca rules, common reporting standards and latest instalments of the Ucits story. 

“We need to be cost effective, able to overlay compliance tools and be as pragmatic as possible,” volunteers Mr Dobbins, who is increasingly seeing client fund firms from the Asia Pacific region, Latin America and Africa using Luxembourg platforms to distribute their funds.

“Hong Kong, Singapore and Taiwan are already markets where Ucits, and Luxembourg Ucits in particular, are very heavily distributed,” acknowledges Charles Muller, partner at the KPMG consultancy in Luxembourg in charge of regulatory issues. If there is a recognised ‘Asian passport’ for funds, either organised by Hong Kong and Chinese authorities, the south east Asian nations of Singapore, Thailand and Malaysia or with Australia talking the lead, this could provide serious competition from a new regional brand to take on Ucits, he believes. But it is a complicated project to get off the ground and align political interests of China, Hong Kong, Japan and Singapore, among others.

“Every time I talk to Asian financiers, they say ‘wouldn’t it be nice to have such a passport’, but it never gets further than that. European integration is complicated in this market, but in Asia, they are even less integrated than we are, so political discussion is complicated.”

Asian fund promoters, he says, are more interested in distributing their funds in Europe, both traditional funds, but also alternative products under the AIFMD rules, than they are selling their wares to neighbouring Asian states.

“To have access to 28 countries in one go, with a developed funds industry, is certainly attractive to them. If a passport did not exist, they would have to go country by country and ask for a specific licence from each one. We know how complicated it is to help a client get such licences when they don’t have a European fund.”

US hedge fund managers are still sceptical about using Luxembourg to distribute their funds in Europe, he says. “US managers with Cayman Islands-registered funds are trying to stay out of AIFMD,” claiming they sell their funds only through the dubious process of “reverse solicitation”, where asset managers are always apparently approached by clients, rather than the other way round. 

The problem is every country has its own definition of what defines fund marketing. “If I speak at a conference in London, then that is not marketing, but it is if I make the same presentation in France,” says Mr Muller.

Where Mr Muller has seen much recent activity in Luxembourg, particularly during the first few months of 2016, has been in “contingency planning” for a possible Brexit vote from the British public in the EU membership referendum.

Larger players such as Schroders and Aberdeen already have Luxembourg operations, but KPMG received many enquiries from smaller firms about the impact of a possible Brexit. While most bankers in Luxembourg were saddened at the thought of the UK leaving the EU, they did also see a possible opportunity for Luxembourg, if UK companies were forced to relocate parts of their business from London to the Grand Duchy in order to be able to market funds around the European bloc.

Fintechs

This feeling of seizing opportunities in an increasingly competitive market is certainly permeating the industry here, with technology at the forefront of most players’ strategies. Whereas many custody banks were previously wary of working with technology companies and ‘fintechs’, seeing them as competitors, a more inclusive approach is being adopted, even if there is still distrust beneath the surface.

“There is clearly room for fintechs to be coming in providing complementary services and specialist tools, which a large global custodian like State Street uses,” says the US bank’s Mr Dobbins.

“The big topic of discussion is fintech,” confirms Mr Muller at KPMG, which has established ‘The Cube’ incubator in Luxembourg to encourage smaller, tech-based start-ups to get off the ground. There are several initiatives currently springing up in this space, “perhaps too many”, suggests Mr Muller, who recommends various programmes offered by both private firms and the Luxembourg authorities are eventually combined. 

He reports a proliferation of “special departments with tech people, who don’t wear suits,” being launched by most market players.

“At the moment, everybody is trying to jump on this bandwagon and take part in this theme. Big players in Luxembourg are trying to get ahead of the curve before they get disrupted by smaller ones. When the revolution happens, you want to be at the front.”

Fintech companies, he says, are coming to Luxembourg firstly because they are receiving encouragement from the authorities, with reduced tax packages, but also because the country already has a strong financial services industry, with many potential clients for the start-ups.

Looking out from a balcony in the distinctive red KPMG building in Luxembourg’s financial thoroughfare of Avenue John F Kennedy, Mr Muller describes the gradual planned expansion of his city, with housing, cinemas and shopping malls being constructed around offices, where farmland once prevailed. “People used to come to my house and tell me I was crazy, living in the middle of nowhere. Now they tell me that I am very lucky, living in the centre of town.”

One of the government initiatives he refers to is Digital Luxembourg, which aims to bring together parties interested in fintech, including start-ups, established companies, academics and research institutes. 

“We want to create a physical space where these different communities can interact,” says Tom Theobald, deputy CEO of Luxembourg for Finance, who oversees the project and aims to pinpoint the finance industry’s “concrete needs” in this sphere. 

“We have to look at this topic from a financial centre perspective, rather than one specific industry such as banks, funds or technology,” he says.

The first step has been mapping the fintech companies operating in the country, and so far Mr Theobald’s team has identified 150 fintech firms, with 75 of them specifically dedicated to financial services, many of them created during the last three years.

“Luxembourg as a country has quite an interesting client base for financial technology,” he says, with a mix of private banking, custody, fund distribution and capital markets trading helping to attract fintech entrepreneurs to join established software providers such as Temenos and Avaloq. 

The presence of European headquarters of major payments providers Amazon, PayPal and Rakuten is another attractive factor. The start-up “eco-system” was given a further boost by a statement from the regulators, CSSF, in 2014, the first such commitment in Europe, to offer a road map for the development of trade in virtual currencies.

Mr Theobald has also seen a major shift in sentiment during the last two years, with banks looking to co-ordinate increasingly with start-ups. “Banks used to be defensive about disruption, but are now seeing the value of co-operating with fintech companies and leveraging their strength. This allows them to innovate quickly and launch quickly. Fintech companies are very strong on user experience, which has not necessarily been the strength of the banking industry,” he says.

“Smaller start-ups see Luxembourg  as a testing ground, with relatively easy access to senior decision makers in the financial industry,” says Mr Theobald. “We have a global financial centre here, but on a human scale.”