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BUSINESS
FINANCE
Text by STEPHEN EVANS
Photography by MIKE ZENARI
MORE CHANGE FOR PRIVATE BANKING Considering the numerous recent challenges faced by Luxembourg’s private banking industry, the sector continues to perform well. The ending of fiscal secrecy and the rise of other wealth management players have forced a rethink. More will be required, as new regulation is about to overturn the way private banks charge for their services.
A
t the moment, private banking clients could believe the advice they receive comes free of charge. Industry wide, it has been customary for financial advisors to be remune rated from commission on the sale of the financial products they recommend to their clients. Europe’s politicians decided this relationship was prone to conflicts of interest. Their response is part of the EU’s second Markets in Financial Instruments Directive (MiFID II). As of 1 January 2018, “inducements” or commission on the sale of financial products will be forbidden. Advisers will need to charge service fees, much as one would expect when using a lawyer. This will apply in all European jurisdictions, including Switzerland.
ONE-THIRD OF INCOME AFFECTED “Private banks will lose a substantial part of their income due to the disappearance of inducements,” said Luc Rodesch, head of private banking and estate planning at Banque de Luxembourg. The industry is quietly confident that clients will accept a move towards a more transparent advisor fee structure. “The UK, the Netherlands, Sweden and Switzerland introduced similar regulations on inducements years ahead of MiFID II, and they have managed this transition well,” commented Hans-Peter Borgh, group head October 2017
of wealth management and member of the management board at Banque internationale à Luxembourg. “It’s a big challenge but I’m optimistic that we can explain this to clients.” Communication explaining the benefits of private banking services to clients will be key. The industry has been training staff and putting internal procedures in place, with autumn targeted as the time to talk about the change. As for the level and type of fees to be charged, “we are all watching the competition while looking at how other European countries have adapted,” remarked Rodesch. Fees per hour are a possibility, as are
performance fees when returns are made on investment. It is other regulatory changes that appear to worry the sector most. “MiFID II and Priips [the Packaged Retail and Insurance-based Investment Products directive] will make the advisory process more complicated from 1 January, and force wealth managers to clearly demonstrate how they add value,” Rodesch said. The aim of these new rules is to improve investor protection by ensuring that clients understand the investments they are making. However, many professionals are concerned that these safeguards are off-putting and will
HANS-PETER BORGH The “Luxembourg card” remains a selling point with many international clients