No lakes and no mountains
The asset management world is in the middle of a regulatory storm. The hitherto accepted norms with regard to the production and selling of products are constantly being challenged. This is one of the conclusions in PWC’s latest asset management guide: Luxembourg, your location of choice. In an interview with LFF, Didier Prime, Asset Management Leader, and Xavier Balthazar, Regulatory Compliance Advisory Services Partner at PwC Luxembourg speak about trends they observe and how the asset management business has changed over recent years.
In the United States asset management companies are diffused throughout the country; in Europe asset management is associated with Paris or London. How can Luxembourg attract more asset managers?
Xavier Balthazar: there are certain centres for asset management. If you rank them by order of importance, you would probably have New York in first place, London in second and Geneva in third and Paris between fourth and sixth place worldwide. This is the European view, if you were Chinese, Hong Kong would be first.
Now, how can Luxembourg attract more asset managers? We have had that goal on our radar screens for years now. If you look at what has made the success of Luxembourg, it is private banking, fund administration and custody services. Luxembourg has many tools for structuring your estate.
Didier Prime : in terms of succession planning, Luxembourg is in a good position to provide appropriate tools and services to large families.
What trends do you observe?
Xavier Balthazar: We see many private bank managers settle in Luxembourg so that they can offer a full range of services to their clients. Given the current crisis, you could see this as a risk diversification: very large families want to have their money in various places. However, the nature of wealth management is also switching to more high-level structuring services.
Didier Prime: We can leverage on this to develop asset management capabilities even if this is not Luxembourg’s core business. We still want to attract more asset managers, but in practice we believe that the development of the financial centre will continue with the activities of services providers because we have more and more products administered in Luxembourg.
So the aim is not to compete with large asset management centres?
Didier Prime: It is going to be difficult because there is a lot of prejudice against Luxembourg in terms of standard of living: People at home in London, Paris or Geneva believe that they can only live in such large cities. Even if our quality of life is very good, many of them don’t even consider coming here. I can give you the example of a bank that asked its asset management team to move to Luxembourg, and the staff refused because we have no lakes and
mountains. They decided to be in the European Union, but they chose London. It will be hard to change people’s perception about Luxembourg.
So what is the future of the Luxembourg financial centre?
Didier Prime: The future of Luxembourg is to continue to be the main service provider for the asset management industry where a large range of products is consolidated. With the UCITS IV directive, we are going to see cross-boarder mergers of products. If there is a merger, we see that often the foreign fund is absorbed into the Luxembourg domiciled fund.
What is more, with UCITS IV we might attract management companies to Luxembourg because of the political stability, which is becoming more and more unique. These companies will not focus on asset management activities but on distribution. So physically asset managers are often located elsewhere but in practice the substance will be in Luxembourg in terms of risk management, compliance and distribution.
How has the business changed over recent years?
Xavier Balthazar: On the funds side, Luxembourg was the first country to transpose the UCITS I Directive in 1988. At the time it attracted the US asset managers to sell funds cross-border. They saw the UCITS directive as a good framework and Luxembourg was the first to implement it, so we became the gateway for these funds. We have taken the lead from the beginning and we managed to keep it.
For other countries it is becoming extremely challenging to get into the dance. The business hasn’t changed much over recent years except for the quality of service offered. There is undoubtedly more technicality in the risk management space because there have been more requirements since the UCITS III Directive was introduced in 2003. Distribution is happening more and more out of Luxembourg but the distribution itself is still very decentralised. If you want to sell a fund on the German market, your sales team will be in Germany. It is rather the distribution network administration that is based in Luxembourg.
The asset management world is in the middle of a regulatory storm. Can you give some examples?
Didier Prime: asset managers have to deal with the UCITS IV Directive, then with the revision of the MiFID Directive and they have to take into account the impact of the AIFM Directive, to name but three.
Do you think that the “first mover” advantage will play a role again, as it did with UCITS 25 years ago?
Didier Prime: yes I do. The regulation is so complex that we should not react in a hurry and should be careful to accommodate the needs of asset managers; but we should not be late in implementing the AIFM Directive either. Non UCITS could have the same success as UCITS.
With AIFMD it will become more and more difficult for asset managers to sell non-regulated non-European products in Europe so in practice if they want to continue selling their strategies to European institutional investors, they will probably need a European domiciled product. Luxembourg will be in a good position for domiciling these funds.
How should the asset management industry deal with the regulatory storm?
Xavier Balthazar: There is some regulation that resulted from the financial crisis and some that is part of normal evolution, like UCITS IV which was drafted before the crisis. The latter doesn’t come as a surprise because it has been in discussion for such a long time. But crisis regulation like AIFMD came out “quick and dirty” and may be difficult to deal with for asset managers.
MiFID II is another example of planned regulatory change that will present a challenge to the industry. Today, when an asset manager managing a portfolio on behalf of his clients invests in funds, the fund, under certain conditions, can pay rebates to him as portfolio manager. It is probable that this will be forbidden under the new MiFID rules, though it is only a draft proposal by the EU Commission so far. This new regulation would force a model change. Today, assets managers get remunerated not only by their clients but also through the products they buy on behalf of them. That might change.
Are there any specific lessons from the Madoff affair for asset management companies?
Xavier Balthazar: the most important changes for the fund industry are the new AIFMD rules, a Directive which is not yet implemented, and the draft provisions of UCITS V to change the duties of the depositary bank, which is a direct consequence of the Madoff affair. The result of the rules that have been written in the AIFM Directive might be that depositaries will not accept funds that invest in certain exotic jurisdictions because of the risks involved.
Didier Prime: the UCITS branding was such a success that 50% of net sales are made outside Europe. So it is important for Luxembourg or a European domiciled product to remain competitive in terms of cost. For the moment, we believe that the EU brand is such that no other country or region is strong enough to propose an alternative even if in Asia some countries would like to create an Asian passport.
Xavier Balthazar: the UCITS side is not at risk because it is such a strong brand. For the AIFM, I think that some non-UCITS business will leave Europe. With the Specialised Investment Fund (SIF) law we managed to promote Luxembourg as a domicile for non-UCITS even to non-European investors, but we will have to work more to retain this business.
The big umbrella funds seem to have had a full range of sub funds for the last 10 years. How has the industry reacted to this? Have sales teams learned to sell old funds?
Didier Prime: for the moment we see a harmonisation of products. The policy of creating new products in order to gather new assets under management because sales teams prefer to sell new products to their investors is still valid. But you also have players who don’t want to create numerous products and are still successful in gaining new assets under management. Some independent asset managers prefer to focus on a core investment strategy and to communicate on the basis of their track record and performance. CW