“Regulatory change in finance has become a key topic for our clients,” says Oliver Zwick, counsel at Clifford Chance, investment funds practice, with a focus on financial regulation. “The constant increase in financial regulation has led to an increase in complexity.” For certain functions market participants therefore rely on outsourcing/delegation to service providers. However, the legal and regulatory requirements (such as due diligence and monitoring) applicable to outsourcing are likewise increasing. Together with his team at Clifford Chance, Oliver helps investors, fund managers and other service providers navigate through this ever-changing regulatory environment.
Changes on the horizon
Because of the high level of complexity of the regulatory landscape, the firm’s clients rely more on delegation and outsourcing of functions, not just for classical functions like management, but also for the likes of IT and Cloud Computing. Brexit is contributing to making the situation more convoluted as it raises a lot of questions around what regulations need to change in order to be able to continue delegating certain functions to London. In Oliver’s perspective, another important trend, besides the increased overall complexity of regulation, is reg tech, or the digitalisation of industry. “It affects all companies, not just investment funds, especially in the context of Covid-19 as this has led to an acceleration of digitalisation,” explains Oliver. “Not to forget, there’s also compliance to anti-money laundering rules. Regulators are monitoring AML much more than before, so there are huge risks with not getting this right. Further changes on the horizon are upcoming ESG regulations, which are a priority for many of our clients.”
The constant increase in financial regulation has led to an increase in complexity.
Towards more regulation
As varied as they may be, these regulatory changes have a major impact on the Luxembourgish fund industry. “Even though it has become more difficult than ever to be compliant, the vast majority of regulations can be seen as positive, aiming at more investor protection, disclosure and transparency,” says Oliver. “Luxembourg and the rest of Europe are benefitting from these high standards. For example, market participants that were damaging the reputation of the industry because they weren’t playing fair will now have a harder time to enter into the market – so more regulation is a good thing overall.”
Oliver recommends clients to anticipate regulatory changes, as it gives companies more time to set up new structures and be compliant. “There’s a competitive advantage to this,” he explains. “It can take a long time to set up a product: if a new regulation that directly impacts the way you market your services in the EU comes into force in August, you should already take it into consideration now.”
Whenever there are new regulations, Luxembourg is at the forefront of implementing them.
Challenges and opportunities
Increased levels of regulation also come with a downside: costs. However, compliance is a necessary investment as the cost of non-compliance is always higher than the cost of compliance. “Regulators make it very clear that non-compliance is not an option,” says Maren Stadler-Tjan, counsel at Clifford Chance, investment funds practice.
In general, the downsides are outweighed by a number of opportunities. Maren highlights that Luxembourg’s regulatory environment is one of the most advanced in the world, making the Grand Duchy highly attractive for investment funds. “Whenever there are new regulations, Luxembourg is at the forefront of implementing them,” says Maren. “There’s no fear of living with financial regulations, but instead, we look forward to implementing them. This is one of the reasons why Luxembourg remains one of the most important investment fund centres worldwide.”