This news service recently spoke to the Luxembourg funds sector about how Brexit affects the UK's ability to tap into to the European funds market. While access and "passportability" will change, fears of a freeze-out are exaggerated.

Luxembourg has attracted scores of financial organisations shifting some work from London to avoid being frozen out of the European Union. However, fears that UK access to the EU funds market could be deeply hit are unwarranted, an organisation representing Luxembourg’s fund management sector has said.

While UK-EU talks about a possible trade deal go down to the wire, fund managers, banks, insurers and other financial bodies have moved into Luxembourg, as well as other EU hubs such as Ireland and the Netherlands. At the heart of the matter is whether UK-based financial institutions will face new barriers and loss of market access. In the case of funds, for example, the UK’s ability to market funds across the whole bloc via the UCITS regime will arguably get more laborious.

The UK departure from the EU means that some firms based outside the EU, such as those from the US, will go straight to Luxembourg rather than London when it comes to distributing their funds, Marc-Andre Bechet, director of communications, events at business development for ALFI, told this publication. (ALFI is the Association of the Luxembourg Fund Industry.) But he does not think that the UK investment industry is going to be locked out. “Luxembourg is doing as much as it can to make it easier for UK managers,” he said. 

The stakes are high. UK asset managers are the second largest group of initiators of investment funds domiciled in Luxembourg, with a market share of 17.1 per cent (based on assets under management), equating to €801.185 billion ($953.9 billion) as at 30 September. In total, there are €4.696 trillion of regulated investment funds registered in Luxembourg.

The Brexit process naturally has put the shifting fortunes of European financial hubs under the spotlight, although some of this drama has been arguably obscured by the COVID-19 drama. In 2019, it was reported that the Brexit relocation plans of 47 financial institutions involving Luxembourg had been disclosed.

London and Luxembourg enjoy something of a “symbiotic” relationship: the City is where much of the investment management work goes on, and Luxembourg is the registration/distribution hub for the money that London-based teams manage. The European principality has flourished as the largest centre for UCITS funds, as well as for certain other fund structures. 

“We do not need trade agreements to have this relationship between the London and Luxembourg fund industry,” Bechet said. “We are a servicing centre; asset management decisions are still being made in the UK.” Some 49 per cent of overseas funds sold in the UK are Luxembourg funds, he said, suggesting the linkages are strong and will remain so after Brexit.

Don’t exaggerate the change
WealthBriefing asked about the use by UK firms of private placement to distribute UK domiciled funds in Europe after Brexit, due to the loss of the EU “passport” that the UK currently enjoys. Bechet said a UK firm can set up a Luxembourg-based fund so that they can access the whole European market thanks to the marketing passport. In fact, 25 per cent of member firms in the UK’s Investment Association don’t operate any UK funds, only using Luxembourg and Irish structures, so the access issue should not be exaggerated. 

This news service also spoke in the same call to Jerome Wigny, partner at law firm and ALFI member Elvinger, Hoss & Prussen. 

Wigny said that some of the big US fund management houses such as Blackstone and Carlyle, are setting up operations in Luxembourg. “The US is an important partner,” he said. In many cases, these firms also use Cayman and Delaware-based structures as part of their distribution strategy. After Brexit, we could see more US investment firms putting structures directly into Luxembourg and bypass London,” he said.

One area of growth in Luxembourg is the structure known as the “RAIF”, or Reserved Alternative Investment Fund. This can invest in all types of assets. It qualifies as an alternative investment fund and does not need product approval from the CSSF, the Luxembourg regulator. RAIFs must appoint an authorised external Alternative Investment Fund Manager. If the AIFM is domiciled in the EU, RAIFs can market their shares, units or partnership interests via a specific passport to “well-informed” investors across the EU.