Our Insights

From London to Luxembourg?

Asset managers eye Luxembourg's world class reputation for fund administration

This edition of RBC Investor & Treasury Services' Flight from London series examines the potential for Luxembourg to attract UK-based financial service firms following Brexit.

Luxembourg's extensive expertise in fund administration and world class reputation for financial services are attractive to asset managers who are considering relocating to the country following the UK's exit from the European Union (EU).

Key insights

  • Luxembourg's reputation as a leader in cross-border fund distribution positions it as an attractive destination for UK-based fund managers

  • Financial firms are keen to draw on Luxembourg's IT expertise and base their digital operations within the country

  • Luxembourg is Europe's largest renminbi securities settlement hub making it a key hub for Chinese investment

Given Luxembourg's close proximity to other European countries, its financial infrastructure has strong multi-cultural and multi-lingual influences (e.g., Belgian, Dutch, French, German), which are represented in its diverse 42,000 member workforce.1 It is also centrally located on the continent, with 70 percent of EU wealth within 700 km of the Grand Duchy.2

A global leader in cross-border fund distribution

Over the past three decades, this melting pot of European cultures and languages has rapidly developed its financial services around its fund industry, private banking sector, and insurance business. Today, financial services account for 33% percent of the country's GDP and employs 11 percent of the country's workforce.3

In recent years, Luxembourg has emerged as the largest investment fund centre in Europe and the second largest in the world, serving as a domicile for more than 6,000 funds with total assets under management exceeding GBP 3 trillion.4

Underpinning Luxembourg's position as a global leader in cross-border fund distribution services is its unique expertise in managing UCITS

Underpinning Luxembourg's position as a global leader in cross-border fund distribution services is its unique expertise in managing Undertakings for Collective Investment in Transferable Securities (UCITS) funds. More than 65 percent of UCITS funds distributed internationally are based in Luxembourg.5 The Grand Duchy's dominance in this investment vehicle makes it a stand out destination for London-based asset managers seeking to retain access to EU capital markets.

The China connection

The global asset management industry has changed significantly since the global financial crisis. The emergence of the Chinese renminbi (RMB) as an international trade and investment currency has been enthusiastically received by European investors and has propelled the currency to be recognized as a global reserve currency.6

In November 2013, the first Renminbi Qualified Foreign Institutional Investor (RQFII) UCITS fund was authorized in Luxembourg.7 Together with the designation of the Industrial and Commercial Bank of China (ICBC) in Luxembourg as Europe's renminbi clearing bank, the RQFII scheme has established Luxembourg as the largest renminbi securities settlement hub in Europe, with more than GBP 29 billion in renminbi-denominated assets held in Luxembourg-domiciled investment funds.8

Luxembourg has worked hard to attract Chinese financial institutions. Many large Chinese banks have established branches and/or subsidiaries, and are using the Grand Duchy as their European entry point, which is clearly reflected in the Luxembourg skyline. They have been warmly welcomed. The Commission de Surveillance du Secteur Financier (CSSF) has embraced various market entry products, including approval of Stock Connect, which enables Luxembourg funds to invest into mainland China.

Fintech approach

Luxembourg hosts around 40 percent of Europe's Tier IV data centres

With European directives such as the Markets in Financial Instruments Directive (MiFID II), the General Data Protection Regulation (GDPR) and the Payment Services Directive (PSD 2) coming into effect over the next several years, one of the pre-eminent concerns for financial institutions is how to manage both the security and accessibility of financial data. Luxembourg has positioned itself as a leader in financial data and hosts around 40 percent of Europe's Tier IV data centres.9

Of note, as a market highly experienced in cross-border activities, the CSSF has taken a proactive approach in supporting financial and regulatory technologies.10 Along with major cloud service providers, the European Commission and large settlement providers such as Clearstream, have opted to locate digital service centres within Luxembourg. As a result, Luxembourg's expertise in financial technologies could set it apart from other markets.

Attracting giants

Unlike Dublin, Frankfurt, and Paris, a fewer number of systemically important financial institutions are currently located within the Grand Duchy. However, Luxembourg has a business-friendly government typical of smaller, open countries where innovation and efficiency provide a competitive advantage.

JP Morgan Chase CEO, Jamie Dimon, confirmed that the bank is seeking to relocate around 4,000 of its 16,000 UK employees to locations across the EU following Brexit.11 Both Dublin and Frankfurt are thought to adopt the bulk of those workers, but as many as 1,000 front and back office staff operating in treasury services may be relocated to Luxembourg.12

Already, US insurance giant AIG, investment firm M&G and private equity firm Blackstone Group have joined JPMorgan Chase in announcing their intention to establish operations in Luxembourg following the triggering of Article 50.13 Luxembourg officials are hopeful that a growing number of firms will choose to relocate their operations to the Grand Duchy, although the country's finance minister said 'it will not offer sweeteners to undercut rival centres'.14

As Europe's largest fund centre, and one of the only European countries that retains its S&P AAA credit rating,15 Luxembourg offers both security and opportunity. Its world-class expertise in asset management marks it as a potential financial superpower in post-Brexit Europe.

 

Flight from London to Luxembourg Infographic

 


Other articles in the series

June 05, 2017

Flight from Paris?

June 01, 2017

Flight from Frankfurt?

May 31, 2017

From London to Dublin?

May 26, 2017

Flight from London?


Sources

  1. ALFI (August 5, 2016), 10 reasons for a Luxembourg management company "manco"
  2. Ibid.
  3. The Official Portal of the Grand Duchy of Luxembourg (2017), Economy and key sectors
  4. PwC Luxembourg (March, 2017), Asset Management Luxembourg, your location of choice
  5. ALFI (April 4, 2017), UCITS
  6. Financial Times (September 30, 2016), China's renminbi joins elite global reserve currency club
  7. ALFI (April 29, 2015), RQFII quota granted to Luxembourg
  8. Luxembourg for Finance (May, 2014), Investing in UCITS
  9. Deloitte (April 7, 2014), Luxembourg - The gateway to Europe
  10. PwC Luxembourg (2017), Banking in Luxembourg
  11. Independent (May 15, 2017), US investment bank J.P. Morgan buys 130,000 SQ FT office building in Dublin
  12. Ibid.
  13. Reuters (March 13, 2017), Blackstone picks Luxembourg for EU base: Luxembourg official says
  14. CNBC (May 4, 2017), Luxembourg says no sweetheart deals for financial firms fleeing Brexit
  15. Luxemburger Wort (March 21, 2017), Luxembourg maintains Standard & Poor's triple-A rating