As the Brexit progress grinds on, here is an article from a wealth industry practitioner on how the financial centre of Luxembourg is and could be affected by the UK's departure.
There are lots of different ways to think about Brexit (not just whether one is for or against the UK departing the European Union). There are clearly important implications for financial services, not just from the perspective of the UK but for those firms in the rest of the EU and outside it. Policymakers as far apart as New York and Singapore have to take account of it if they deal internationally.
The following article is from the global funds, administration and advisory firm Maitland, and written by Kavitha Ramachandran, senior manager for business development and client management. A big part of the argument below is the effect that Brexit and tech are having on the small European state of Luxembourg. The editors of this news service are pleased to share these views with readers and invite responses. The editors do not necessarily agree with all views of guest writers. Email firstname.lastname@example.org
Brexit is a major political disruptor and, despite the uncertainties, it brings tremendous opportunities. London is a key financial centre and it is no surprise that while we wait for the final negotiations to fall in place, financial industry players have started taking action to create a presence on the Continent to stay competitive and continue to attract capital. As a result, the asset management industry is seeing a shift from the UK to the Continent which is creating opportunities for countries in the EU 27. Simultaneously, digitalisation is gaining pace due to changing investor profiles and demands, cost pressures and growth, notably in the alternative asset classes. Brexit is likely to be a catalyst for accelerating the pace of digitalisation in the asset management industry with a focus on alternative asset classes and a country like Luxembourg is ideally placed to re-engineer its ecosystem to lead the intelligent digital journey.
Indeed, the financial industry in Luxembourg has long since embarked on its digital journey. As one of the largest finance centres in the world, fintech has been a priority for the government and Luxembourg has been an early adopter. It has stayed ahead developing on digital payments, smart contracts and blockchain technology. Proactive developments with fintech hubs like LoFT offer a collaborative platform for innovators, financial industry participants and help to promote research and development. Data centres and state of the art technology combined with innovation-friendly regulatory developments are paving the way forward.
Furthermore, as the leading European centre for investment funds with €4 trillion ($4.6 trillion) plus in assets under management, Luxembourg has created a niche for itself by introducing a proactive legislative and regulatory toolbox for fund structures. It has built up a strong infrastructure and network of service providers covering the spectrum from legal to audit firms and administrators to depositaries. Luxembourg established itself early on as a leading fund domicile for traditional assets and has over the years grown in stature as a key domicile for alternatives initially focusing on private equity and real estate with debt and infrastructure following suit. The illiquid asset classes have leveraged off Luxembourg’s excellent structuring tools for it to emerge as a leading provider of services to special purpose vehicles, general partners and carry vehicles.
This has seen a steady influx of funds, asset managers, insurance companies and banks as firms finalise their post-Brexit plans. The regulator has raised the ante for substance requirements and all of this is slowly creating a shift in the ecosystem with a focus on asset management. Historically, asset management has tended to remain outside the jurisdiction. However, this trend is changing with Brexit. A recent article in the Financial Times quoted that around 5,000 people now work in the financial industry in Luxembourg, a figure that has grown by 10 per cent over the last year. Moreover, this has only scratched the surface with more than half of the large UK-based asset managers yet to finalise their plans. The pace of change is likely set to continue.
Alternative asset growth will outpace
Parallel to Brexit, growth projections show that there will be a far greater increase in alternative assets versus traditional assets due to the shift in investing patterns and type of investors. The private equity, real estate and debt classes are set to increase substantially, driven by demand from institutional investors, high net worth individuals, pension schemes and insurance companies.
Enhancing the client experience has never been more important as a key differentiator than just product innovation. As millennials begin to dominate the investor pool and seek technologically savvy solutions – combined with pressures on fees and costs and the need to penetrate new markets with the constant race for alpha - there is a call for managers to create value. With client-centricity being the key driver for the change, the asset management industry is progressing down the intelligent automation journey. Automation has become a must and digitalisation a necessity. Traditional asset managers are ahead in this journey with Robotic Process Automation (RPA) and progressing towards Artificial Intelligence (AI). In contrast, the change in the alternative asset space has to date been slow or non-existent. Private equity, real estate and debt are still in their nascent stages when it comes to automation. This is largely the result of the complexities inherent in the asset classes, fewer integrated systems and manual processes. But alternative fund managers are now finding themselves at the same fork and will need to digitalise if they want to avoid atrophy.
Moreover, the hedge fund industry which has historically tended to be less prominent in Luxembourg - but is nevertheless a key player with liquid alternatives and similar strategies - has narrowed the gap between traditional and hedge funds. Hedge fund managers have followed in the footsteps of traditional managers keeping up with the digitalisation story. Now, with more private equity managers investing in hedge funds and securitisation vehicles, the digitalisation gap is likely set to narrow. Combined with the demands brought in by Brexit and organic growth, the pace of change is going to be more accelerated than ever before as these fund managers will look to differentiate and create value. Being conscious of disruption and using this as a stepping stone to success has become a necessity for growth.
This will call for more of these firms to go down the intelligent automation journey and will trigger changes to current processes. Portfolio and risk management are set to undergo major changes with big data analytics supporting investment identification and management of risk, and changing the way operational due diligence is conducted. Changes to risk and compliance processes and real time reporting will transform middle office functions and the way the alternative asset management industry has been functioning. Blockchain is transforming the transfer agency industry and is predicted to change property management and operations in the real estate world. Systems integration and automation of the NAV process and reporting will be a necessity as the move up the value chain continues. Fund managers will be seeking strategic partnerships with service providers and fintech firms in their digitalisation journey. Digitalisation is set to transform the service providers to value providers and firms will need to cope to stay ahead.
Luxembourg is reengineering its ecosystem
Luxembourg and its financial industry are no newcomers to challenges and the jurisdiction has reinvented itself many times not only to stay ahead of changes but also to be proactive and emerge as a leader. The current trend to digitalisation calls for transformation in the way the current ecosystem is re-engineered and will make demands on talent. Luxembourg has a rich talent pool and has the luxury of being able to draw from its neighbours. This talent pool will not only need to beef up on portfolio management skills but also combine this with a digital skill set. The Luxembourg University and its partners in industry have created the ideal platform for identifying and nurturing talent and collaborations.
A recent issue of the Harvard Business Review ran an interesting article on “The Business Case for Curiosity”: This is very apt for a country like Luxembourg which is now on the cusp of another transformation which is likely to last for the next decade or so. In upskilling the current workforce and changing processes, companies need to hire for curiosity, encourage inquisitiveness and create a platform for life-long learning. Working with Millennials, Generation Z and future generations will provide interesting human resources challenges as the country adapts.
Much of the impetus for change can be dated back to Brexit. That a political disruptor would help set the pace for digital transformation in Luxembourg would have been unthinkable a little over two years ago but much has changed. As firms face up to the challenge and work progresses in building the digital highway, the road ahead will have its fair share of challenges. As the fireworks lit up the skies and Luxembourg celebrated its National Day, little did it realise the catalytic effect the Brexit vote would have.