According to the latest statistics released by the CSSF, the total net assets for regulated funds in Luxembourg amounted to more than EUR5 trillion as at 31 January 2021, representing an increase of some 5% compared to 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. In recent years Luxembourg has proved itself resilient and has fully embraced transparency and exchange of information. Its willingness to adapt and change will ensure that in the coming years the industry will continue to thrive.
One thing the pandemic has done is focus attention on environmental 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 in recent 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 that 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 years to come.
To seek industry views on how to achieve a more effective and efficient EU AIF market, in October 2020 the European Commission launched 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 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 during the third quarter of this year. Inevitably there will be changes and the Luxembourg industry will need to be prepared for this.
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 European Long Term Investment Funds (ELTIF) is therefore welcome. Increasingly, ELTIF 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 are here to stay. A new generation of tech savvy investors expect easily accessible and efficient solutions. This, along with continuing pressure to drive down fees for end investors, will force the industry to continue to look at ways that digitisation of certain processes can reduce costs and improve efficiency.
The use of Distributed Ledger Technology (DLT) in financial processes will become 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 to embrace and integrate 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 financial market, there will be a role for Luxembourg funds. We expect that the industry here which has shown such resilience throughout the last decades will play its role in that market.