This publication recently attended the ALFI Global Distribution Conference in Luxembourg.

At a time when investors are scrambling for shreds of predictability, the fund industry is being watched worldwide and Luxembourg is making its voice heard. This tiny European country, bordered by Belgium, France and Germany, has been a key domicile for internationally distributed funds since the first European directive for collective investments (UCITS) was implemented into local law in 1988. 

Recently, it passed a law relating to reserved alternative investment funds (RAIF), allowing authorised alternative fund managers (AIFM) to set up an investment fund with the same characteristics and flexibilities of specialised investment funds (SIFs) and investment companies in risk capital (SICARs), without requiring regulatory approval from the Commission de Surveillance du Secteur Financier (CSSF). Indirectly supervised through its authorised AIFM, the RAIF comes with the key perk of the AIFM’s EU marketing passport.
 
With €3.46 trillion ($3.76 trillion) in assets under management, the Grand Duchy’s standing as Europe’s largest investment fund centre and the world’s second largest after the US makes it an attractive location for private banks and wealth managers to develop a cross-border transaction hub. Worth noting, people with wealth in excess of €20 million accounted for more than half of all assets managed by Luxembourg wealth managers in 2015, a 14 percentage point increase on 2011, according to the Luxembourg Financial Centre.
 
That is not to say Luxembourg is immune to the world of uncertainty that has been unleashed by the UK’s decision to quit the European Union. The UK is its most important investment fund partner, with 16.7 per cent of Luxembourg’s assets under management originating from there. 

At a recent conference hosted by the Association of the Luxembourg Fund Industry (ALFI), Luxembourg’s finance minister, Pierre Gramegna, stressed that the complementarity of the two financial centres is very important and must continue beyond Brexit. 

When the UK walks out of the EU, banks will need a greater presence on the continent, specifically inside the EU Single Market. Gramegna pitched Luxembourg as “an obviously credible option” and “open for business”.

Claude Marx, director general of the CSSF, said: “We have had, and are continuing to have, discussions with numerous UK-based institutions. Major players are not waiting for Article 50 to be triggered – they are already deep in the analysis of their operating models, and in negotiations.”

An audience member noted there is definitely a sense of urgency and the first mover advantage may well apply to banks that get there first, calling dibs on local talent and other resources.

Among non-EU member models that the UK could emulate is the Swiss one. Swiss fund managers may not have the passport to market and sell in EU countries but to reach investors across the continent they tend to set up a hub in the bloc. Also, their domestic market is a sizeable one. Excluding cross-border funds, Switzerland is the fourth largest country in Europe by assets under management. It has a 6 per cent share of European assets under management in retail funds, excluding money market funds, funds of funds and exchange-traded funds, according to Broadridge data.
 
It must be noted, however, that Switzerland, which is not part of the European Economic Area but is still within the European sphere with access to the Single Market, has spent many years reaching bilateral agreements. 

Unlike the Norwegian model, which could be implemented more quickly, the Swiss one is a long market-by-market bilateral agreement process and thus involves no passport, said Revel Wood, chief executive of FundRock Management Company. 

“It is key for the UK investment management community to start to review their fund distribution strategy and contingency plans, as investors will want certainty and neither the Swiss, Norwegian or Canadian models provides efficient Single Market access for the product or management company passports enjoyed today,” Wood said.
 
In the case of a “hard” Brexit, Luxembourg funds may have to go through a regulatory process like in Switzerland and Hong Kong in order to be sold into the UK, said Jérôme Wigny, partner at law firm Elvinger Hoss Prussen.
 
Ultimately, the world will continue to turn even if the UK loses its passporting rights, panellists agreed. UK asset managers will have no lesser appetite for managing funds based in Luxembourg, said Noel Fessey, chief operating officer for product at Schroders Group and managing director of Schroders Luxembourg.