EU firms themselves have long been leveraging Luxembourg’s financial services ecosystem and expertise. Luxembourg is not drawing these firms away from their home country but acting as a competence centre for European firms seeking a specific skill set or completing the links in their European and global value chains. This applies particularly to the marketing of cross-border products and services. Luxembourg acts as complementary hub for these firms and supports their drive into new markets outside their home territory.
CREATING VALUE THROUGH MULTIJURISDICTIONAL EXPERTISE
EU integration and globalisation have brought about unprecedented trading and investment opportunities. However, such opportunities entail the complex navigation of multiple markets and jurisdictions, with their different rules and laws. Even within the EU, despite decades of harmonisation, some 5000 different national regulations continue to apply to the selling of services across borders, according to a survey conducted by The Economist. In addition to complexities brought about by these multiple national regulations, cross-border sales of financial services still face difficulties arising from the diverse cultural norms and traditions of consumers and investors across the EU.
Over decades, Luxembourg has developed a financial services industry specialised in helping financial institutions market their products and services across multiple jurisdictions.
Whether it is a fund manager looking to set up investment vehicles to be sold to clients in Spain, the Netherlands, Sweden and Italy, or whether it is an entrepreneur planning his succession while living in France, running a company with operations in Germany and Poland, children living or studying in the UK and in Belgium and eventually looking to retire in Portugal, Luxembourg has made it its trade to help provide solutions to complex cross-border questions, while ensuring full compliance with the different aspects of the administrative, consumer, tax and other regulations that apply to each situation.
Today, this expertise covers not only Europe but has taken on a global reach as our industry caters to an ever greater number of markets. For instance, Luxembourg investment funds are admitted for sale in 73 different jurisdictions around the world. Asian asset managers, for instance, can set up a fund in Luxembourg and sell it from here across multiple Asian markets.
Expertise to help finance the post-pandemic recovery
Ensuring that economic growth and job creation resumes after the crisis will require investments tapping capital sources from around the world. Capital is by definition international and needs to be able to flow from jurisdictions where it is available to where it is needed. Luxembourg’s multi-jurisdictional expertise has for decades helped connect global investors with firms and projects in need of financing. Now more than ever finance needs to be fluid and deployed for the benefit of all. Luxembourg can help with that.
Many European and international groups have set up competence centres in Luxembourg to perform exactly these kinds of multi-jurisdictional tasks. To support these centres, an entire ecosystem of third-party service providers has developed in Luxembourg over the years to provide bespoke legal, tax and consultancy services. The financial sector authorities in Luxembourg have also developed a high level of expertise in regulating and supervising cross-border business.
This expertise is also vital to expanding Luxembourg’s role in the wealth management sector, particularly by further developing Luxembourg’s offer in terms of family office and multi-family office service. This is an area of potential growth, where Luxembourg can provide a stable and safe environment in combination with the financial expertise of Luxembourg’s private wealth management ecosystem.
Another area where Luxembourg’s multi-jurisdictional expertise will see increasing demand over the coming years is in the area of alternative investments. In the current low-interest rate environment, an increasing number of investors, both institutional players, such as insurance firms or pension funds, as well as family offices, are looking to invest in alternative asset classes, such as real estate or private equity. Assets under management in Luxembourg private equity funds increased by 20% in 2019 and even 50% in 2020. This is an opportunity Luxembourg intends to seize. A growing number of institutional investors in alternative asset classes are seeking investment vehicles and funds located in an onshore jurisdiction. Luxembourg offers a unique environment and toolbox catering to investors from civil law and common law traditions. The introduction of a special limited partnership regime in 2013 has allowed Luxembourg to capture this growing onshore alternative investment business. The creation of a new product, the Reserved Alternative Investment Fund or RAIF, has also significantly contributed to the success Luxembourg has enjoyed in this sector. It is one where we will continue to ensure conducive legislation and a congenial business environment.
Assets under management in Luxembourg private equity funds increased by 50% in 2020.
SUPPORTING CROSS-BORDER STRATEGIES
Luxembourg plays a special role in the value chain of many EU financial products and services.
The benefits of relying on Luxembourg’s cluster of specialised services are very clearly the number one attraction for financial institutions seeking to set up here. Their Luxembourg operation acts as a specialised entity, providing the group’s activities with the knowledge and tools to support the worldwide growth of its business.
The multi-national make-up of the Grand Duchy’s workforce also helps firms tackle the cultural and linguistic barriers to marketing cross-border financial services. Instead of having to establish a team in each jurisdiction, a firm can simply draw on the expertise of its Luxembourg staff to adapt its products to the requirements of each different market. Cost and efficiency gains are obvious direct benefits of operating in this way.
This unique skill set is heavily leveraged by some of the world’s major financial players to set up multi-jurisdictional pension products, for instance. These can take the form of funds or insurance schemes and are very attractive to expats working in several different jurisdictions over the course of their careers. Such products may also be suitable for multi-national firms, as well as other companies needing to operate across different jurisdictions.
In addition, the international outlook and availability of knowledge on a variety of markets, from a regulatory perspective as well as commercial considerations, within the Luxembourg financial sector cluster also provides financial institutions with valuable insights and comparisons which help these firms refine their business models and expand into new markets.
Seen from the perspective of the consumer of financial services, Luxembourg’s expertise means a more diversified range of products is available to them, in terms of geographic reach and asset classes. Such a diversity is of particular importance in the current low interest rate environment, as the ability to diversify a portfolio allows consumers to choose the most suitable products for their current and future financial needs.
The consumer also benefits from the lower costs of such multi-jurisdictional products compared with those which are restricted to a single jurisdiction.
CLIMBING THE VALUE CHAIN
With increased specialisation, Luxembourg’s financial industry has also been climbing up the value chain of financial services over recent years.
First, Luxembourg has grown into a regulatory, risk management and compliance competence centre. Many firms, in the asset management industry have built up teams in Luxembourg which serve as the group’s regulatory nerve centre and global control tower. Since the financial crisis, risk and compliance functions have come to play a central role in the global operations of financial institutions. As a result, the functions performed in Luxembourg are becoming key to the global operations of these groups, which increasingly assign these functions a more prominent middle-office role.
Second, we continue to observe a movement towards bringing front-office functions as well as an increasing number of key decision-making roles to Luxembourg. Whether it is client relations managers that serve large banks from their Luxembourg hub or investment advisors and sales teams for asset management firms, or dealmaking functions for PE houses. The advantages of Luxembourg’s multi-cultural and multi-lingual ecosystem also apply to these activities.
In the past, Luxembourg has been successful in attracting smaller yet highly specialised portfolio managers or asset management firms to Luxembourg, focusing on certain asset classes. For example, Luxembourg has launched a dedicated accelerator for climate finance asset managers. We will look into measures to attract additional portfolio management expertise to Luxembourg to cover a broader range of asset classes.
In order to support this trend, Luxembourg will strive to enhance its appeal to international talent and ensure that the education and vocational training of the local talent pool supports the changing nature of the financial industry’s activities. The government is developing a national strategy to develop talent and LFF will be helping to implement it, along with all the institutions involved.
In addition, as Luxembourg’s financial centre, and specifically its fund industry, increasingly responds to the regulatory, compliance and operational needs of cross-border financial services, Luxembourg is also becoming a Regulatory Technology – or Regtech hub, i.e. creating solutions that automate traditional back-office tasks, ranging from KYC and fraud detection to fund reporting and automated investor information tools.
AMBITION STATEMENT :
By 2025, Luxembourg will further develop its role as a centre of excellence for international finance by:
its ecosystem through the addition of relevant financial institutions and service providers
its international reach in terms of the number of jurisdictions its financial products are sold in, as well as its market share of cross-border sales
its role as wealth management hub, by attracting more family offices, increasing AuM and broadening geographic origin of client base
onshoring trends to increase its role as a European hub for alternative investments
its role as a regulatory, risk management and compliance centre
to climb the value chain by bringing additional front-office functions to Luxembourg
Continue Reading the other chapters :
AT THE HEART OF EUROPE
Further expand Luxembourg's role as a cross-border centre of excellence and EU hub.Read More
COMPLEMENTARITY TO OTHER EU CENTRES
Deepening Luxembourg's role as a prime destination for international finance.Read More
LEADING ON SUSTAINABILITY
Leading the drive to increase the total level of funds in sustainable investments from the billions to the trillons of euros.Read More
Build on Luxembourg's proven track record of product and technological innovation.Read More
Continue to build Luxembourg's Financial industry on sustainable principles in taxation and regulation.Read More
NURTURING THE HUMAN DIMENSION
Support the continued expansion of the Luxembourg financial industry.Read More