PAPERJAM PLUS ALFI 09/10 2017

PA P E R JA M . L U • S E P T E M B E R /O C TO B E R 2017

ALFI

A clear horizon

The Luxembourg investment fund industry has been riding a wave of success for more than a quarter of a century.

And the prospects are, more than ever, looking up.

Naturally different.

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EDITORIAL

Confidence is back O

ver the last years, the Luxembourg investment fund industry has experienced steady growth, with €4,000 billion of assets under management now in close reach. This figure not only translates the dynamism of what has become a major pillar of the Luxembourg financial centre, but also underlines the capacity of ALFI and its members to continuously innovate and adapt to an ever-changing international landscape.

While UCITS funds remain the flagship product, since the implementation of the AIFMD, Luxembourg also increasingly attracts interest from asset managers of private equity, real estate and hedge funds.

Another area that has gained unprecedented momentum is sustainable finance. Building on the pioneering work of institutional investors like the EIB, Luxembourg has succeeded in positioning itself as a leading European domicile for sustainable and green investment funds. Given the environmental urgencies that our planet faces, this area will only gain in importance over the years to come.

As the media focuses on Brexit, it is often overlooked that the European Union’s economic health is better than it has been in a long time. Growth is picking up and the GDP is now higher than before the crisis. Employment has been rising uninterruptedly and unemployment is set to continue to fall. Confidence is back in the markets. Benefiting from these developments as well as from the reforms initiated by this government, the Luxembourg economy is thriving, with growth rates well above the EU average and its AAA confirmed by all major rating agencies. Investments in the EU are expected to further pick up in 2018. Projects financed under the Investment Plan for Europe will increasingly support private and public investment as they enter their implemen-

Pierre Gramegna Minister of Finance

tation phase. In this context, the investment fund industry has an important role to play. The opportunities for private investors are palpable.

With regard to Brexit, I firmly believe that we need to de-dramatise the situation. London is and will remain an important partner. Our fund industries have a long history of working closely together, and currently around 17% of the assets under management in Luxembourg have been initiated by British fund managers. While companies based in the UK will no longer benefit from the EU passport, solutions can and will be found to allow them to continue to develop their business on the continent. I am pleased to see that many companies have already decided that for them, Luxembourg is part of that solution.

In the long run, the main challenge that the fund industry will face is not Brexit, but the digital revolution. FinTech will not only disrupt the industry by providing consumers with better-targeted services and products.

It will also challenge current fund distribution models.

Recently, investors have, for the first time, bought shares in funds using blockchain technology through a Luxembourg platform. This is only a taste of things to come. With the Luxembourg House of Financial Technology, we now have a platform that brings together all major players and stakeholders to develop and promote new and innovative solutions that will allow the Luxembourg financial centre to continue to stand out in a digital world.

Finally, I would like to congratulate Denise Voss on her re-election as chairman of ALFI and commend her whole team for the successful organisation of yet another stimulating edition of the Global Distribution Conference. I wish all the participants every success and fruitful discussions.  September/October 2017 — ALFI —

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CONTENTS

September/October 2017

OUR EXPERTS’ CONTRIBUTIONS

36 silke bernard What will happen after 1st January 2018?

24 Jon Griffin Six reasons for success 34 Manuela Abreu The digitalisation of the tax administrations

03 Pierre gramegna Confidence is back 38 Stewart aldcroft Opportunities and threats for fund management

26 Jim fitzpatrick The top fund industry talk in the US 40 jonathan boyd The giants and the gems

32 barbara Wall Opportunities for subadvisor funds

28 Claude Kremer Pepping up our pensions 30 julie patterson Regulatory disruptors to European fund distribution September/October 2017 — ALFI —

— 05

Connect with the new generation of investors While the fund industry is undergoing major regulatory changes, investors are expecting digital solutions for their business needs.

At Deloitte, we combine our regulatory expertise with the technical tools you will need to compete effectively in the global economy. https://www.deloitte.com/lu/im-services Š 2017 Deloitte Tax & Consulting

CONTENTS

September/October 2017 Anouk Agnes, ALFI

“ Brexit is a top priority ” Investment funds play an important social role helping people save for the long-term, and a new EU pension vehicle could help further by offering greater flexibility and choice. But could Brexit have negative long-term implications for cross-border fund distribution?

10 behind the scenes

Essential link Paperjam had the opportunity to open the doors of RBC Investor Services’ trading room, located at Esch-Belval, where billions of data are monitored by analysts.

22 statistics

Cartes blanches

agenda

Luxembourg investment funds at a glance

What are the potential consequences of Brexit on the Luxembourg fund industry?

Always on the run

Net assets, number of funds, origin of Luxembourg funds, top 10 fund domiciles…

Have a look at Luxembourg’s investment funds key figures.

Since last year’s referendum, the Brexit has risen a lot of questions amongst the fund industry, especially in Luxembourg.

Should it be seen as a threat or an opportunity?

11 experts express their opinion.

48

20

Many events will be organised around the world to promote national know-how in the investment fund industry.

58

on the Radar

Picture report

Tips

Next steps

Have a quick glance at Luxembourg’s fund industry.

The ALFI Global Distribution Conference 2016 took place at the European Convention Center Luxembourg on 20-21 September.

Here are a few highlights.

Everything you wanted to know about sustainable investing. An overview from LuxFlag, the Luxembourg Finance Labelling Agency.

Denise Voss, ALFI’s chairman, has answered the question “How do you see the immediate future of the Luxembourg fund industry?”

42

66

Investment funds at a turning point

08

Alfi Global Distribution Conference 2016

60

10 reasons for sustainable investing

“Solid as a rock!”

September/October 2017 — ALFI —

— 07

ON THE RADAR

investment funds at a turning point investment funds

“ We firmly believe European regulation is a cutting-edge framework at global level.”

net assets

BREAKDOWN BY INVESTMENT POLICY On the one hand, in terms of net assets, fixed-income securities reward investments are most often made, just in front of variable-yield securities.

On the other hand, in terms of the number of units monitored, mixed securities are most often encountered.

Real estate 1% Other assets 4% Money market instruments and other short-term securities 8%

s u s ta i n a b l e f i n a n c e i n e u r o p e

Fixed-income transferable securities 30%

under study

Variable-yield transferable securities 29%

a s set m a nagem en t p ol l

33% In a live poll carried out at the ALFI London Conference in May (with 650 attendees), one in three respondents declared that educa­ting individuals on the value and importance of investment represents the asset management industry’s biggest challenge.

08 —

PHOTO: Maison Moderne (archives)

Mixed transferable securities 22%

The High-Level Expert Group on Sustainable Finance, established by the European Commission, published in July its first report setting out concrete steps to create a financial system that supports sustainable investments. It includes a European standard and label for green bonds and better disclosure from financial institutions and companies on how sustainability is factored into decision-making and a “sustainability test” for relevant EU financial legislation. A public consultation will help the group to shape its policy recommendations.

c h i n a a- s h a r e s

“Luxembourg investment funds are ideally placed to take advantage of this new and strategic opportunity.”

MARC-ANDRÉ BECHET Director of legal and tax affairs at ALFI, about the decision of MSCI to include China A-shares (5%) in the MSCI Emerging Markets Index.

— ALFI — September/October 2017

PHOTO Maison Moderne (archives)

Funds of funds 6%

PETER DE PROFT EFAMA director general, after the publication of a paper analysing how and why leverage is used in investment funds in Europe.

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INTERVIEW

10 —

— ALFI — September/October 2017

INTERVIEW

ANOUK AGNES, ALFI

“ Brexit is a top priority” PHOTO Maison Moderne

Investment funds play an important social role helping people save for the long-term, and a new EU pension vehicle could help further by offering greater flexibility and choice.

But could Brexit have negative long-term implications for cross-border fund distribution?

September/October 2017 — ALFI —

— 11

INTERVIEW

E

urope has a pension problem. For every retiree in 2060, there will only be two people of working age, compared to four today, says the European Commission. As well, 41% of European household wealth is sitting in bank accounts when it could be working in the wider economy if it were invested in equities and bonds. Policy makers have been aware of these problems for many years. It was a driving force behind the first UCITS directive adopted in 1985 which encouraged citizens to invest for the future. The Pan-European Personal Pension Product (PEPP) is the EU’s latest attempt to encourage a private sector solution (see box on page 18).

CRITICS

PEPPS’ POTENTIAL PROBLEMS While most have welcomed the PanEuropean Personal Pension Product (PEPP) initiative, some commentators are worried that aspects of the Commission’s proposal are overly prescriptive. There is broad acceptance of the plan to make the product as simple as possible, with just five investment strategies offered. However, some are concerned that the default option offered to savers would be low-risk, capital guarantee product.

Critics suggest this could defeat the object of seeking to encourage inexperienced savers

Mrs Agnes, why has ALFI welcomed the PEPP? Anouk Agnes We have not been alone in cal-

ling for more action to encourage second and third pillar retirement provision [company and individual pension schemes]. It’s widely known that Europe’s first pillar, state pension systems, is insufficient. The asset management industry is well placed to provide a solution for this major social and economic challenge.

The PEPP proposal will give the industry more scope to do this, and we see it as a real opportunity. Not only could this encourage people to save for their future, but it answers a real need for a genuine European challenge of how to provide pensions to people who work in different countries.

to invest capital markets. The Actuarial Association of Europe said this requirement may reduce the number of institutions willing to become PEPP providers because “the value of such a guarantee is very small for a consumer saving over a period of 30 to 40 years”. They pointed that savers should be encouraged to invest in equities before moving to less volatile assets before retirement. They also added that “the PEPP provider will be required to reserve for the guarantee, which will impact on the investment strategy followed and the costs

which will be borne by the consumer”. There are also worries that this requirement would make it harder for savers to switch between providers. Others are sceptical that the market needs a new product, and that problems run deeper, linked to a lack of investor education.

Tax is also a concern.

The European asset management association EFAMA agreed, saying: “Member states should grant the same tax treatment to the PEPP as to existing national personal pension products.” The Commission appears to agree, and this feature is in the initial draft text.

Why could the PEPP succeed when other pan-EU pension regulations have failed?

The IORPs [pan-European products launched by the EU in 2000 which are the SEPCAVs and ASSEPs in Luxembourg] are second pillar, occupational pension products, while the PEPP would be for third pillar, personal pensions, so this is a major difference and this is why the PEPP should be more successful.

That said, the SEPCAV and ASSEP do work and are used by a handful of multinationals.

The general impression is that these vehicles are held back by national tax treatment, but they can be made to work. However, the intention is to design the PEPP so that it avoids these complications.

How would it work?

These are still early days but one of the important features foreseen is that each PEPP would have a separate compartment for each country in which the person works. Thus the provider and the pension scheme would remain the same but each compartment would abide by all local rules such as on tax, tax breaks and retirement age, and so on. The PEPP provider could be one of many regulated financial sector firms: asset manager, bank, or insurer, and that too is a big difference from previous schemes.

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This is why Luxembourg would be well placed to be a cross-border centre for PEPP production?

Yes, because there are parallels with a product like UCITS. PEPP is about servicing the cross-border retail investor, while taking into account the national regulations, laws, and tax situation in each member state. The Luxembourg fund industry has decades of experience and expertise doing just this with pan-European products like UCITS. The suggested shape of the PEPP would give substantial leeway to each member state in the way the rules would be applied, and all this will need to be understood as PEPPs are designed and managed. So PEPPs could be sold across borders being administered centrally from Luxembourg.

How confident are you that a useful pensions vehicle will result? Is there a danger that the Commission’s proposals could be too restrictive? (See box above)

This is still an early stage. This will be a regulation, not a directive, and we are having early comments made at the European Council. We

— ALFI — September/October 2017

don’t see major difficulties with bringing this to fruition because it goes with the grain of existing national policy. There are still many questions about how the compartment structure will work in practice, for example. But we will work through those technical details and we will find a solution, but at the moment it’s about drawing up a roadmap.

Ultimately much will depend on the willingness of each member state to make the PEPP work when the rules come into force. Every country in Europe is challenged by the looming pensions crisis, and so it will be in the interest of citizens in every country that this should work. If the PEPP receives less favourable tax treatment than national products, then it won’t fulfil its potential.

You have highlighted investor education as being key to success.

Yes, we need the right structures, and also each individual needs to understand the opportunities and risks of personal longterm financial planning. Basic knowledge is required with the PEPP as the individual can choose the investment options. The trend of

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IN A CHANGING WORLD,

INTERVIEW

INVESTORS EDUCATION “Each individual needs to understand the opportunities and risks of personal long-term financial planning.”

NEW PRODUCT

PEPP FOR DUMMIES

giving responsibility for personal finance to individuals is interesting, however communication is needed to make this attractive.

Asset managers’ Brexit plans are being put into action, and they are tending to look to Luxembourg or Dublin as their EU fund distributions hubs. While this is welcome short-term news for the Grand Duchy, there are suspicions that the regulatory dynamic could be changing. What is driving fund businesses in their choice of a post-Brexit EU27 hub?

The key concern is that businesses need to know they can carry on as now when Brexit happens.

Nobody is waiting to find out what the details of the Brexit departure terms are. They need 14 —

to be able to continue to offer their products with the least disruption. Clearly Luxembourg is on the map, but the final choice depends on the model being used. Some already have operations here, so it’s just a question of beefing these up, even if many are waiting to see how the negotiations will progress and then assess what needs to be done. Everything is about being ready and reassuring clients that there will be continuity and no cliff edge.

Which jurisdiction is attracting most interest in the fund sector?

The early signs are that Dublin and Luxembourg are sharing the announcements, but really there haven’t been any major scoops.

Very often the firms announcing they will

— ALFI — September/October 2017

The Pan-European Personal Pension Product (PEPP) would be a personal pension plan that could be sold and used across EU borders. It offers the prospect of increased choice for savers, greater competition, and a worker would only need one pension vehicle even if they work in several EU countries during their career. Europe’s web of national tax laws and regulations have made it difficult to find a potential solution, but European Commission policy-makers have arrived at an outline that has won broad support from the investment industry. “A highly standardised product that can be sold across member states thanks to an EU product passport” is how the European Commission described the PEPP when it launched the proposal on 29 June. This voluntary personal scheme is designed to be used in parallel with existing state, workplace and individual pensions. There is no intention to harmonise existing pensions, but to offer access to a simple, safe and affordable personal pension product. Economies of scale could keep costs down, encouraging more people to save for retirement. It could also encourage Europeans to move some of their cash savings into capital markets, so aiding wider economic growth. Of interest to Luxembourg financial services players, providers in one EU member state will be able to offer these pension products to people living anywhere in the single market. PEPPs would have the same standard features wherever they are sold, and could be offered by a wide range of providers, particularly insurance companies, banks, occupational pension funds, investment firms and asset managers, and sold through different distribution channels.

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PHOTO Colin and Kim Hansen

INTERVIEW

BR EXI T “Our relationship with the UK based on delegation works so well in the interests of millions of savers and the economy, and this model needs to be preserved.”

come to Luxembourg have operations here already, although there are to be some new arrivals, notably in the area of private equity.

It also remains to be seen how many people will move here and how many new hires will be made locally. Most asset managers are still in the planning and reorganisation phase.

How often does Brexit come up in industry discussions?

It’s a top priority. Around 17% of assets managed in Luxembourg are related to a UK promoter. Also the UK is one of Luxembourg funds’ top five global markets. Our relationship with the UK based on delegation works so well in the interests of millions of savers and the economy, and this model needs to be preserved.

What is ALFI’s reaction to European Securities and Markets Authority’s (ESMA) principles regarding regulation and the relocation of UK companies into the EU27?

Some have argued that they go beyond the basic tenants of existing rules.

The CSSF has said that everything in this paper is in line with CSSF practice, and there has not been room for regulatory arbitrage. Yet there are concerns that ESMA 16 —

— ALFI — September/October 2017

“There are now 157 RAIFs in operation.”

might be going beyond its designated powers. Their paper on this topic does clarify a few things, but also has a few things that go beyond previously agreed levels 1 and 2 of the directives. We could therefore question the legal basis of parts of these opinions, while also seeing that this is limited in scope and just related to relocation in the context of Brexit.

The principles of delegating functions within UCITS and AIFMD have worked really well for decades, and have created a framework on which the entire asset management industry relies. The result is that European funds have been a huge success, not just in encouraging investment and saving within the Union, but as regards exports, with one-third of UCITS distributed in third countries. Why should Brexit lead us to question a model that works so well?

Could there be a push for UCITS portfolio management to be in the EU?

UCITS and AIFMD are successful EU export products partly because of the delegation arrangements. Portfolio management is often delegated because, for example, if you are running an Asian equity fund it is surely in the interests of the investor that decisions are being taken in that region. For sure, the regulations could say that there might

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INTERVIEW

need to be portfolio management activity happening in the domicile of the fund. But the likelihood is that this would lead to duplication, and this would add to costs with no added value. This is in no one’s interests.

Some people have the view that portfolio management is the high quality part of an investment fund, but I think the experience of Luxembourg shows that other parts of the business also add substantial value. Key decisions are made here about the central administration of the fund, not least aspects such as risk oversight, which play a key role in the well-being of the fund. And we do have portfolio managers based in Luxembourg, too!

There are many questions to be worked through, not least the status of third countries, and whether the UK will become a special type of third country. It is very confusing, but again, Brexit is not the right context in which to call into question principles that have worked well until now. This September ALFI Global Distribution Conference focuses particularly on

topics such as this will be raised. For example, Dan Waters, the managing director of ICI Global [the US global fund industry association] will be worth listening to as he represents many of Luxembourg players’ largest clients.

Are you concerned that Brexit will upset the balance of decision making at the EU level over the long-term?

One of ESMA’s missions is to encourage regulatory convergence between all member states.

We agreed that there is no room for a “race to the bottom” or regulatory arbitrage. Luxembourg is sometimes accused of cutting corners on regulation, but this is just not true. The rules are the rules, we follow them, and they work.

Is there a concern that the Brexit beauty contest is causing upset in some countries?

Yes, very probably this is the background to all of this. I was reminded of the ALFI ambition paper published when Denise Voss,

REGULATION

THE POST-BREXIT ENVIRONMENT Could the post-Brexit UK and other third country asset managers be subject to tougher regulatory controls in the future? This has been a concern for the industry since the referendum. The UK, with its international financial centre, has traditionally been an ally within the ESMA for Luxembourg and other cross-border business jurisdictions. Now, countries with more domestically oriented financial centres have greater influence. Some people saw omens on 13 July, when the European Securities and Markets Authority (ESMA) issued guidance circulars relating to the treatment of UK financial firms after Brexit. ESMA said these guidelines are simply aimed at preventing UK investment firms using shell companies in an EU country to gain access to the single 18 —

market post-Brexit.

This is fair enough, but why does this need to be said? Current rules explicitly forbid the use of shell companies.

At the moment, nonEU asset managers delegate substantial amounts of back office work to the main fund administration hubs Luxembourg and Dublin, gaining access to the EU market. The new ESMA guidance has been interpreted by some as potentially signalling a change of attitude within the regulatory body. They fear that the delegation model could come under question. Could the UK no longer having a say in setting ESMA policy be behind the perceived shift in tone? An ESMA representative talking to the Reuters News Agency said that this new guidance did not point to an end to delegation. “It means that each situation has

— ALFI — September/October 2017

to be assessed on a case-by-case basis,” they said. Again, some have interpreted this as signalling a potential desire to increase substance requirements. For example, there is speculation that some countries would like to see portfolio managers being required to move to an EU27 country. There was a dry response to the guidance from the Luxembourg regulator, the CSSF. In a communiqué it said it “supports the efforts undertaken

by ESMA to avoid regulatory arbitrage and the establishment of letterbox entities”.

It added that the guidance is “in line with the CSSF’s practice”. Any change to the delegation model could have a major impact for the Luxembourg and Dublin fund centres, hence the jitters.

ALFI’s chairman, was first elected in 2015.

It included a section on foreseeable trends that could impact Luxembourg, and already we saw the risk of protectionist measures in some markets. Brexit has increased this risk. We don’t know what will happen now as countries are still assessing how they should react. Surely the goal of all should be to limit disruption, as a smooth transition will be to the benefit of European consumers and employees.

There are six months until MiFID II and PRIIPs come into force. Will the industry be ready? Is there any need for further delays?

These are still topics that are of high priority and they are keeping us busy, but I don’t think there’s any appetite for further delays.

Is industry ready? You’d have to ask them, but we at ALFI have done all we could. For example, we have hosted more than 50 meetings, discussions and conferences on PRIIPs since it was announced, and I guess we’ve done similar for MiFID II. There’s also the General Data Protection Regulation, due for the middle of next year, and we are in the process of putting a working group together. This is a big item on our agenda.

How has the market taken to the RAIF?

There are now 157 RAIFs [Reserved Alternative Investment Fund – a vehicle designed to cut red tape when establishing a new fund] in operation. The new rules are working. This topic often comes up when we travel abroad on our road shows, and it generates a lot of interest.

ALFI has recently reformed some aspects of its internal rulebook. What are the new governance rules for the association?

A time limit has been put on membership of the ALFI board and the chairmanship of the technical committees. This change to the association’s statutes followed feedback from members in a survey we conducted last year.

This change should open the door to more rotation and add a new dynamic.

There has been a lot of talk recently about the lack of gender diversity in the asset management industry. How is ALFI working on this?

This is something that ALFI and, especially, Denise Voss take very seriously. She is working within ALFI and across the Luxembourg economy to encourage initiatives that inspire women, and raise awareness of the problem amongst decision-makers. We actively encourage women to run for positions of responsibility within ALFI and to speak at our events.  STEPHEN EVANS

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STATISTICS EUROPEAN LEADER

Luxembourg investment funds at a glance NET ASSETS (billion euros as of 30/06/2017)

ORIGIN OF LUXEMBOURG FUNDS (as of 30/06/2017)

4,000 3,500

Others

United States

3,000 2,500

17.8%

France

20.3%

2,000

8.2%

1,500

6,0 % 17.3%

8.6% 6,4 %

1,000

Great Britain

Italy

500

14.4%

13.4% 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 /S 1

0

Switzerland Germany

NUMBER OF FUNDS (as of 30/06/2017) 4,500 4,000 3,500 3,000 2,500 2,000

4,192 The number of people employed in management companies in Luxembourg as of 30/06/2017.

1,500 1,000 500

19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 /S 1

0

TOP 10 FUND DOMICILES (as of 30/06/2017) Global market share in %

NET FUND FLOWS (in billion euros as of 30/06/2017) 350

Japan 3.4% Great Britain 3.6%

300

Australia 3.8%

250

Brazil 4%

200

Canada 3.2%

France 4.4%

150

Germany 4.5%

United States 47.1%

6,4 %

100

Ireland 5.1%

0

Luxembourg 9%

-50 -100 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 /S 1

Others 11.9%

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— ALFI — September/October 2017

SOURCES CSSF, EFAMA

50

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BEHIND THE SCENES

Paperjam had the opportunity to open the doors of RBC Investor Services’ trading room, located at Esch-Belval, where billions of data are monitored by analysts.

22 —

— ALFI — September/October 2017

BEHIND THE SCENES

ESSENTIAL LINK P

aris, London, New York... permanently connected to the four corners of the earth and surrounded by lots of screens, data and figures, analysts working in trading rooms are an essential link in the fund investment industry chain.

September/October 2017 — ALFI —

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CONTRIBUTIONS INVESTMENT FUNDS

Six reasons for success

Jon Griffin Managing director and CEO J.P. Morgan Asset Management

Trust, scale, Europe... Why Luxembourg’s fund industry has done so well, and what lies ahead for the cross-border fund distribution centre.

24 —

— ALFI — September/October 2017

T

he Luxembourg fund industry continues to grow and will soon break through the €4 trillion level of assets under management (AUM) across the spectrum of fund vehicles available here. Despite impressive growth in the alternative funds sector by size, over 80% of Luxembourg AUM remain in UCITS or retail products, which in turn make up 36% of the total UCITS funds in Europe.

CONTRIBUTIONS

Luxembourg’s journey, since adopting the UCITS legislation into its national law back in 1988, is well documented – what is important for the future is how Luxembourg can continue to excel and remain the crossborder fund distribution centre of choice for the foreseeable future.

I have been asked to write this short article for the upcoming ALFI Global Distribution Conference in September 2017. Having been associated with the Luxembourg funds business since 1989, including roles initially in custody and administration and latterly in asset management since 1996, I have experienced first-hand the important growth and development of this key financial centre.

There are a number of elements that chara­cterise Luxembourg as a successful hub for cross-border distribution:

active manager are by no means over, but the strength of passive offerings is forcing active managers to better articulate the value that they offer to investors.

Trust – A five-letter word that means a lot.

Trust in regulation, in transparency, in expertise, in the knowledge and ecosystem. Trust in people and firms or institutions committed to being stewards of the savings of investors of all types. Luxembourg is a small country with a significant fund industry which brings a big focus and competency on all aspects of the mutual fund value and actor chain.

There are very few countries where an industry takes so much time to fully understand ‘how the savings product needs to operate to ensure its efficiency in someone else’s country’. This also explains the uniqueness of the truly international workforce in Luxembourg. Trust is earned over time and proven when points of stress and market volatility occur. It demonstrates resilience and a commitment to be progressive and not complacent.

Technology – Fast moving, disruptive, game changing and what keeps the wheels turning and the lights on: technology has been a force for good, transforming aspects of our lives for decades and there is no expectation that any of that is going to change at all. Advances in the automobile industry, the computing power of the cloud, the so-called Internet of Things: the scale of the world population that is now connected in some form or another is vast. In financial services, there is much reported activity under the generic term of ‘FinTech’ and indeed many initiatives here in Luxembourg seek to spark interest to change or reinvent today’s way of doing things.

Notwithstanding the heavy regulation of the asset management sector, I am sure that it is only a matter of time before a game changer arrives. Overall, the regu­ latory treatment of FinTech is still at an early stage. A one-size-fits-all approach is not conducive to technology innovation. At a high level, policymakers are trying to balance the wish to support innovation, better understand these technologies and protect consumers against stability risk.

New regulatory and supervisory frameworks promulgated by local and regional authorities to address FinTech should strive to be harmonious with existing innovation frameworks in order to mitigate against regu­latory arbitrage and conflicting rule sets that stymie the development of innovative pro­ducts and services.

Scale – Arguably it is very difficult today as an actor in this industry to succeed without the requisite operating scale. That can be measured in terms of AUM, breadth of products, distribution or capacity to keep investing in your business. Scale is not neces­ sarily always good; if you consider one mea­ sure, such as the abundant oversupply in the 30,000 or more European mutual funds, there are too many funds and many are too small to be economically viable in the future.

This is why the European Commission is planning to remove national barriers that make it difficult or costly to market funds across borders.

Removing those barriers should help build economies of scale and ultimately bene­fit investors through cheaper products.

There is also a tremendous force shifting assets from active to passive fund offerings, which delivers a commensurate reduction in costs at the investor level. The days of the

Saving – Globally there is no clear answer to how people achieve income security in retirement, particularly in a world of lower returns and where support from national schemes will diminish. Products such as UCITS offer investors a wide-ranging choice of funds and access to well diversified, liquid and transparent savings products to meet an array of investing needs from short-term to longterm. This needs to be coupled with an environment that nurtures financial education from an early age so that the most informed decisions can be made.

Investment will never be without risk, but perhaps the highest risk of all is to do nothing and not invest and save for the future. The European Commission’s new proposal for a Pan-European Personal Pensions Pro­duct (PEPP) could help individuals save for their retirement. However, the possibi­lity that life-styled funds might be excluded from the default option could undermine efforts

to channel those savings into productive long-term investment and ensure a larger retirement income for savers.

Europe – Of course, Luxembourg’s growth has been enhanced through the common rules and regulations set with EU neighbours.

UCITS would not exist without such cooperation and is one of the EU’s biggest success stories in the area of financial regulation. The Capital Markets Union is another such EU initiative that has the potential to propel Europe’s financial markets forward.

As the EU undergoes fundamental change, it is important that the new regulations are backed by coherent supervision. Luxembourg, in particular, has benefited from a common approach.

Challenges – In recent months, we have seen a great deal of focus on delegation and outsourcing rules in the context of Brexit.

ESMA’s work has, quite rightly, focused on ensuring that EU member states require that firms have sufficient substance within mana­ gement companies when it comes to risk management and compliance.

If this work were to lead to new restrictions on the ability of investment management companies to delegate certain activities like custody and portfolio management to non-EU jurisdictions, this would be irresponsible.

Delegation, under strict controls and supervisory agreements, allows investors to enjoy both the safety and soundness of a robust set of EU rules (UCITS/AIFMD) and access to global markets/investments. UCITS have become a globally competitive pro­duct because of the openness of the structure and ability to delegate fund management to centres of excellence across the globe.

This in turn also attracts more investment into Europe. We should not risk the safe and open-model framework that UCITS is, and threaten its success as the global gold stan­ dard for retail investment funds.

Luxembourg’s fund industry has a lot to be proud of. I have laid out some of the factors that I believe have contributed to this success. However, the globalisation of financial markets, especially across Europe, has been the sine qua non for this financial centre. Keeping in mind what has delivered success in the past, Europe should look towards the future with the same open and consumer-­o rientated approach to continue to attract international investment into Europe and allow for investment outside of Europe. Luxembourg’s fund centre can continue to promote this process and play its role as the cross-border fund distribution centre of choice. 

September/October 2017 — ALFI —

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CONTRIBUTIONS TECHNOLOGY

The Top Fund Industry Talk in the US US fund industry discussions are keenly focused on increased efficiencies and enhancing the “customer experience”.

T

hanks to ever-evolving, data-related technologies, US fund companies are rapidly transforming themselves into “analytics-driven” organisations. Data is king, and analytics are driving business strategies across all distribution channels. While financial institutions across the US may fall on a wide spectrum when it comes to how they are using data to make informed business decisions, creating a complete customer picture with a combination of data is a clear and present goal.

Artificial intelligence and machine learning are delivering insights to predict client behaviour and business outcomes. While many US fund companies are still evaluating the best way to put data and FinTech to use, those ahead of the pack are incorporating new datadriven business models that are leading to competitive advantages.

RPA: PAVING THE WAY TOWARD BUSINESS AGILITY

What we’re hearing through various NICSA discussion forums is that robotic process automation (RPA) is paving the road toward

enhanced business agility and customer interaction. The big theme we are witnessing here in the US is that technology is swiftly moving from the back office to the front office.

12 to 18 months ago, conversations were centered on RPA as an alternative to outsourcing and offshoring, with a focus on the mid and back office. Now, the industry is seeing a dramatic trend toward the front office, which is helping firms scale this technology toward improvements and enhancements in portfolio management decision-making, distribution strategies, and client service models.

DEMYSTIFYING BLOCKCHAIN

One of the most discussed topics in the global asset manage­ment industry today is blockchain tech­no­l­ogy. The US fund industry is clearly making strides to better understand distributed ledger technology, but the fog is still lifting on how best to use this technology within our businesses. Blockchain may be in relatively early stages of implementation in the US, yet it holds the promise of changing the shape of financial services in

the future. With several compelling blockchain use cases in recent years, fund companies here in the US are researching, analysing, and documenting the infrastructure efficiencies, cost savings, and transparency benefits of this new technology.

CYBERSECURITY TOPS CORPORATE RISK DASHBOARD

Risks are mounting for financial institutions across the globe as data integrity and client confidentiality come under fire. With evolving applications of technology within the fund industry, data protection is a moving target.

Cybersecurity has become a top corporate risk item, with hacking, malware and ransomware attacks on the rise.

Cloud computing and automation have resulted in a somewhat challenging cyber environment and, as a result, security priorities are shifting. IT infrastructure solutions that can withstand these attacks without exposing critical data are imperative. Asset managers and broker dealers alike are addressing the issue of how to store client data, transact and safely communicate with investors in this new technology age.

THE QUEST FOR HIGHER EFFICIENCY AT A LOWER COST

Jim Fitzpatrick Chairman NICSA

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— ALFI — September/October 2017

Technology and business groups alike are continuously challenging their staff and tech models to leverage “best of breed” solutions to enhance efficiencies and minimise costs – not only across sales and HR systems but for larger operational components of their organisations such as analytics, back office processing, data centers, software development and delivery, and data warehouses.

The global fund industry must find a way to keep up with fast-paced evolution, and technology is just one piece of the puzzle. Product trends and distribution remain top-of-mind as investors and their advisers continue to place a greater emphasis on absolute performance net of fees, a trend that is likely to continue in the US and abroad. The “customer experience” reigns supreme, and effective implementation of technology applications is clearly generating opportunities for innovative fund companies to achieve their goals. 

INVESTORS

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CONTRIBUTIONS EUROPEAN NOVELTY

PEPPing up our pensions The European Commission’s proposal for a pan-European personal pension product fires the starting gun on a huge opportunity for EU savers and financial services providers.

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hat Europe’s pension market is hugely fragmented is beyond dispute. With an estimated 72 existing pension structures across the EU member states, it is clear that the market is not optimally organised.

In recognition of this fragmentation and accompanying inefficiencies, in July the European Commission came up with a solution – a 73rd structure. If adding yet another product to a marketplace replete with products seems a bizarre solution, think again. In our opinion, it’s a great idea whose time has finally come.

Implemented well, the pan-European personal pension product (PEPP) could give huge impetus to long-term savings by individuals, help stimulate the European economy, boost

the European asset management industry and offer early bird opportunities to jurisdictions which commit to adopting it. In this regard, Luxembourg has a significant role to play.

WHY SHOULD WE BE EXCITED ABOUT PEPPS?

The idea of a PEPP has been moving through the corridors of the European Union for years, without attracting serious attention. The EC’s recent proposal is therefore momentous.

It sets out in considerable detail and clarity what a PEPP should be, who can offer it, and how savers will benefit from it. The proposal has been carefully crafted and ticks every box for a pan-European pension product. It standardises core product features, such as

transparency requirements, investment rules, switching and portability. It ensures consumer protection, while being sufficiently flexible to enable providers to make products that suit their business models. And the initiative is complementary to existing pension plans, so it does not pitch the PEPP into direct confrontation with other structures. The EC’s focus and attention to detail is impressive. But it is not surprising, given how much the EU has to gain from such an initiative.

PEPPs are designed to help meet the demographic challenges that are heaping pressure on public finances. It will improve a European market for personal pensions that is currently fragmented and uneven, with a patchwork of

Claude Kremer Partner and co-chairman Arendt & Medernach

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— ALFI — September/October 2017

CONTRIBUTIONS

products at EU and national levels impeding the development of a large and competitive EU-level market. A more developed market for pensions in the EU should also channel more savings into long-term investments and increase the depth, liquidity and efficiency of capital markets. This could ultimately lead to growth and higher employment in the EU, as well as contribute to the EU’s plans for a Capital Markets Union Investment Plan for Europe.

PLENTY OF REASONS FOR SAVERS TO LIKE IT

So much for the market structure advantages, what about the benefits for pension investors?

Well, for savers across the EU, the advent of the PEPP appears to be unequivocally positive. The proposed simplicity of the PEPP and its cost-effectiveness should encourage new savers into the pensions market and help existing savers to invest more. PEPP savers will have the choice of up to five investment options. Providers will design these options using high levels of consumer protection under the “prudent person” principle. A safe default investment option in which savers are guaranteed to lose none of their capital will be offered in every PEPP. Perhaps the most eye-catching and talkedabout aspect of the new product is that providers can offer PEPPs right across the EU. This is great news for an increasingly mobile EU workforce: many people are deterred from saving for retirement because they cannot take their pension with them when they change country. With the PEPP, they will be able to continue contributing to their pension when moving to another member state for work, personal or other reasons. And the differences in national tax regimes will hopefully not be an issue because PEPPs will comprise national compartments, fitted to the specific national tax requirements.

PEPPs will also allow savers to switch providers every five years, at capped costs. The PEPP will be easy to access, too, with rules allowing for online distribution and purchase.

As well as offering portability, minimum standards mandated by the EU will mean PEPPs are more transparent than many existing products, easier to understand and also more robust, all of which leads to higher consumer confidence.

A HUGE OPPORTUNITY FOR ASSET MANAGERS

This increased confidence is vital. People tend to postpone making provision for retirement and, when they do, are often discouraged by poor performance, high fees and complex products. PEPPs offer the potential for improved performance, which will increase the attractiveness of personal pensions and should lead to higher take-up rates. The financial services industry has a chance to seize this opportu-

nity with both hands and make it work both for the benefit of savers and itself.

The Commission foresees that PEPPs will be offered by a range of financial companies, including insurance companies, banks, occupational pension funds and investment firms.

All these providers will benefit from a large, single market and from cross-border distribution, including an EU passport.

The Commission is very optimistic about the potential size of the market if all goes to plan. Its impact study estimates that the current €700 billion of assets held by EU personal pension providers could reach some €2,100 billion by 2030 with PEPPs in place. This compares with €1,400 billion without PEPPs. Which segments of the financial services industry will benefit most depends on which industry participants are the first to rise to the occasion. Asset managers appear to be particularly well placed, given that the Commission’s proposal is for the PEPP to be structured in a similar way to many existing investment funds. Asset managers have the potential to further develop their product ranges, including creating next generation lifecycle and target-date funds. PEPPs could also facilitate cross-border activity for fund managers, creating large pools of capital that benefit from economies of scale and reduce administrative costs.

Opportunities are equally available to banks, insurance companies and existing pension providers. Insurance companies, for instance, currently manage about 90% of personal pensions assets across the EU. While the PEPP could be seen as a threat to this dominant position, insurers can also view it as a way to further increase the pension assets they manage.

LUXEMBOURG CAN HELP EUROPEANS ADOPT PEPP

In particular, they could expand their activities from mostly domestic distribution to an EU-wide business model, thereby reaping the benefits of scale and of asset pooling. But the opportunity at hand is less a contest for market share, and more about how the various segments of the financial services industry can work together to create the solutions, scale and performance that savers need. Providers may well seek to form partnerships – formal and informal – that can extract the full benefits of economies of scale and distribution opportunities.

Just as providers can position themselves to take advantage of the new pension product, so there is a sizeable, long-term opportunity for international financial services centres.

In particular, Luxembourg has the chance to be a prime location for the launch and distribution of PEPPs. Over the last three decades,

Luxembourg has built significant expertise in the creation and distribution of funds with net assets under management in the Grand Duchy now amounting to some €3,956 billion. In particular, it has championed UCITS funds, which now account for €8,800 billion in assets under management across Europe. Luxembourg is also a specialist in cross-border structures, with 95% of its funds in this category. Based on informal conversations with industry participants, we believe Luxembourg could become the first jurisdiction to fully develop PEPPs. Already working groups are in place, and we would like to see cross-industry partnerships coming together to present a common approach.

We know from previous work transposing financial-related directives into Luxembourg law that the government of Luxembourg, as well as the policymakers and regulators, are helpful counterparts to the industry, facilitating rather than hindering changes that benefit the local and European financial services industry. The enthusiastic assistance of lawmakers will be critical in introducing PEPP legislation, which will need to be adapted before it can be enacted in Luxembourg.

JOINING FORCES, RIDING THE BUMPS

Although the PEPP is incontrovertibly a good idea, few good ideas are realised without hitting a few bumps in the road. Pensions have always been controversial from a political point of view, and tax, language requirements, administration and local marketing rules could also present challenges to the PEPP’s development.

These potential obstacles are exactly why the industry must come together and ensure that the momentum provided by the Commission’s proposal is not lost amid handwringing over practical difficulties. It is possible, in any case, that some of these difficulties could be dealt with when the Commission issues clarifications in subsequent drafts.

We urge participants to acquaint themselves with the Commission’s proposals for the PEPP and to deliver the message to their clients and supply chains that it is a force for good. For most providers, the PEPP would not entail a major infrastructure change. Under the proposals, there would be no need to set up a new company, to hugely increase staffing or to recruit new skills.

In other words, the raw ingredients for the Commission’s PEPP recipe are well known by the banking, insurance and asset management industries. If a collective effort to make the PEPP work is made, they can ensure its longterm success for all.  This contribution was written in collaboration with Pierre-Michaël de Waerseggen, partner, Arendt & Medernach.

September/October 2017 — ALFI —

— 29

CONTRIBUTIONS BUSINESS MODEL

Regulatory disruptors to European fund distribution With new MiFID II legislation, regulatory silos are being eroded, meaning firms will have many considerations moving forward. Debates have begun, and there is likely to be some variance in national interpretations and practices, at least in the interim.

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he days are over when fund managers could assume that for the majority of investment funds they would need to do no more than to get them authorised, promote them to distributors and let the market take care of itself. Long-term low interest rates are driving a focus on costs and “value for money” (including concerns about “closet tracking”). Coupled with concerns about products not being aligned with customers’ interests and about conflicts of interest, this is driving regulatory priorities. New European legislation – MiFID II – is breaking down regu­latory silos between manufacturers and distributors, and is requiring all firms to consider the whole manufacture-distribution chain. MiFID II includes many provisions that could impact fund distribution:  It strengthens existing requirements for giving advice, and for assessing suitability and appropriateness.  Non-complex products (which includes most UCITS) can be sold execution-only without the appropriateness requirement.

However, ESMA believes that all non-UCITS funds (including listed closed-ended AIFs) are “complex per se”, which could have significant ramifications for platforms and other forms of digital distribution.  Independent advisers and discretionary investment managers cannot accept monetary bene­fits. Other distributors can accept monetary benefits, provided they “enhance the quality of the service for the client” and are disclosed.  Firms must have a product governance process, which includes identifying and articulating the target market for each product; ensuring their products are appropriately tailored and suitable for that target market; and monitoring their distribution.

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 Distributors will require detailed information

on the underlying costs and charges of products in order to comply with disclosure requirements.  ESMA and national regulators have the power to ban or restrict products under certain circumstances.

NEW PRODUCT GOVERNANCE PROCESSES

Three areas that have generated heated debate are inducements, product governance and the disclosure of costs and charges. The Netherlands and the UK already have in place a wider ban on inducements, not just for indepen­dent advice. Sweden and Denmark considered a wider ban but decided to fall in with other national regulators and apply the MiFID II inducement requirements without embellishment. That still leaves the question of what “enhancing the quality of the service for the client” means in practice, and how regulators will supervise and enforce it. The answer will evolve over time as the new MiFID II rules become embedded and as national regulators inspect what happens in practice. This is likely to give rise to slightly different national interpretations and practices, at least for an interim period, which will be a further irritant in firms’ cross-border distribution activities.

MiFID II brings in for the first time at the European level detailed product governance requirements for investment firms. UCITS and AIF managers are also impacted. Although they are not directly subject to MiFID II, distributors are and will have to seek information from fund managers about their product governance process and the “identified target market” of the fund. Fund managers need to put in place product governance processes, from inception and throughout the life of the fund.

The requirements are wide-ranging and cover

— ALFI — September/October 2017

all aspects of the product design, change and monitoring process, including effective controls, stress testing, identification of the target market, appropriate product information, appropriately trained staff and so on. The Level 2 rules and Level 3 guidance acknow­ledge that many products can be considered as suitable for the mass retail market, but doing nothing – or very little – is no longer accep­table. Containment of conflicts of interest in general, and of inducements in particular, are key themes throughout MiFID II, including within the pro­ duct governance requirements.Articulating the MiFID II obligations on product governance – in particular, “target market” was never going to be an easy task. Products covered range from bank deposits with structured interest rates and plain vanilla UCITS through to the most exotic of structured products, and the very different types of manufacturers and distributors need to be accommodated. ESMA’s draft caused considerable concerns for manufacturers and distributors, but initial reactions to the final guidelines seem more muted. It remains to be seen how well the guidelines will work in practice and whether manufacturers will be able to provide distributors with full sets of data by this autumn, especially given the many other MiFID II requirements that firms need to comply with by January 2018, together with the PRIIP KID.

THE MIFID II REQUIREMENTS

For funds, the MiFID II requirements on disclosure of costs and charges are based on, but are not identical to, the UCITS KIID and the new PRIIP KID. ESMA makes no reference to or allowance for the fact that MiFID II expli­ citly excludes the impact of market risk from reportable costs. It expects the industry to use the methodology in the PRIIP KID for ex-ante

CONTRIBUTIONS

as well as the key principles underpinning the regulatory requirements, have remained unchanged, but the obligations have been further strengthened and detailed. In particular, reference is made to the fact that the use of electronic systems in making personal recommendations or decisions to trade shall not reduce the responsibility of firms.

So, what does all this mean for the European fund distribution landscape going forward? Here is a view from one crystal ball.

DIFFERENT DISTRIBUTION CHANNELS

Julie Patterson Director, asset management, regulatory change KPMG

costs, which includes implicit market risk. Also, it expects UCITS and other funds not currently subject to the PRIIP KID regulation to provide ex-ante transaction costs in accordance with the methodology for new PRIIPs. This methodo­logy is less problematic for the industry than the main PRIIP methodology, but it nevertheless includes (or is silent on) a number of aspects that are causing firms practical difficulties in implementation, for example, due to the current absence of market data.

ESMA is also consulting on draft guidelines on certain aspects of the MiFID II suitability requirements. It notes that the assessment of suitability is one of the most important requirements for investor protection in the MiFID framework. It applies to the provision

of any type of investment advice (independent or not) and to portfolio management services. Firms have to provide suitable personal re­commendations to their clients or make suitable investment decisions on behalf of their clients. Suitability has to be assessed against clients’ knowledge and experience, financial situation and investment objectives.

The draft guidelines are based on those for MiFID I but are augmented throughout to take into account the results of supervisory activities conducted by competent national authorities on the application of the MiFID I suitability requirements, technological evolution in the advisory markets (e.g., robo-advice) and recent studies on behavioural finance.

The objectives of the suitability assessment,

In the first phase (pre-2020), fragmentation of the Single Market is likely because of different interpretations of “retail client” around Europe; different national interpretations of the quality enhancement criteria leading to different “thresholds” being applied; and additional local restrictions on inducements.

However, different distribution channels do­minate in different European markets, so the impacts will differ between member states.

There is likely to be a low impact on an already fee‑based environment. Fee-based advice is on the rise in private banking, but proving difficult to implement, with some clients preferring execution-only. In bank-dominated distribution markets, banks may initially retreat from their tentative steps to “open architecture”, unless and until the “quality enhancement” test bites hard. Distributors will focus on a smaller number of products/ product providers, so will generally not be “whole of market” or independent, thus avoiding the inducement ban.

The minimum portfolio size for bespoke portfolio management service is likely to rise further. Clients will still want a full range of products, not concentrated in-house. But increased fee transparency may cause clients to ask more questions. Managed solutions (like profile funds or target risk funds), which can be internally managed by distributors’ dedicated subsidiaries, correspond to client demand for outcome-oriented products and allow distributors to charge an all-in-fee. Use of funds of funds and portfolios of passive funds will further increase. Multi-management solutions may grow as an alternative to open architecture in non-independent organisations. Distributors will undertake firmer segmentation of clients, within a more diversified range of service models and with increased use of digital channels.

There will be a steady rise of robo-advice platforms or “guided sales” in the mass retail market, which do not strictly provide “advice” as defined by MiFID. But beware the possibi­ lity of a widening of the regulatory boundary – regulators are actively questioning whether current rules are fit for purpose in an increa­ singly digital environment. 

September/October 2017 — ALFI —

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CONTRIBUTIONS GLOBAL DISTRIBUTION

Opportunities for subadvisor funds An assessment of the global outlook for mutual funds.

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espite market turbulence and growing risk aversion, mutual funds worldwide posted strong growth last year, with assets under management (AUM) increasing from US$75.4 trillion in 2015 to US$79.3 trillion as of year-end 2016.

Cerulli predicts mutual fund assets will pass US$100 trillion in 2020 with non-US assets accounting for more than 50% of the overall volume.

While there are attractive pockets of growth in both developed and developing markets, the global fund distribution landscape remains difficult to navigate because of fragmented regulations and, in many cases, entrenched home bias. That said, international managers with very different growth aspirations are finding their own routes to market, be it through subadvisory channels in the US and South-East Asia, setting up wholly owned enterprises in China, or developing digital platforms in Europe.

Home bias is especially acute in the US, where AUM by foreign exposure was around 16% in 2016 versus 63% for Switzerland. But opportunities for international managers will continue to improve as asset managers and investors recognise the growing importance

placed on accessing and increasing international exposure. Subadvisory relationships are a way for foreign managers to tap into this need without building the distribution infrastructure.

During the last 15 years, the number of subadvised mutual funds in the US has increased by over 55%. The opportunities for subadvised funds differ dramatically across asset classes, with alternatives and equities proving especially successful. As the investment world becomes more complex and as regulation and competition create higher barriers to entry, subadvisors will become increasingly requested due to US sponsors’ need for specialisation.

International managers focused on Asiaex-Japan are increasingly being drawn to outsourcing opportunities in the institutional segment, particularly in Hong Kong and China.

Hong Kong is one of the most attractive institutional markets in the region with around 39% of the country’s assets farmed out to external managers in 2016. This is projected to rise to 41.7% in the next four years. While many international managers are focused on growing their existing business in Asia, it is encouraging to see a group of managers keen to venture into

Barbara Wall Managing director Cerulli Associates

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— ALFI — September/October 2017

new markets, such as South-East Asia. White labelling is considered an ideal way of tapping the SE Asian market, which is attracting growing attention as it opens its retail and institutional markets. In a survey of local fund houses in Thailand, Cerulli found that a third plan to engage external managers on new funds in 2017. Top on their wish list are global/developed market strategies, emerging market equities and thematic strategies.

New distribution opportunities are also emerging in Latin America where tax amnesty programmes and global information agreements have encouraged wealthy residents to seek out advisory relationships locally. As a result, global sponsors are less reliant on relationships in the US and Switzerland and are landing more business from local asset managers via subadvisory agreements and funds of funds. International managers are also creating new relationships with in-country private client distributors. It is notable that nearly half of all cross-border fund AUM sits with distributors operating in Uruguay and Argentina.

The Middle East is another small but growing market that is gaining in maturity. If we consider UCITS as a proxy for international sales, the Middle East represents a modest 2% of global UCITS sales, but the vehicle is widely understood and was used as a template to develop Bahrain’s onshore fund structure.

In the first quarter of 2016, approximately US$4 billion of Bahrain’s existing US$7 billion of funds business was from locally incorporated sales. The remainder were UCITS funds.

Large banks continue to control distribution to individual investors in the region, but this is likely to change as new distribution channels, such as digital brokerage platforms, emerge.

Digitisation is a theme common across many regions, but not all observers believe that so-called robo-advice will grow into a significant distribution channel.

In 2016, we canvassed cross-border mana­ gers’ opinion about the future of robo­-advice in Europe. Only 8% expect the channel to gain significant market share in five years.

However, the percentage increases when the time frame is widened to 10 years. We believe that managers dealing with the technology today will be well placed to reap the rewards when the channel starts to gain traction globally. 

INDEPENDENT ADVISERS. PRACTICAL SOLUTIONS. A DIFFERENT WAY TO THINK ABOUT TAX.

www.atoz.lu

CONTRIBUTIONS

TAX 3.0

The Digitalisation of the Tax Administrations

Manuela Abreu Executive director Ernst & Young Tax Advisory Services

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— ALFI — September/October 2017

CONTRIBUTIONS

Tax authorities are moving into the digital world.

While some are at the front end of making their systems digital, others lag behind.

GOING CROSS-BORDER

It is commonly accepted that businesses will continue to become increasingly global; indeed, expansion and growth are the drivers of a profi­ table business, be it in the financial or in the operating sector. As businesses expand, so must their understanding of the tax rules of each foreign jurisdiction they move into, in order to ensure, amongst other things, compliance with local tax obligations. Whilst in past years, some businesses have benefited from the fact that the IT systems of tax authorities and asso­ ciated government bodies were rudimentary and not connected, nowadays, in many fo‑ reign jurisdictions, the IT systems of these bo­dies (tax authorities, social security, nota­ ries, etc.) are very much interconnected and, due to new exchange of information mecha­ nisms, the authorities have real-time access to valuable financial information on taxpayers.

MOVING TO DIGITAL

For those tax authorities that have already stepped into the digital space, the outcome

LEVELS OF DIGITALISATION

LEVEL 1

LEVEL 2

LEVEL 3

“E-life”

“E-accounting”

“E-match”

Corporate entities required or having the option to use a standardised electronic form for filing tax returns.

Other income data (e.g., payroll, finan­ cial) filed electroni­ cally and matched annually.

Corporate entities required to submit accounting or other source data to sup­ port filings (invoices, trial balances, etc.) in a defined elec­ tronic format at a defined frequency.

Additions and changes at this level occur frequently.

Corporate entities required to submit additional accoun­ ting and source data, government accesses additional data (bank state­ ments). Government begins to match data across tax types, potentially across taxpayers and jurisdictions in real time or near real time.

LEVEL 4

LEVEL 5

“E-audit” Corporate entities’ Level 2 data is ana­ lysed by government entities and crosschecked to filings in real time or near real time to prevent fraud, unintended errors, and to map the geographic eco­ nomic ecosystem.

Governments send taxpayers electronic audit assessments with a limited win­ dow to respond.

“E-assess”

DISRUPTIVE

ow many times have you heard that the tax environment is changing? How many pre­ sentations have you attended where yet another tax advisor talked about the fundamental shift being lived by tax directors?

In presenting the new tax environment, tax advisors tend to make reference to some of the following topics: new tax transparency and reporting requirements; increasing tax and reputational risks; the extent to which BEPS actions, including the Multilateral Agreement, are going to impact your business; the way some tax authorities are quickly moving into the digi­ tal space, finishing with a “quick word on robo­ tics and analytics”. We have heard our clients repeatedly referring to the challenges of kee­ ping up with the pace of change at domestic, European and international level, and to how difficult it is to put in place IT tax systems able to extract data that provides a global understan­ ding of investments and helps them manage comprehensively their tax risks and opportuni­ ties. Interestingly enough, in certain countries, it is not the business world setting the pace of the digital race but government bodies, agen­ cies and, last but not least, the tax authorities. In this article, we will focus on how tax authorities are moving into the digital world, how some are at the front end of making their systems digi­ tal and how others are still behind in this race.

PARADIGM SHIFT

H

Government entities use submitted data from corporate entities to assess tax without the need for tax forms. Tax­ payers have a limited window of time to audit government calculated tax.

*Note that not all governments collect the same information or treat it the same under this model. For example, a country might be at Level 1 for certain data, but at Level 3 for other data. Further, the move to digitisation is not necessarily linear, nor should higher levels of digitisation be viewed as the ultimate goal of either taxpayers or tax authorities.

can be rather powerful – accessing real-time taxpayer financial data, running cross checks with data held by other government bodies and agencies, increasing the quality of tax audits – these are benefits that could not have been anticipated ten years ago.

In 2016, EY performed a study “Tax admi­ nistration is going digital: understanding the challenges and opportunities”, which con­ cluded that five levels of digitalisation exist (see above). While it is true that, for some tax authorities, the immense financial flows and data generated by reporting obligations such as CRS will be slowed down by the availabi­ lity of local tax inspectors, the above indicates that other tax authorities, digitally ready, will be in a position to rapidly scrutinise large vo­lumes of data and use it to improve the quality of tax audits, to monitor compliance with tax obligations, to challenge access to double tax treaties or EU directives and also to share it with other tax authorities.

Potentially significant costs incurred in the reconversion, and the set-up of new IT tax systems is clearly justified due to the sub­ stantial increase in tax revenue collection and the improved effectiveness of tax audits. How can the above impact the tax function and the business? In each of the foreign tax juris­ dictions in which their businesses operate or hold investments, tax directors and/or CFOs need to understand where the tax authori­

ties stand, in terms of digitalisation and to make use of sufficiently equipped monitoring tools. As each tax administration becomes more digital, requests for information will potentially increase in frequency and in com­ plexity – taxpayers will be granted less time to pre­sent their arguments, and queries will not be limited to domestic tax issues but will also encompass matters related to foreign jurisdictions, at different levels of the group structure.

More discussions about tax matters will necessarily revolve around public tax sys­ tems, up-to-date tax monitoring and repor­ ting tools, internal IT systems, and the need for more comprehensive analytics, in anticipation of challenges from the tax authorities. Robotics, digital and artificial intelligence can and should be considered as catalysts of opportunities.

Examples include: allowing taxpayers to quickly identify potential tax reclaims, either through double tax treaties or EU directives, creating efficiencies in the collection of documentation, not to mention the benefits arising from overall time savings. At EY, we have been successfully assisting our clients in the set-up of tax monitoring tools that allow them to track withholding tax reclaims opportunities, but also on IT-based capital gains tax tools to compute and monitor fo­reign risk and to have a coordinated approach into foreign tax agents, to name a few projects. 

September/October 2017 — ALFI —

— 35

CONTRIBUTIONS GERMAN INVESTMENT TAX REFORM

what will happen after 1st January 2018?

Can Luxembourg funds still be sold to German investors next year?

T

he German investors are an important market for the Luxembourg investment fund sector. Not only do German-spea­king houses heavily distribute their funds to domestic investors, but a large majority of fund sponsors target at least some German investors, such as savings banks, insurance companies and pension funds as well as retail investors, especially in UCITS. The German legislature recently adopted new investment tax legislation that changes substantially the treatment not only of German funds but also of German investors in foreign funds, including those from Luxembourg. The tax reform could significantly affect the attractiveness of Luxembourg funds for German investors in the future. Some changes might lead to considerable tax leakage for investors, a serious blow to the attractiveness of a fund. The new rules will apply from 1st January 2018, so there’s no time to waste. It is crucial to

look closely now at the changes and determine which Luxembourg fund structures may no longer meet the needs of German investors in a few months’ time and need to be amended.

We won’t try to list all the charges here, but highlight some of the most important.

To start with, the legislation fundamentally changes the scope of the “investment fund” tax regime. Currently, most AIFs qua­ lify as “investment companies” rather than “investment funds” from a German tax perspective. After 1st January, many AIFs will be reclassified as investment funds and will be subject to the new investment fund tax treatment. There will be three categories: investment funds, a quite narrowly defined category of special funds, and partnerships.

The latter will fall outside the investment fund regime and will instead be subject to the re­gular German tax regime for partnerships. Also new is extension of the investment

Silke Bernard Partner Linklaters LLP

36 —

— ALFI — September/October 2017

fund regime to single-investor funds. Investment funds will no longer be subject to the previous semi-transparent tax regime but to a non-transparent regime. However, they will only be taxed on German-sourced income. To mitigate the impact of the new taxation at fund level, the legislation creates a partial tax exemption regime for investors that depends on asset classes (stock funds, mixed funds or real estate funds) and their proportion of the fund’s assets.

The partial exemption is good news for German investors, but it means investment policies may need to be revisited before year end to ensure investors benefit. Unless the relevant asset class thresholds are stipulated in the fund’s investment strategy, investors may have to provide evidence of compliance to the German tax authorities (e.g., a list of all the fund’s investments). If an investor holds a large number of funds, producing this evidence for each fund might be extremely burdensome.

The partial exemption regime is a crucial element of the new regime, but the devil is in the details. Its application will depend on the precise implementation of the investment strategy. For instance, a stock fund that invests exclusively in listed stocks may still be ineligible for the partial exemption if the exposure is achieved through derivatives. Similarly, with real estate funds attention should be paid to factors such as the level of leverage and the downstream structure (e.g., holding entities), which could jeopardise the tax exemption.

Other changes deal with areas such as distributions and capital repayments, lump sum taxation, and the VAT exemption for fund administration services to AIFs that are “comparable” with UCITS. The impact of the reform on fund distribution in Germany should not be underestimated, and it is highly advisable to examine current structures and open discussions with investors now.

The current semi-transparent fund taxa­ tion regime will in the future only apply to special investment funds. The future conditions for classification as a special fund will be largely similar to the current rules, but there are some changes and the fund documentation will need to reflect them.

Finally, at least one change will without doubt be unanimously welcomed: from 1st January 2018, the traditional German tax repor­ting requirement will disappear. 

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CONTRIBUTIONS ASIA

Opportunities and Threats for Fund Management

Stewart Aldcroft Chairman Cititrust Limited Senior advisor and managing director Citi Markets and Securities Services

Overview of the origins and evolution of the fund management industry and considerations about the best opportunities that have emerged in different regions around the world.

38 —

— ALFI — September/October 2017

T

he fund management industry in Asia started in Hong Kong in the mid-1970s, and has spread across the Asian region, to the point where today virtually all countries have some fund managers located inside their borders.

As Asia is increasingly cited as the region globally, with the highest rate of growth among high net worth individuals (HNWI), the highest number of billionaires and millionaires, the strongest gross domestic product (GDP), it is of no surprise that there is money available to be invested, and managers wan­ ting to offer their services to do so.

CONTRIBUTIONS

These days almost all global fund managers with any “international” pretensions have now established a presence in the region, most either in Hong Kong or Singapore. Those that have been here for longer, have used their initial base to expand to other parts of Asia, as business opportunities have grown.

In the early days, it was a few British fund managers that set up in Hong Kong to mana­ge money through local unit trusts, invested into Japanese equities, on behalf of UK pension funds. This gradually spread to include other funds invested into Hong Kong equities, then Asian region and eventually to the point where there are now funds that provide virtually any type of investment opportunity you could wish for.

China entered the markets in the late 1990s, first by forming stock markets in Shanghai and Shenzhen, and then allowing the creation of local fund management companies (FMC), which could also be joint ventures with foreign partners.

As China’s economic growth has by far outstripped that of all other economies du­ring the last 20 years, this too has created vast wealth in the hands of both individuals and corporations, which ultimately has required professional fund management. It is estimated that total assets available for investment in China alone exceeds US$5 trillion.

So, as we look at the Asian region fund mana­gement industry in 2017, and in particular at the opportunities and threats for the offering of collective investment schemes (CIS) such as unit trusts, mutual funds, etc., it is worthwhile considering whether the industry can continue to build on the obvious success it has achieved to date.

In 1985, the then securities regulator in Hong Kong, the Office of the Securities Commission (OSC), which was the forerunner of the Securities and Futures Commission (SFC) that is in charge today, took the bold step of accepting that not only could locally domiciled CIS be offered to the investing public, but also those that were created in other jurisdictions, provided they met the reasonable criteria set for all to comply with.

This initially opened the way for a couple of Channel Islands-based umbrella products (also a new idea at the time) to be approved, and then eventually the path for Luxembourg UCITS and other European domiciled funds to be approved.

Over the intervening 30+ years, there have been more than 100 fund managers and 2,000+ funds that have been able to enter the Hong Kong market for funds distribution. This then has led to similar market opening opportunities occurring in Taiwan and S­ ingapore, as major funds distribution centres. Mana­ gers from Europe, North America and Asia

DIFFERENT OPPORTUNITIES ARE PRESENT ACROSS DIFFERENT COUNTRIES COUNTRY

CURRENT SIZE

Australia China Hong Kong India Indonesia Japan South Korea Malaysia Philippines Singapore Taiwan Thailand

Medium/Large Large Medium Small Small Large Large Medium Small Medium Large Medium

GROWTH POTENTIAL BEST OPPORTUNITY

EQUITY OWNERSHIP

 Institutional   Retail/Institutional   Institutional   Retail   Retail   Institutional   Retail / Institutional   Retail   Retail   Retail   Retail / Institutional   Retail 

MARKET ACCESS

           /  

 Moderate  High  Low

Pacific have all set up offices, built platforms to develop their business and offered products to both individuals, via third-party distributors, and to institutional investors.

SOME OF THE BEST OPPORTUNITIES

The institutional market in the Asian region perhaps offers some of the best opportunities these days. It is estimated there are around US$4 trillion of assets and more than 350 different mandates available in the market.

Typically, most mandates are awarded to mana­gers for a three-year revolving time period, although in some instances, the institution feels obligated to change managers for some mandates every three years.

This clearly throws up a lot of potential for newcomers entering the market, although they soon learn that it can take a considerable amount of patience and fortitude to achieve success in this area. Mainland China, with around half the AUM available for institutional management, has been through a period of learning, where initially the lowest fee offer usually won mandates, which inevitably led to lower returns being achieved (in most instances), to now being far more selective on their appointees, looking for both noncorrela­ted returns and more sustainable performance. In the last couple of years however, some of the major Chinese institutions have begun taking back “in-house” the management of assets, and then more actively using “passive” investment strategies rather than “active”, in the belief that the consequent lower costs and strategy management (rather than stock selection) can achieve better returns.

In the mutual funds market, growth in AUM has come from a number of factors.

Greater market access, broader distribution, lower interest rates have all contributed. It was pro­bably the decision by a few banks in the mid‑1990s to start to sell funds via their branch networks, which has had most impact.

Not only did this increase volume, it also led to opportunities for external fund managers who could have their funds included on “open

architecture” platforms many of the banks professed to offer. “Wealth management”, as this area became known within the banks, mushroomed massively during the subsequent 20 years, as the revenues from this became a significant proportion of the total income earned by banks from their customers.

Banks and similar financial institutions now account for over 80% of the sales of cross-­border funds such as SICAVs. And within the banks, it is generally the retail banks, using their extensive branch networks, that have the highest volumes, representing 70%-80% of all sales.

FUND PASSPORTS

Private banks, although very active in the region, generally choose not to use the “retail funds”, preferring to offer hedge or alternative funds, or those that might not otherwise get offered in Asia, thus retaining a degree of exclusivity, typical of the requirements of private banking.

In the last couple of years, there has been a development towards creating “fund passports” within Asia. This would, in effect, allow those funds domiciled and approved by the regulator in one country to then be eligible for approval in another country. To date there have been three different schemes created, for 10 of the 17 eligible countries in Asia, all with the one objective of seeking a “passporting” of funds. Despite these now having been in some form of operation for almost two years, none of the three schemes has to date achieved any degree of success.

Nevertheless, it should be noted that almost all Asian governments are very keen to achieve greater domestic asset management, and these “passporting” schemes may eventually lead to increased restrictions on the access currently given to UCITS products from Europe.

Asia remains significantly under-invested in funds. Yet it also has one of the highest savings rates in the world. It is therefore expected that in time this will lead to even greater growth in the opportunities for fund managers, whether local or international, who wish to be active in the region. 

September/October 2017 — ALFI —

— 39

CONTRIBUTIONS END INVESTOR

The Giants and the Gems

Jonathan Boyd Editorial director Open Door Media Publishing

Is it better to have a share in a smaller but faster growing pie, or a share in a bigger but slower growing pie?

And what about scale, branding and platform accessibility? Here is an examination of the priorities of the end investor.

40 —

— ALFI — September/October 2017

T

he Association of the Luxembourg Fund Industry Global Distribution Con­ference will be considering many facets of fund distribution.

These may range from the regulatory technical – “What does Section 7, Paragraph 39, Clauses 4 & 5 of MiFID II actually mean?”

(I don’t know if they actually exist, but you get the gist) – through to geography – “How do you practically manage distribution across 24 time zones” – to personnel – “I am tearing my hair out trying to find somebody who can

CONTRIBUTIONS

get my fund onto the right platform for reaching very rich people on their yachts berthed in the Galapagos!”.

Meanwhile, ALFI itself will be pondering the place and role of industry champions in distribution questions, when it shares insights and anecdotes with peers from Hong Kong and the US. However, the thrust of these questions may take a different path when it comes to considering the micro-picture relevant to individual fund provider firms and their distribution activities.

That is because there can be significant differences between the activities – operational or otherwise – that can be supported by a small firm versus a large firm, but also because the nature of investment fund products themselves may mean they are more or less attractive irrespective of the size of the provider.

For example, fund selectors generally prefer to get into funds that are a long way off running into capacity issues, because of the way return on capital invested is influenced by how much money is chasing what type and size of underlying asset (a $100bn equity fund specialised in Icelandic equity is possibly not a great idea); but it may not matter in that case whether the new fund is offered by a larger or smaller firm.

Does scale matter? Does brand recogni­ tion matter?

Scale and brand are factors not exclusive to the fund industry. In fact, 2017 could be the year when total global marketing spend pushes through the $1trn barrier. But, of course, the old adage also says – I paraphrase – that half of all ad spending is wasted because of uncertainty over who exactly is receiving what messages. Technology is changing that and making it easier for fund and asset management houses to spot who is viewing their online ads. However, knowing that a recipient has received the message is not enough: is it a professional fund buyer or retail fund buyer? And therefore, if a smaller (in terms of turnover) manager is up against a larger one in a shootout in front of a professional buyer, does the branding make as much of a difference?

In one sense, yes, it does still make a difference, as professional buyers are less likely to be buying on behalf of themselves, and the person on whose behalf they are investing may be more swayed by brand recognition leading to a point of sale decision. Scale is a different issue. Modern regulations as they apply to fund selectors mean that they must now consider the business case of the provider firm, not just the product on offer, as part of the DDQ process. Scalability of the strategy has already been touched on (the capacity issue), but there is also the business scalability challenge: if a small firm has a block-

buster hit on its hands, it could experience a significant administrative nightmare – unless it soft-closes the fund.

Is it really easier cutting distribution deals if you are a giant of the industry? Are (smaller) boutiques getting a raw deal from distributors?

Looking at these questions puts me in mind of cows, farming and dairy. Let me explain.

The UK had roughly 1.9 million dairy cows as of mid-2016, according to statistics updated in early 2017. However, logging on to a supermarket website, such as Tesco’s, the largest supermarket by market share in the UK, and doing a search for “butter” leads to just 867 results. And when looking for the brands, it is even more concentrated, perhaps as few as six brands immediately visible.

Now, given that the weekly footfall at Tesco is about 16 million people, that suggests that any brand that is not on the Tesco shelf faces a hurdle to faster growth. Size of producer is an issue, as any company – read farmer – who can only manufacture a certain amount of product may be less favoured as a supplier where output undershoots potential demand from that size of footfall.

The power of Tesco then lies in concentrating the output of many of those 1.9 million cows into six brands of butter seen by 16 million people weekly, presumably making a decent profit in the process.

For the fund industry, it illustrates a key challenge facing smaller fund provider firms, i.e., how to deal with the power of platforms.

Funds are not butter – that’s true – and the admittedly rather facile example does not go into issues of elasticity of demand and supply, product substitution, etc., but considering the policy push in Europe and elsewhere to make funds more easily accessible to the growing number of people needing to save more for retirement, there is a growing need for efficient and cost-effective distribution, but one that also maximises choice.

In Europe, there are over 58,000 funds available according to the European Fund and Asset Management Association (EFAMA) update for May 2017, based on data from its 29 member associations. But if distribution deals are simply to be guided by profitability maxi­ misation, there is a real question mark over how many of these funds may be sufficiently attractive for distributors to do deals with.

A boutique strategy may have a much smaller sweet spot in terms of capacity, indicating a limit to growth in fund assets under management (AUM), which for a distributor looking for a multi-year deal based on basis points of AUM and/or net sales becomes less attractive than a more mainstream supertanker-type fund. However, in contrast, on

the basis that a newer and smaller, in AUM terms, fund is going to grow its assets faster than an older, mature fund, it may actually be more attractive for a distributor. Is it better to have a share in a smaller but faster growing pie, or a share in a bigger but slower growing pie?

This may then be a question less about to what extent distributors are abusing their position or not, and more one simply of what cut of profits are being demanded, subject to ongoing and robust negotiations.

But throwing in the branding question again at this point can also impact: a distributor serving predominantly a retail market may prefer a deal with a recognised brand than one that is not, irrespective of marginal differences in actual product performance.

Another unknown at this point is to what extent regulators enforce treating customers’ fairly-type requirements on this part of the value chain. Stricter enforcement might level the playing field between known/unknown brands and smaller/larger fund management businesses when it comes to accessing distribution.

What difference does this make to the end investor simply seeking the best funds?

Considering the myriad challenges already noted, it should come as no surprise that there is an argument that scale, branding and platform accessibility issues are restricting the ability of boutiques to place their stra­ tegies in front of as many investors as possible, even when those strategies may be outperforming larger peers.

But then again, it is not as straight­forward as that. For example, is this a debate just focused on actively managed portfolios, or does it also include passively managed funds, too? In the case of the latter, provider firms may be bypassing distributors to not only manage distribution in a style they feel more comfortable with, but also to shave valuable basis points off costs, to drive down the price of the product to the end investor even further. And lower costs mean more return goes back to the investor, which, if reinvested over time, ought to produce better total return.

But changes to the market environment may also influence the source of that return.

Low cost beta return may be working today, but will it work next year, or in three or five years? Is the “best fund” today still going to be the “best fund” in three years’ time, regardless whether it is actively or passively managed? This may be more important to the end investor than the size of the fund management company currently, as measured by how much AUM is held. 

September/October 2017 — ALFI —

— 41

TIPS GREEN FINANCE

10 REASONS FOR SUSTAINABLE INVESTING Everything you wanted to know about sustainable investing, but were afraid to ask…

An overview from LuxFlag, the Luxembourg Finance Labelling Agency.

1.

2.

CLIMATE CHANGE LEAVING NO AFFECTING US ALL ONE BEHIND

Climate change is the biggest challenge – Climate action is just one puzzle piece of the bigger picture to sustainable deve­ and opportunity – of our lifetimes. We see it happening not only in rising sea levels, lopment. We need to act in many areas the biggest iceberg (twice the size of and each of us can make a difference. The Luxembourg) breaking off the Antarctic ice fight against poverty and hunger, ensuring shelf two months ago and droughts around good health, reducing inequalities and the world, but also next door with fires responsible consumption remain, amongst threatening our summer vacation destina­ others, the biggest goals yet to be reached tions and people’s lives, caused by global by humanity. The United Nations summed warming advancing at an unprecedented these up to 17 Sustainable Development rate in the past years. Climate change is Goals adopted by governments worldwide a serious risk for businesses and eco­ for significantly changing the world by nomic stability, and sustainable develop­ 2030. Sustainable investments are a power­ ment clearly needs financing and action ful and necessary tool to help significantly at the individual and community level. advance these overarching goals and foster This is where all of us come in to guaran­ a sustainable and inclusive future. tee a safe and prosperous future to the world’s growing population.

42 —

— ALFI — September/October 2017

3.

AN EMPOWERING GAME CHANGER

Whether you spend money on local food with minimal packaging, emission-free transport solutions or invest in a sus­ tainable financial product, your spending and investment decisions from the daily material to the long-term immaterial ones are all contributing to transform our world.

Sustainable investing is an empowering tool to help people build their road out of pov­ erty and transit to a low-carbon economy.

PUBLI-COMMUNIQUÉ

PUBLI-COMMUNIQUÉ

L’impact investing, des outils pour envisager d’investir plus efficacement

L’impact in envisager d

Les approches ESG classiques ne perçoivent pas, selon nous, l’impact réel des entreprises sur le monde environnant.

Quelques pistes pour remédier à cette faille.

Le point avec Vincent Archimbaud, directeur commercial en charge de la distribution en France, Belgique, Luxembourg et Monaco L’analyse des facteurs ESG (environne­ ment, social, gouvernance) par les investisseurs peut poursuivre deux objectifs principaux. Le premier est d’améliorer la performance d’un portefeuille grâce à une meilleure gestion des risques. Ce sont bien des failles en matière ESG qui ont mené à des affaires comme Parmalat ou Macondo, lesquelles valident une telle approche. Les investisseurs peuvent aussi utiliser les critères ESG pour vérifier que leurs investissements ont un impact positif sur le monde.

Chez Lombard Odier, vingt ans d’expérience nous ont convaincus du bien­ fondé de l’ESG, mais aussi de certaines lacunes. L’approche traditionnelle ne voit pas tout : on peut ainsi s’étonner de constater que, si lorsque Total obtient des bonnes notes dans la plupart des modèles ESG, ce n’est pas le cas de Tesla ­ pourtant acteur clé de la révolution du transport propre ­, faute d’une communication suffisamment étoffée.1 La notion d’empreinte carbone, déjà utilisée par Lombard Odier, est une première réponse à ce manque, mais notre approche propriétaire « CAR » (conscience, actions, résultats) va, selon

nous, plus loin : elle enrichit la notation ESG en distinguant les intentions, des actions mises en œuvre et des résultats mesurables.

Prenons un exemple : une entreprise signataire du Carbon Disclosure Project (projet transparence carbone) va marquer des points dans la catégorie « conscience » ; elle améliorera sa note « actions » si elle décide de changer sa flotte de véhicules pour des modèles hybrides ; mais il faudra qu’elle démontre une réduction de ses émissions pour avoir une bonne note « résultats ». Cette approche permet de distinguer les bons élèves discrets (note « conscience » médiocre mais note « résultats » élevée) des beaux parleurs (le cas inverse). Entre une entreprise A, qui formalise peu sa politique en matière de droits humains mais n’a subi aucune controverse sévère et recourt massivement aux énergies renouvelables, veillant à la mixité de son conseil d’administration, et une entreprise B qui, grâce à des moyens plus conséquents, veille soigneusement à élaborer de multiples chartes en matière d’environnement ou de droits humains mais est soupçonnée par des

ONG de recourir au travail des enfants, la notation ESG classique risque de ne pas voir de différence claire. Au contraire, nos « lunettes CAR » peuvent offrir une vision plus palpable de la réalité.

Notre ambition est ainsi de dépasser la vocation première de l’ESG, qui consistait à évaluer les processus et l’organisation des entreprises plutôt que leur impact réel. Souvent à partir des mêmes données, il s’agit de parvenir à une meilleure compréhension des risques et opportunités liés à nos investissements.

La lutte contre le changement climatique étant également l’un des enjeux majeurs de notre génération, nous avons développé un leadership de compétences dans ce domaine avec une stratégie investie en obligations climatiques lancée en mars 2017.

Les performances passées ne sont pas une garantie des performances futures.

1

Toute référence à une entreprise particulière ou un titre particulier ne constitue pas une recommandation d’acheter, de vendre, de détenir ou d’investir directement dans l’entreprise ou dans le titre. Il ne doit pas être supposé que des recommandations portant sur le futur seront profitables ou auront la même performance que les titres discutés dans ce document.

Découvrez nos solutions « Impact Investing » : jeudi 26 octobre 2017, 12h30 - 14h00 (Hotel Le Royal, Luxembourg) Les spécialistes Robert de Guigné, Directeur des Solutions ESG, et Bertrand Gacon, Directeur de l’Impact Office, illustreront comment cette thématique est abordée par Lombard Odier IM pour améliorer la gestion du risque et la performance des portefeuilles d’une part, et pour vérifier que les investissements ont un impact positif sur l’environnement et la société d’autre part. Cette présentation est exclusivement réservée aux investisseurs professionnels.

INFORMATION IMPORTANTE Cette communication est exclusivement réservée aux investisseurs professionnels.

Ce document est publié par Lombard Odier Asset Management (Europe) Limited, autorisée et supervisée par l’autorité de surveillance des services financiers (Financial Conduct Authority ou FCA) et enregistrée sous le numéro 515393 dans le registre de la FCA. Le Fonds est autorisé et supervisé par la Commission de Surveillance du Secteur Financier (CSSF) en qualité d’OPCVM au sens de la Directive européenne 2009/65/ EC, telle que modifiée. La société de gestion du Fonds est Lombard Odier Funds (Europe) S.A. (ci­après la “Société de Gestion”), une société anonyme (SA) de droit luxembourgeois, ayant son siège social 291, route d’Arlon, L­1150 Luxembourg, autorisée et supervisée par la CSSF en qualité de société de gestion au sens de la Directive européenne 2009/65/EC, telle que modifiée. Le Fonds est autorisé à la commercialisation dans certaines juridictions seulement. Les statuts, le prospectus, le Document d’Informations Clés, le formulaire de souscription ainsi que les derniers rapports annuels et semi­annuels sont les seuls documents officiels de vente des parts du Fonds (les « Documents de vente »). Ils sont disponibles sur www.loim.com ou peuvent être obtenus sur demande et sans frais au siège social du Fonds, de la Société de Gestion, auprès des distributeurs

Comment la distribution au Luxembourg est-elle devenue un axe fort de développement de Lombard Odier IM ?

La demande de nos clients distributeurs étant de plus en plus importante sur les expertises que propose Lombard Odier IM, l’équipe s’est récemment étoffée, notamment sur la zone du Luxembourg, pour toujours mieux L’analyse des facteurs ESG (en les servir et les conseiller. ment, social, gouvernance) p Jérémie Mrejeninvestisseurs travaille peut à mes poursuivre deux Le premier est d’a côtés depuis 6principaux. mois et Matthieu la performance d’un portefeuill Bath nous a rejoint en décembre à une des risq dernier. Matthieu nousmeilleure apportegestion sa sont bien failles en matière longue expérience des des banques ont managers mené à des privées, des asset et affaires des comme P ou Macondo, lesquelles valident u family offices. approche. Les investisseurs peuve les critères Nous pouvons utiliser également nousESG pour vér leurs investissements appuyer sur l’ADN de banquier privé ont un impa sur lehistoriquement monde. de Lombard Odier, Chez dédié à des clientèlesLombard haut deOdier, ving d’expérience ont convaincus gamme. Sur ce segment, la nous qualité fondé de l’ESG, mais et la personnalisation du service aussi de c L’approche font toute la lacunes. différence.

C’est traditionn voit pas tout : on peut ainsi s’éto cette approche personnalisée que constater que, si lorsque Total nous ouvrons à notre clientèle des bonnes notes dans la plup de distributeurs.

La polyvalence modèles ESG, ce n’est pas le de l’équipe estTesla l’un­ pourtant de nos acteur fils clé de la ré rouges : chaqueduclient est suivipropre par transport ­, faute l’ensemble de l’équipe commerciale. communication suffisamment éto Nous connaissons tous d’empreinte chacun La notion carbon d’entre eux. utilisée par Lombard Odier, e première réponse à ce manqu Vincent Archimbaud, notre approche propriétaire « Lombard Odier IM (conscience, actions, résultats) v

Découvrez nos solutions « Imp Nous invitons exclusivement les investisseurs professionnels à s’inscrire par email : Robert de Gu Les spécialistes v.archimbaud@lombardodier.com illustreront comment cette thém

des portefeuilles d’une part, et p @loimnewspart. Cette présentation est ex

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Les stat la propriété de LOIM et est adressé à son destinataire pour son usage personnel exclusivement.

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TIPS

4.

GETTING EVERYBODY ON BOARD

Sustainable investing enables you to follow your conscience by investing in companies that match your values.

Everybody can be a sustainable investor ranging from individuals, who hold shares of sustainable companies or invest in responsible mutual funds as part of their savings or retirement plans, to professional institutional investors (banks, insurance companies, pension funds, etc.) investing the largest fortunes. Responsible investing shifts money away from harmful businesses to more sustainable stewards.

SECURING A SUSTAINABLE FUTURE Current pressing global issues together with demographic changes and genera­ tional shifts, characterised by the new generation of Millennials, are influencing the way we think about our working environ­ment and investment behaviour.

Responsible investing made a remarkable jump in the past years and is one of the fastest growing sectors in finance. Next to the established specialists and earlymovers, mainstream financial and corpo­ rate players jump on the bandwagon as they feel its attractiveness. How assets are handled globally plays a fundamental role in securing a sustainable future.

44 —

6.

7.

If I can get the returns, then why wouldn’t I want the sustainable side too? Indeed, with sustainable investments you can easily do well financially by doing good.

Sustainable investors generate financial returns by aiming for environmental, social and/or governance advancement. Multiple studies prove that, contrary to popular belief, investments into sustainable compa­ nies can reach market-rate returns and even lead to outperformance as the con­ sideration of ESG (Environmental, Social and Governance) factors reveal future risks.

There is a widening array of sustainable investment alternatives, product innovation being at the forefront of this dynamic sec­ tor. New solutions and investment vehicles are constantly emerging and are backed up by strong growth patterns such as in the case of “green bonds”, which are debt instruments financing green projects.

Impact funds often help ground-breaking technologies to flourish and develop new life-changing solutions. Microfinance is one of the most stunning examples. Since more than a decade, social entrepreneurs from underserved communities are given access to finance via mobile phones and other financial technologies.

DOING WELL

BY DOING GOOD

— ALFI — September/October 2017

INNOVATION AT ITS CORE

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9.

COMPETITIVE ADVANTAGE

SEIZING THE MOMENTUM

In the wake of corporate scandals on human rights, climate and corruption, sustainable investing helps to identify, quantify and manage business risks emer­ ging from sustainability issues leading to reputational damage, supply shortage or stranded assets. A best – or worst – practice example is the well-known Volkswagen emissions scandal. Investors performing screenings on environmental, social and governance performance indica­ tors noted governance issues long before the scandal broke out and partly divested their assets. Such ESG screenings are an ample risk management tool to assess future material challenges that may arise at company level but might also reveal promising business opportunities.

As world leaders concluded the historic Paris agreement at COP21 with the aim to hold the increase in global average temperature to well below 2 degrees Celsius above pre-industrial levels, regula­ tory changes are in the pipeline. The EU is in the process of analysing how to effec­ tively promote sustainable investments and change Europe’s financial system to a more sustainable model. Upcoming regulatory and legislative developments in sustainable finance will stir up the whole investment and business community.

Early sustainability movers will be those that could take most advantage out of such new policies. Pressure from competi­ tors, who are seeking to differentiate themselves by offering sustainable invest­ ment services, is rising and sustainability is no longer just a nice-to-have.

Don’t be left behind and get active by stepping outside your comfort zone and seize the opportunity: as a company executive you can make a sustainable approach core to your strategy. As a shareholder you can take advantage of your position to advocate for more sustainable approaches by attending annual meetings of companies and using your proxy voting rights. As an investor you can put your money where your values are. At an individual level a change in your monetary and non-monetary daily actions can help advance sustainable development. Sustainable investments are at prime time and an effective tool to empower transition.

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10.

46 —

— ALFI — September/October 2017

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CARTES BLANCHES SEQVOIA

“ Brexit should not fundamentally change this modus operandi”

PERSPECTIVES

what are the Potential consequences of Brexit on the Luxembourg fund industry?

Since last year’s referendum, Brexit has risen a lot of questions within the fund industry, especially in Luxembourg. Should it be seen as a threat or an opportunity?

11 experts express their opinion.

48 —

— ALFI — September/October 2017

Nicolas Buck, CEO, Seqvoia

B

rexit is bound to exert po­sitive and negative forces on the Luxembourg fund industry.

We have witnessed over the last few months the news of various players (asset managers and custodians) deciding to put more resources into Luxembourg.

However it is too early to foresee what the long-term consequences will be. Over the last 20 years, the Luxembourg fund centre has built a very effective relationship with the City of London in the UCITS space. The roles and responsibilities were clearly defined: London had portfolio management, product management and distribution, while Luxembourg managed UCITS operations. The two magic words were delegation and oversight. As such, Brexit should not fundamentally change this modus operandi. US and UK-based asset managers had used Luxembourg and Dublin as a home for their fund products to push distribution in Europe and in Asia. The OEIC, a UK UCITS domiciled cross-border product, had never been able to challenge the prominence of both Luxembourg and Dublin. So all quiet on the Western front? Yes, if it were not for ESMA. Indeed, over the last weeks, ESMA released two opinions to National Competent Authorities (NCAs), which seem to be more restrictive in terms of delega-

tion and highlight the need for more substance when investment firms apply for an authorisation to operate in an EU27 framework.

There is always talk of regulatory arbitrage. The catastrophic scenario would be a push by ESMA to fundamentally redefine the rules of engagement in the world of dele­gation. The vacuum created by the UK leaving Europe could give the two remaining large countries and would-be financial powerhouses the room for this opportunist plan.

However there’s more posi– tivity in the alternative space.

AIFs managed by UK AIFMs will lose their access to the EU. As the regime for “third countries” under AIFMD is not yet clarified, these UK AIFMs are left with two choices: either rely on each member state’s private placement regime or relocate the AIF or AIFM within the EU. The latter would imply a need to review operational arrangements. Investment firms might have to consider relying on subsidiaries in the EU and will have to ensure that there is enough substance regarding portfolio management, risk management and oversight capabilities. AIFrelated services performed in the UK will not cease to exist, but the framework to deliver them will have to evolve to satisfy EU NCAs’s requirements. 

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CARTES BLANCHES ATOZ

“ Luxembourg has the ability to serve, support or welcome British professionals”

fund industry and related ser­ vices. Highly specialised in the set-up, distribution, servicing, admini­stration and risk man­ agement of UCITS and AIFs, it also has the ability to serve, sup­ port or welcome British pro­ fessionals. With a qualified and

multilingual financial sec­tor workforce, quick and simple access to main European capi­ tals, first-class IT infrastructure, poli­tical stability and a pragmatic and business-friendly regulator, Luxembourg offers an exceptional quality of life to all residents. 

EY LUXEMBOURG

“ luxembourg seems to be the obvious option for OPCVM managers” f r, head o r, partne sers e ff e a h Sc dvi Jérémie tion, Atoz Tax A nta impleme

corporate

Christophe Darche, partner, head of corporate finance, Atoz Tax Advisers

A

“hard” Brexit will leave the UK as a “third country” in the EU financial services sector and, in the absence of any equiva­ lence regime, will lead to the loss of its EU financial services pass­ port, with direct consequences.

UK financial services firms will lose the right to freely distri­ bute products, provide services, manage or distribute European funds in the EU. Currently, only two of the 166 UK-headquar­ tered UCITS management com­ panies and only eight of the 600 UK-­authorised alternative invest­ ment funds managers have a European branch. Luxembourg can play an important role in support and relocation, with its almost 250 UCITS management companies and an ever-increasing number of AIFMs (800+).

In order to access the EU mar­ ket, UK financial services firms will need boots on the ground in the EU through a fully autho­ rised subsidiary or a third-party European partner. The un­cer­ tainty associated with Brexit and the loss of the European passport that could result have already spurred asset managers

50 —

(M&G, Blackstone, Carlyle) and major insurance firms (AIG, FM Global, CNA Hardy, RSA Insu­ rance Group, Hiscox, LSM, etc.) to settle in the Grand Duchy, rein­ forcing Luxembourg’s role as a hub for insurance and asset mana­ gement services. £1.2tn of assets are managed in the UK for EU clients, of which £60bn are placed in UK UCITS. These assets risk losing access to EU investors should a “hard” Brexit occur. An estimated 25% of the UK’s annual financial services revenue comes from business related to the EU (£40bn-£50bn), £6bn of which relates to activities of UK asset managers in the EU. Half of this £6bn is at risk if the passport is lost. The migration of just 5% of this income would repre­sent a 3% increase in asset mana­gement income in Luxem­ bourg. Moreover, 30,000 jobs in the UK financial sector could be at risk. Luxembourg may attract between 5 and 10% of these jobs, mostly middle and back office work in fund management and insurance sectors.

Luxembourg is complemen­ ta­r y to London in terms of

— ALFI — September/October 2017

O

ne of the biggest uncertain­ ties linked to the conditions of Brexit is whether investment com­ panies based in the UK can continue to distribute their products and ser­ vices within the European Union through a mutual recognition mechanism similar or not to the passporting regimes currently used (UCITS, AIF, MiFID). In order to safeguard and guarantee their cur­ rent client base, some British funds managers distributing their products and services on a cross-border basis have already expressed their intention to establish or to reinforce a presence on the continent.

Considering its long-stand­ ing position and history for the cross-border distribution of invest­ ment funds within the European Union and outside, Luxembourg seems to be a prime location for investment managers, investment firms already largely distributing their products and services on a cross-border basis or having a global ambition. Thus, are expected in Lux­ embourg in the coming months: the

creation of Management Compa­ nies and/or AIFMs, the extension of license of existing companies, the re-domiciliation or the creation of investment vehicles or the cre­ ation of MiFID investment firms.

Smaller investment companies, who position themselves in niche markets or having a smaller distri­ bution footprint seem to wait for more information on the Brexit negotiations and the future impacts on their business model. A conside­ rable number of these actors should finally choose to conduct part of their activities outside the UK. They will probably make their choice quite late, Ireland and Luxembourg appearing to be equal options for them at this stage. In addition to the short-term impact on the cur­ rent Assets under management in Luxembourg, Brexit could also affect the activities of professio­ nals of the financial sector, espe­ cially accountants, transfer agents or domiciliation companies. 

Steve

Rafael Aguilera, partner, EY Luxembourg

r, irecto cing d bourg fa t e ark xem er, m EY Lu Gohi

Notre approche a résisté à l’épreuve du temps.

Capital Group figure parmi les plus anciennes sociétés de gestion au monde, et The Capital SystemSM est le pilier central de notre processus d’investissement depuis 1958. Nos portefeuilles allient les styles d’investissement de chaque gérant, ce qui assure une diversification naturelle du risque, tout en laissant à ces derniers la liberté d’exploiter leurs idées porteuses des plus fortes convictions. Une approche de recherche fondamentale possède à notre avis un atout déterminant, celui de générer des résultats supérieurs pour nos investisseurs, le tout avec une volatilité réduite.

Pour en savoir plus, consultez thecapitalgroup.com/europe

DOCUMENT RÉSERVÉ AUX PROFESSIONNELS DE L’INVESTISSEMENT Le présent document est publié par Capital International Limited (société agréée et régie au Royaume-Uni par la Financial Conduct Authority), filiale de Capital Group Companies, Inc. (Capital Group). Il s’adresse exclusivement aux professionnels de l’investissement et non aux investisseurs particuliers, dont les décisions ne peuvent être fondées sur ces informations. La société Capital Group s’efforce d’obtenir des informations de sources réputées fiables. Toutefois, elle ne peut certifier ni garantir leur exactitude, leur fiabilité ou encore leur caractère exhaustif. Le présent document n’a pas vocation à être complet ni à fournir un conseil d’investissement, fiscal ou autre. © 2017 Capital Group. Tous droits réservés.

CARTES BLANCHES INTERTRUST

KPMG

“ highly depending on the post-Brexit model that will finally be applied” ercial rt, comm cquema st Ja ru e rt n te ti In s , Chri ices fund serv director,

U

K asset and fund managers currently benefit from the EU passport granting access for their fund products to the EU market. There is – depending on the final post-Brexit model – a high probability that UK-based fund managers will lose the EU passport for their alternative investment funds and might think about reallocating their registered office to any other of the remaining 27 countries of the EU. For the Luxembourg fund industry, Brexit could bring many opportunities.

There are clear advantages for UK fund managers to re­allocate their business to Luxembourg and not to Dublin, Paris or Frankfurt. Luxembourg, being the largest investment fund centre in Europe, appears to be the ideal place to reallocate the business, as it already offers the necessary international human resources and infrastructure combined with a business-friendly environment.

Most of the UK-based asset and fund managers already have subsidiaries or branches located in Luxembourg. In the view of Harald Thul, director Alternative investment services at Intertrust Luxembourg, it would be the logical consequence that Luxembourg becomes the main entry point for UK-based fund managers accessing the European 52 —

single market. The reallocation of UK fund managers to Luxembourg would consequently increase the number of employees in Luxembourg.

The new relocation guidance from ESMA, Europe’s top financial markets regulator, which plans to stop shell companies in Europe routing business back to the UK, would imply substance to be deployed in Luxembourg.

Senior staff together with effective decision-makers should be based within the EU. This could mean compliance, audit and legal staff, as well as chief executives and boards, to be located in the EU. Outsourcing the investment management functions to the UK would only be possible where the entity is in compliance with the UCITS and AIFM directives.

Outsour­cing of portfolio management would require a MiFID II compliant entity.

Considering the majority of UK-based AIFM mancos that do not have a presence in the EU, Luxembourg is ideally positioned to support UK managers wishing to continue distribu­ ting their products to European institutional investors. Nevertheless it needs to be mentioned that the posi­tive impact on the Brexit is highly depending on the post-Brexit model that will finally be applied. 

— ALFI — September/October 2017

“ the only solution is to build a substantive base in Europe” I

t’s a little like someone removing the roof from over your head, leaving you no option but to follow it – this is how fund managers in London may be feeling, as they are set to lose their un­fettered access to the EU single market post-Brexit. Once a hub from which third-party countries did EU business, London now finds itself in danger of becoming, itself, a third-party outsider.

As of yet, the nature of the new dynamic is undecided. However it is highly unlikely that the EU will want to grant Britain any privileged status, as that would open the floodgates from other nations wanting the same. More probable will be, at best, a transitional window of a couple of years, and at worst, an immediate break. In the former scenario, fund mana­ gers would have time to evaluate the options for EU single market access. In the latter scenario, the options would be the same, but the risk of being blindsided would be much higher.

Of three options, private placement is the least viable on a large scale because each country has its own sharply varying regime, forcing asset managers to be artful. This option might suit mana­ gers seeking limited access to a specific country. Most fund managers will be interested in either

George s Bock, head of tax, KPM G

setting up their own AIFM in the EU or appoin­ting a third-party European AIFM. The former might suit managers see­king a permanent EU presence, whereas the latter might be best for those who want access to multiple or even all EU countries without having to personally worry about the full set of legal requirements.

Unlike funds, there is no delegation framework for institutional portfolios (e.g., pension funds or insurers). For London’s fund mana­gers, this means that they must rely on MiFID passporting rights, which they are almost certain to lose. The only solution is to build a substantive base in Europe.

The remaining EU27 offer a smorgasbord of financial set‑ups, which means London fund mana­ gers have careful decisions to make. While Ireland is popularly mentioned in this realm, Luxembourg is no less worthy of consideration. Proportional to its size, the country is brimming over with fund experts, who work in the se­cond-biggest fund centre on the planet (after the US). The Grand Duchy additionally has language expertise embedded in its population, deep expertise with dele­gation models, and a proactive finance-friendly government. 

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CARTES BLANCHES LINKLATERS

LUTHER

“ if Luxembourg plays its “ Luxembourg appears cards well, it will prosper” to be a serious contender” M an, n Beyth roup, Herman management g t n e tm s e rg v u in Luxembo Linklaters

T

o preserve access to the EU markets through cross-­ border provision of services or branches, services now performed from the UK will need to be moved to other EU jurisdictions before 29 March 2019.

The most likely scenario is a hard Brexit, meaning that the UK’s membership of the EU will end abruptly with no meaningful transitional period or other measures to ease the economic shock of losing access to the single market.

Even a last-minute extension of the withdrawal period or other interim measures would come too late. Financial institutions based in the UK are making their choice now and over the coming months, and will begin implementing them next year.

There is only a limited choice of suitable new host EU member states, and Luxembourg is well positioned in this respect. Many financial groups can use existing business structures in Luxembourg to carry out the services currently performed in the UK, or benefit from Luxembourg’s business and legal ecosystem to establish new entities.

In particular, we anticipate an increased use of top-up licences for existing management companies and AIFMs in addition to investment fund management investment services.

Meanwhile Luxembourg banks that have traditionally focused

54 —

on depositary and fund admi­ nistration, as well as private wealth management activities, will add new service lines. Thirdparty management companies and AIFMs will clearly increase their client base as well, and many new management companies, AIFMs and investment firms are likely to be created.

All these developments are promising, but there are challenges, too. One is the need for substance in the form of welltrained human resources, even if support may be available from group companies in other jurisdictions. The government will have to deal with housing and transportation issues, while the CSSF must cope with increased regulatory challenges. However, these are short-term problems that can and will be solved.

More important for the long term is the loss of the UK as a traditional force for libera­ lism within the EU, at a time when protectionist tendencies and economic chauvinism are becoming a greater concern. In addition, Luxembourg has benefited greatly in the past from the close relationship between the UK and the US financial industry, which has included the transfer of financial engineering expertise via US institutions with businesses in London.

So there’s no room for complacency – but if Luxembourg plays its cards well, it will prosper. 

— ALFI — September/October 2017

ore than one year in the aftermath of Brexit, most of the financial players have made up their mind for a “postBrexit” strategy. Looking at the announcements that have been made so far, Luxembourg appears to be a serious contender when it comes to re-­domiciliation of funds.

Hard to say if that comes as a direct consequence of the said aftermath or if it is due to other factors but all market players over the past few months seem to have noticed a vibrant interest in setting up new Luxembourg funds. Reasons officially being put forward are that flexibility and sophistication of the legi­s­lation offer the right balance between investors’s needs and managers’s possibilities.

Because AIFMD regulations have been incorporated quickly, Anglo-Saxon players seem to be increasingly familiar with (and ready to take advantage of ) the Luxembourg offer. On that front, one can only welcome initiatives regarding the special limited partnership widely replicating Anglo-Saxon limited partnership features. Not to be forgotten is the introduction of the reserved alternative investment

fund, a pragmatic outcome of the AIFMD, which competes with non-EU funds vehicles in terms of time to market and offer the much looked after EU marketing passport available under AIFMD. It remains to be seen to what extent Luxembourg setups will be able to rely on delegates that could be located elsewhere. Part of the answer will strongly be dependent on the outcome of pan-European negotiations.

In these competitive times, being over optimistic should however not be an option. Other countries, especially those active in the alternative asset ma­na­ gement segment, openly plan to take advantage of Brexit. Some challenges remain particularly vivid, should Luxembourg wish to remain on the centre stage, notably overall set up and maintenance costs of the funds as well as the ability to locate some key functions such as portfolio management or fund raising in Luxembourg.

Also it might be the right time to consider whether Luxembourg will also be able to leverage on the situation and demonstrate an ability to attract new assets classes such as hedge funds. 

“Anglo-S a seem to xon players be inc familiar w reasingly Luxembo ith the urg offer .” partner –

He investme rvé Leclercq, nt mana gement, Luther

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“ big players have already confirmed their choice of Luxembourg”

“the challenge is to keep a united Europe to face global competition” M

mel, Von Kym olutions, Eduard S d n VP Fu head of VP Bank

T

he United Kingdom (UK) has voted to leave the European Union (EU) in a referendum held on 23 June 2016. Even though it took place more than a year ago, it is still difficult to assess the con­ sequences for the UK, the EU and Luxembourg, as this mechanism has never been used before.

REGULATORY FRAMEWORK ISSUES

In due course, the UK govern­ ment will need to unscramble the current regulatory framework from EU law. If the UK loses its EU passporting on investment management level, this can be a significant opportunity for other fund jurisdictions.

As has already been done by some UK managers, larger mana­ gers can set up a subsi­diary in Luxembourg and execute the regulatory relevant tasks out of Luxembourg, which will be serviced by their UK entity. An option for smaller or mid-sized managers could be appointing a Luxembourg service provider for IM services. This IM can then dele­gate as much as possible to the UK entity. By using this set-up, smaller IMs still have access to the EU single market on an ongoing basis, but can still stay in the UK. Yet, at this stage it is chal­ lenging to assess whether UK managers will prefer Dublin or 56 —

Luxembourg as their domicile of choice. But what has happened actually so far? Nearly all major UK managers already have a presence in Luxembourg and – according to different press information – big players like Blackstone have already confirmed their choice of Luxembourg. A decision has already been taken by Northern Trust and by mid-2017 NT decided to set up its European hub in Luxembourg.

LUXEMBOURG ADVANTAGES

The following advantages could be reasons to attract additional IMs to make use of Luxembourg.

Apart from the existing UK banks, 6,000 Britons already live in Luxembourg. Luxembourg is able to offer a direct access to London, but also to other Euro­ pean cities. Furthermore, Luxem­ bourg offers a skilled multilingual labour force. An important addi­ tional argument is the presence of all major global law, audit and consultants’ companies, and finally the financial and political stability of Luxembourg. It is by far still too early to classify this as a trend. However, Luxembourg has huge opportunities to be an attrac­ tive option for IMs, if all parties in Luxembourg, such as service pro­ viders, government and author­ ities, give their best in terms of flexibility and professionalism. 

— ALFI — September/October 2017

&G Investments is prepa­ring to transfer £6bn in assets to a new Luxembourg-based funds division as a “precau­t ionary move” ahead of the UK’s exit from the European Union.

This is the kind of statement we will read more and more in the press on both sides of the Channel.

The outcome of the negotia­ tions between the UK and the rest of the European Union on its future trading relationship is still all but unclear. Financial institu­ tions, asset managers, insurers… hope for the best but are currently planning for the worst.

A loss of the European pass­ port shall have huge impacts.

Luxembourg, in a cooperative approach with London, may be considered as an alternative home for financial institutions looking to maintain their precious rights to market access.

CROSS-BORDER DISTRIBUTION CHALLENGES

The EU distribution passporting system, which guarantees a cer­ tain freedom for trading incorpo­ rated and authorised European Economic Area (EEA) funds in EEA countries, is not open to third countries. Thus, to be marketed in the EEA, foreign funds must com­ ply with each national regulation: strict conditions may be imposed to access these regulated markets especially for retail investors. The trading of UK funds in EEA and vice versa will substantially be affected by the Brexit.

companies currently managing EEA regulated funds operate in compliance with EU rules; it is most likely that they will get postBrexit recognition from the EU. Moreover, UK and non-EU cli­ ents may be dealt from the UK and the Brexit could give the UK new opportunities to extend its trading with other non-EU mar­ kets. The Luxembourg strategy, not to engage into a race to attract wholesale office but to co­ope­rate more and offer services comple­ mentary to those in the City, could be the winning hand.

Luxembourg seems to be a jurisdiction of choice due to its solid financial centre which suc­ cess is based on the social and political stability of the Grand Duchy and on a modern legal and regulatory framework that is continuously being updated.

Talented professionals, crossborder expertise, AAA rating and the ability to discuss with the authorities in English give us competitive advantages to other EU financial centres.

Brexit will have major impacts on Luxembourg financial centre but beyond Brexit the challenge is to keep a united Europe to face global competition. 

RELOCATING PARTS OF UK-BASED FIRMS’ ACTIVITIES

If most funds focused on distri­ bution to EEA investors seem to have more interest in being dom­ iciled in EEA countries such as Luxembourg, it is unlikely that all the UK-based firms’ activities will be relocated. Indeed, UK

Raphaë lE business ber, managing dire developm ent office ctor and chief r, MAS F und Serv ices

CARTES BLANCHES KNEIP

ALLEN & OVERY

“ Extremely favourable for “Closer ties with the Luxembourg fund centre” London post-Brexit” B er, ix, partn ristian S Jean-Ch ry Luxembourg ve Allen & O

L

ess than 19 months ahead of the deadline of 29 March 2019, uncertainty remains as to the ultimate agreement which will go­vern relations between the UK and the EU once Brexit becomes a reality. Market players must establish their Brexit strategy on the basis of the worst-case sce­ nario, one involving a cliff-edge exit from the single market by the UK on 29 March 2019.

Under such a scenario, all UK fund managers will instantly lose the benefits of all EU passports, which currently allow them to manage and market their funds on a cross-border basis within the EU. The counter-attack gene­rally consists in establishing a regu­ lated manager in another EU member state.

This entails building up suf­ ficient “substance” locally, and in particular recruiting sui­ table personnel. Over the past year, fund managers affected

by Brexit, i.e., all managers who access the single market through a UK-regulated entity have car­ ried out a comparative analysis of the solutions available in various EU jurisdictions. Nume­rous criteria, such as the existence of

a stable and robust regulatory and tax framework, are relevant.

The status of Luxembourg as the leading European fund domicile is a strong argument in its favour.

Concentrating funds and their managers in one and the same jurisdiction offers many bene­ fits: the same legal and regula­ tory framework, the ability for funds and their managers to share local resources, etc.

It is therefore not a surprise that several leading financial insti­ tutions have announced their deci­ sion to establish their European asset management hub in Luxem­ bourg. The establishment of a reg­ ulated manager in Luxembourg will enable them to secure access to the single market, regardless of the outcome of the current nego­ tiations. This trend is extremely favourable for the Luxembourg fund centre. It creates a strong connection for such asset man­ agers to Luxembourg and results in the relocation to Luxem­bourg of key functions associated with portfolio and risk management.

This enables Luxem­bourg to con­ tinue moving up in the value chain of the global investment funds industry. 

rexit has happened, but this should be seen as an oppor­ tunity to make a positive change.

The UK transposed European fund law, which is supported by the FCA, and focuses on pro­duct governance and investor pro­ tection. Therefore, I see the UK following European fund regu­ lations for quite some time.

However, as this is not an abso­ lute certainty, fund managers should take the necessary steps to ensure their businesses remain efficient and all data is accurate, so they can adapt to possible re­gulatory change quickly.

The impact on Luxembourg as a whole is up for debate, but early signs seem positive, with major institutions like AIG, M&G and Lloyds making the decision to move here. Luxembourg’s busi­ ness connectivity to the rest of the world is fantastic and the reason Kneip, Skype, and many others continue to be located here is because access to other jurisdictions is easy.

Luxembourg and London are maintaining a very close relation­ ship, with a healthy approach towards managing business headquarters relocations, and it’s my view that the government is very supportive and open to liaising with other government bodies overseas.

Will Luxembourg benefit from some short-term movement of com­ pany headquarters? Possibly, as will

others such as Dublin, Frankfurt and Amsterdam. Luxembourg is a country of 600,000 people, so it’s unlikely we’ll see an enormous influx, but we want to remain pivotal in the success of finan­ cial services.

Large technology-driven com­ panies such as PayPal and Amazon are already located here and Luxembourg is investing heavily in infrastructure around IT, secu­ rity, data lakes, and so on. It is an exciting time to be in Luxembourg.

For the funds industry, they need to ensure they can adapt seamlessly regardless of the final outcome of Brexit. Kneip has developed an online digi­ tal platform that can give con­ trol back to fund managers and ensure their data management and repor­t ing processes are transparent, streamlined and always com­p liant, no matter what countries their funds are distributed in. We are at the fore­ front of know­ledge when it comes to regulatory change and keep our clients compliant.

Making the funds industry better not only for our clients but for investors, too. Brexit could be good for Eu­ro­pe, prompting it to fix some of the inefficiencies that have arisen from bureaucracy.

Businesses as a whole should accept it as reality, and those in the funds industry should not fear the unknown but rise to the challenge. 

Lee Godfrey, CEO, Kneip

September/October 2017 — ALFI —

— 57

AGENDA CONFERENCES

Always on the road Between now and the end of the year, many events will be organised around the world to promote national know-how in the investment fund industry.

Overview at a glance.

14. NOVEMBER LUXEMBOURG

Leading Edge Conference (ALFI) Tax EY premises (Luxembourg-Kirchberg)

21.-22. NOVEMBER LUXEMBOURG

PE & RE conference (ALFI) Operational efficiency and legal engineering – A toolbox for excellence European Convention Centre (Luxembourg-Kirchberg)

30. NOVEMBER LUXEMBOURG

3. OCTOBER

TA & Distribution Forum (ALFI) Key subject matters that continuously transform Luxembourg’s Global TA & Distribution Operations operating model Chamber of Commerce (Luxembourg-Kirchberg)

LONDON

Leading Edge Conference (ALFI) Risk Management, Substance, Delegation Trends in an evolving environment Church House Westminster, London

16.-17. OCTOBER BOSTON, NEW YORK

U.S. roadshow (ALFI) Luxembourg solutions for raising capital in Europe and beyond Harvard Club (Boston) & The Harmonie Club (New York)

20. NOVEMBER MILAN

Milan 2017 (Ministry of Finances / Luxembourg for Finance) Excelsior Hotel Gallia (Milan)

28.-29. NOVEMBER GENEVA, ZURICH

Switzerland roadshow (ALFI) Hotel Marriott (Zurich) & Hotel Kempinski (Geneva)

4.-8. DECEMBER BOGOTA, LIMA, SANTIAGO DE CHILE

Latin America Roadshow (ALFI) Ritz Carlton (Santiago de Chile) Westin Lima (Lima, Peru) JW Marriott (Bogota, Columbia)

58 —

— ALFI — September/October 2017

26.-28. SEPTEMBER BEIJING, SHANGHAI

China 2017 (Ministry of Finances/ Luxembourg for Finance) Connecting you with markets, investors and expertise Ritz Financial Street (Beijing) & Ritz Pudong (Shanghai)

Reach for the top with our courses PROFESSIONAL TRAINING AND QUALIFICATIONS FOR THE FUND INDUSTRY Developing knowledge and competence in Luxembourg in association with ALFI and the fund industry’s leading specialists Check our comprehensive offer on our website www.houseoftraining.lu:

INVESTMENT FUNDS

More information and registration on www.houseoftraining.lu

• 65 training modules (French and/or English) for both traditional and alternative investment funds • 7 career pathways and certification opportunities for traditional investment funds: • • • • • • •

Fundamentals Certificate Certified Fund Accountant (Junior) Certified Fund Accountant (Senior) Certified Transfer Agent Certified Depository Bank Certified Fund Lawyer Fund Compliance Officer (Non Certifying)

• 3 career pathways for alternative investment funds: • Real Estate Investment Funds (Certifying) • Private Equity Investment Funds (Certifying) • Hedge Funds

07463_HoT_Ann_PAPERJAM_ALFI_220x140mm_09-17.indd 1

07.09.17 16:51

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alfi global distribution conference 2016

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Organised in cooperation with NICSA and HKIFA, the industry associations of the US and Hong Kong, the ALFI Global Distribution Conference 2016 took place at the European Convention Center Luxembourg on 20-21 September. Here are a few highlights.

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1. Alexander Monica and Bruce Brown (Phoenix Systems) 2. Nasir Zubairi (Lhoft) 3. Saverio Fiorino (HSBC Bank) and Paul Heffernan (HSBC Securities Services) 4. Thomas Seale (EFA) 5. Viviane Reding (member of the European Parliament) 6. Corinne Audin (Marsh & McLennan) and Frank Van Eylen (Degroof Petercam Asset Services) 7. Calum Chace (futurist, writer) 8. Miller Guo (GF International Asset Management) 9. Camille Thommes (ALFI)

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10. Vincent Gillet (EFA) and Raphaël Charlier (Deloitte Luxembourg) 11. Marc Saluzzi (ALFI’s former chairman) 12. Jean-Michel Loehr (independent administrator) and Hermann Beythan (Linklaters LLP)

60 —

— ALFI — September/October 2017

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PICTURE REPORT

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13. Viviane de Moreau (Simmons & Simmons), Thierry Detz (BNP Paribas Securities Services) and Ingrid Dubourdieu (D.Law) 14. Anna Prihodova (ALFI) and Frédéric Becker (Luxembourg for Finance)15. Jan Vandendriessche (VP Lux) and Franck Delbès (Aurexia) 16. Andrew Kehoe (Zeidler Legal Services) 17. Richard Hutton and Mateusz Derejski (Metrosoft) 18. Gert Rautenberg (GFA) and Sven Lorenz (Nordea Investment Funds) 19. Noel Fessey (Schroders Luxembourg)

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PHOTOS Marion Dessard

20. John Marshall (UK’s ambassador to Luxembourg) and Denise Voss (ALFI) 21. Thomas Göricke and Benjamin Rossignon (Elvinger Hoss Prussen) 22. Enrico Turchi (Pioneer Asset Management), Nils Kruse, Steve Kieffer and Ewald Ramiescher (GAM)

62 —

— ALFI — September/October 2017

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INDEX

COMPANIES LEADING FIGURES ADVERTISEMENTS

A - B ABREU MANUELA 34 ACTUARIAL ASSOCIATION OF EUROPE 10 AGNES ANOUK 10 AGUILERA RAFAEL 50 AIG 50 ALDCROFT STEWART 38 ALFI 8, 10, 24, 58, 60, 66 ARENDT & MEDERNACH 28 ATOZ 50 AUDIN CORINNE 60 AUREXIA 60 BANQUE DE LUXEMBOURG 67 BANQUE HAVILLAND 53 BANQUE PICTET 9 BECHET MARC-ANDRÉ 8 BECKER FRÉDÉRIC 60 BERNARD SILKE 36 BEYTHAN HERMANN 54, 60 BIL 68 BLACKSTONE 50 BNP PARIBAS 13 BNP PARIBAS SECURITIES SERVICES 60 BOCK GEORGES 52 BOYD JONATHAN 40 BROWN BRUCE 60 BUCK NICOLAS 48

C - D - E - F CARLYLE 50 CACEIS BANK 17 CERULLI ASSOCIATES 32 CAPITAL INTERNATIONAL 51 CHACE CALUM 60 CHAMBER OF COMMERCE 58 CHARLIER RAPHAËL 60 CITI MARKETS AND SECURITIES SERVICES 38 CITITRUST LIMITED 38 CLIFFORD CHANCE 15 CNA HARDY 50 CSSF 10, 20, 60 D.LAW 60 DARCHE CHRISTOPHE 50 DE MOREAU VIVIANE 60 DE PROFT PETER 8 DE WAERSEGGER PIERRE-MICHAËL 28 DEGROOF PETERCAM ASSET SERVICES 60 DELBÈS FRANCK 60 DELOITTE 6, 60 DEREJSKI MATEUSZ 60

DETZ THIERRY 60 DUBOURDIEU INGRID 60 EBER RAPHAËL 56 EFA 45, 60 EFAMA 8, 10, 40, 41, 48 ELVINGER HOSS PRUSSEN 60 ERNST & YOUNG TAX ADVISORY SERVICES 34 ESMA 10, 30, 48, 52 EUROPEAN COMMISSION 8, 10, 28 EUROPEAN CONVENTION CENTRE 58 EUROPEAN PARLIAMENT 60 EY 50, 58 FESSEY NOEL 60 FIORINO SAVERIO 60 FITZPATRICK JIM 26 FM GLOBAL 50

G - H - I GAM 60 GF INTERNATIONAL ASSET MANAGEMENT 60 GFA 60 GILLET VINCENT 60 GODFREY LEE 57 GOHIER STEVE 50 GRAMEGNA PIERRE 3 GRIFFIN JON 24 GSK 47 GUO MILLER 60 HEFFERNAN PAUL 60 HIGH-LEVEL EXPERT GROUP ON SUSTAINABLE FINANCE 8 HISCOX 50 HKIFA 60 HSBC BANK 60 HSBC SECURITIES SERVICES 60 HOUSE OF TRAINING 59 HUTTON RICHARD 60 ICI GLOBAL 10 INTERTRUST 52

J - K - L

Q - R - S - T

JACQUEMART CHRISTINE 52 JP MORGAN 24 KEHOE ANDREW 60 KIEFFER STEVE 60 KNEIP 21 KPMG 30, 52 KREMER CLAUDE 28 KRUSE NILS 60 LECLERC HERVÉ 54 LHOFT 60 LINKLATERS 2, 36, 54, 60 LOEHR JEAN-MICHEL 60 LOMBARD ODIER 43 LORENZ SVEN 60 LSM 50 LUTHER S.A. 49, 54 LUXEMBOURG ART WEEK 61 LUXEMBOURG FOR FINANCE 58, 60 LUXEMBOURG INVESTMENT SOLUTIONS 60 LUXFLAG 42 LYXOR 4

RAMIESCHER EWALD 60 RAUTENBERG GERT 60 REDING VIVIANE 60 ROSSIGNON BENJAMIN 60 RSA INSURANCE GROUP 50 SALUZZI MARC 60 SAUMUR 63 SCHAEFFER JÉRÉMIE 50 SCHRODERS LUXEMBOURG 60 SEALE THOMAS 60 SEQVOIA 48 SIMMONS & SIMMONS 60 SIX JEAN-CHRISTIAN 57 THOMAS GÖRICKE 60 THOMMES CAMILLE 60 TURCHI ENRICO 60

M - N - O - P M&G 50 MARSH & MCLENNAN 60 MARSHALL JOHN 60 MARX CLAUDE 60 MAS 56 MEBS 27 METROSOFT 60 MINISTRY OF FINANCE 58 MONICA ALEXANDER 60 MSCI 8 NICSA 26, 60 NORDEA INVESTMENT FUNDS 60 OFFICE OF THE SECURITIES COMMISSION 38 OPEN DOOR MEDIA PUBLISHING 40 PATTERSON JULIE 30 PHOENIX SYSTEMS INC 60 PIONEER ASSET MANAGEMENT 60 PRIHODOVA ANNA 60

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— ALFI — September/October 2017

UNITED NATIONS 42 VAN EILEN FRANK 60 VANDENDRIESSCHE JAN 60 VOLKSWAGEN 46 VON KYMMEL EDUARD 56 VOSS DENISE 60, 66 VP BANK 37, 56 VP FUND SOLUTIONS 56 VP LUX 60 WALL BARBARA 32 WATERS DAN 10 WAVESTONE 19 WEIMERSKIRCH PIERRE 60 ZEIDLER LEGAL SERVICES 60 YOAKÉ 55 ZUBAIRI NASIR 60

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DENISE VOSS, CHAIRMAN, ALFI

“Solid as a rock!”

PHOTO Maison Moderne

Each month, a representative of the sector covered by Paperjam Plus is asked to share their impressions on the future of the space.

Denise Voss, ALFI’s chairman, is launching this new section and answered the question “How do you see the immediate future of the Luxembourg fund industry?”

D

enise Voss has good reasons to be optimistic: “The economic, political and social stability of Luxembourg is evidenced by the country’s AAA rating. We are the 2nd largest investment fund centre in the world and the world’s largest global fund distribution hub with investors in over 70 countries. Finally, the international, multinational and multilingual environment remains a major asset in our play.”

66 —

— ALFI — September/October 2017

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