Over the last decade, Luxembourg has strengthened its position as Europe’s fund industry hub. With more than 4,000 billion euros in assets, the Grand Duchy’s fund industry is mainly dedicated to fund administration, custody and transfer agency services, as well as compliance and risk management activities.
Today, however, if the industry hopes to keep its leading position, then it must transform itself by addressing challenges like evolving investor needs, the digitalisation of operational process and new regulations.
Despite the industry here being more focused on back and middle office activities, it has nevertheless directly felt the impact of swiftly changing investor needs. New generations are tech-savvy and tend to prefer personalised experiences when investing. Hence, robo-advisors: platforms that offer automated portfolio management, two-minute investor on boarding, real-time information on portfolio positions, and “one-click” orders. Luxembourg’s fund industry currently struggles to match such levels of immediacy, with many of its operational processes having been designed for low numbers of large trades by batches. Managing a high volume of trades in real time would require big changes to the current operational model.
However, interesting possibilities for middle-and back-offices have emerged that automate manual and repetitive tasks, thus increasing efficiency. Blockchain technology, for example, could be applied to the processing of fund orders and corporate actions, or to account management (fund registers). It could also drastically decrease the need for reconciliations, as trades would be shared amongst interested parties instantly, or it could be used to power web front-ends or mobile apps so that users have real-time access.
New technologies not only increase efficiency but also bring product and service opportunities for asset managers and their clients. For instance, asset managers could develop new saving products where small amounts are invested on a recurring basis, based on an automated operational process that uses blockchain technology.
Mutualising its market infrastructure
Beyond new technologies, the industry can increase its efficiency by mutualising its market infrastructure costs, explorations into which are already underway for AML/KYC checks and order management processing. For AML/KYC, a single platform could collect distributor documents, giving access to asset managers (or transfer agents) entering into distribution agreements. Each entity could then assess the distributor based on their risk appetite, thus ending the current “spaghetti model” between distributors, asset managers and transfer agents where the same documents are sent several times. And costs could be mutualised for order processing if orders were processed in a blockchain-powered network managed by a market infrastructure.
New regulations are also challenging the status quo, in some places inspiring innovation. For example, the new payment directive PSD II requires banks to allow third parties to retrieve customer data and collect payment via API, which could be used by asset managers to ease payment collection from investors. Other regulations, such as MiFID II, are radically changing fund distribution business models: MiFID II incentivises asset managers with no captive distribution network to reach the final investor more directly. This also represents an opportunity for Luxembourg actors to support asset managers wishing to develop a direct-to-consumer approach.
In order to remain a leading hub, Luxembourg’s fund industry needs to digitalise itself and become a modern and tech-driven infrastructure for both retail and institutional end-investors. Such a transformation will take both efforts by individual entities and operational process mutualisation, which together will enable the development of new, enticing products.