According to the latest statistics released by the CSSF, the total net assets for regulated funds in Luxembourg amounted to over EUR 5 trillion as at 31 January 2021, representing an increase of over 5% from the same period in 2020.
The recent OpenLux attacks on Luxembourg show that, as a small country, Luxembourg will have to continuously justify why it is doing so well. However, the success of Luxembourg as a financial centre is more testament to the strong regulatory and operational environment that Luxembourg has created and less to any alleged tax advantages to doing business here. Over the last years, Luxembourg has proved itself resilient and has fully embraced transparency and exchange of information. Its willingness to adapt to change will ensure that, over the next years, the industry will continue to thrive.
One thing the pandemic has done is focus attention on environmental-related issues. This has coincided with the EU’s sustainable finance action plan, which of course doesn’t just focus on climate-related issues but also on social considerations such as inequality and inclusiveness and governance matters. The EU’s push to ensure ESG considerations are taken into account in financial decision-making aligns with the increased focus of investors on sustainability and a more long-term perspective to investing.
Flows into sustainable funds have increased over the last years. That is expected to continue as the mainstream evolve and adapt to the new legislative requirements. The scale of adaptation is huge and managers are moving at different paces. Investor demand for products which have a long lasting positive impact on the economy and society will ultimately determine success but ESG will remain a focus of the fund industry for the years to come.
In order to seek industry views on how to achieve a more effective and efficient EU AIF market, the European Commission launched, in October 2020, a consultation on the review of the Directive on Alternative Investment Fund Managers. The consultation was wide ranging and touched on many subjects including looking at how marketing to retail investors of alternative products can be improved, how to ensure a level playing field between investment firms and AIFMs, the need for a depositary passport and whether or not the delegation rules should be supplemented or clarified. Various industry bodies in Luxembourg have responded to the consultation and the expectation is that there will be a proposal for a directive amending the AIFMD framework later this year. Inevitably there will be changes and the Luxembourg industry will need to be prepared.
Retailisation of alternative products
As mentioned, one of the items that the European Commission is looking at is how marketing to retail investors of alternative products can be improved. Increasingly retail investors want to benefit from higher yields offered by alternative assets and managers want to tap into that market. The industry will need to continue to find ways to meet this demand. The consultation by the European Commission on this point as well as their consultation on the ELTIF is therefore welcome. Increasingly European Long-Term Investment Funds are being analysed as a means of approaching the retail market but to date, only a very low number have been established. Efforts to review why that is and to improve the framework to make it more attractive are encouraging.
The pandemic has also forced the asset management sector to consider its approach to digitisation and operating models in general. Digitisation of meetings and electronic signatures have become the norm and here to stay. A new generation of tech-savvy investors expect easy accessible and efficient solutions. This, with the continuing pressure to drive down fees for the end investors, will force the industry to continue looking at ways that digitisation of certain processes can reduce costs and improve efficiency.
The use of Distributed Ledger Technology in financial processes will become more and more mainstream. Recently, the Luxembourg legislature passed a law enabling the issuance of dematerialised securities directly in DLT and opening the central account keeper role to record and operate DLT issuances of unlisted securities to any EU credit institutions or investment firms.
The fund industry will have to find ways of embracing and integrating this technology which promises lots in terms of efficiency and automation of the traditional processes involved in fund distribution.
As a post-Brexit European Union continues in its efforts to build a strong but sustainable capital markets union, there will be an important role for Luxembourg funds. I expect that the industry here, which has shown such resilience throughout the last decades, will absorb any changes and future evolutions allowing it to remain as the number one funds centre in Europe.