Boutiques making way for the bigger players

Adding 400 new staff in Luxembourg during its integration of the Fortis/BGL operation together with the Fastnet joint venture between BGL and Caceis, means BNP Paribas Securities Services (BNP2S) has been vindicated in its move to modern, out-of-town premises.

At the turn of the millennium, when Luxembourg was identified as the premier European domicile for servicing cross-border mutual funds by the French bank, the group was playing host to just 80 funds worth €5bn. Today, 1300 funds holding €180bn are handled by BNP2S from the Grand Duchy and the bank has called for the majority of its transfer agency and funds processing staff to be based there.

Georg Lasch, who handles the bank’s relationships with key institutions from Luxembourg expects the number of employees to eventually stabilise at 1400, reflecting the Luxembourg location of much of the “intelligence” in the European mutual funds industry.

With BNP2S having recently absorbed two smaller industry players, Mr Lasch admits there is little room left in the cross-border industry and Luxembourg in particular for boutique back-office houses, with large-scale operations prevailing in the era of increasing liability of depositary banks expected under the forthcoming European AIFM Directive.

“The traditional Luxembourg banks have all joined up with or been integrated in larger, international companies,” says Mr Lasch, although he paints a slightly different picture to other global competitors, claiming that through the BGL heritage, his bank can still provide a local service, with an added French flavour.

“We are still a very Luxembourgish organisation,” he says in a bid to distance his bank from some US rivals. “We remain very connected to the Luxembourg market place and the Luxembourg financial community.”

Whereas rival funds centre Dublin is seen by Mr Lasch as having achieved strong competence in servicing alternative and money market funds for UK and US houses, he believes the Ucits III cross-border fund brand is much more closely associated with Luxembourg.

A growing recognition of the expertise of Luxembourg-based custodians in Asia is a major determinant of the country’s success, he adds. “The Asian distribution market is the number one contributor of new assets for our Luxembourg-based clients,” admits Mr Lasch.

But there are as many fund players fearing for the future of their business as those confident that the Ucits growth story is firmly back on track after the crisis. “Smaller players in the mutual fund and private equity space currently need a lot of hand holding,” he reveals. “Some of them fear the AIFMD will put them out of business due to additional compliance costs.”

That said, there is a strong belief at BNP2S in Luxmbourg’s regulatory competence and the groundwork being laid down by funds industry body Alfi. The recommendation coming to clients from Mr Lasch and his team is the same one that BNP2S arrived at ten years ago: If you are going to succeed globally, you need to be regulated, and you are probably better off doing it in the Grand Duchy than anywhere else.

At US back office giant State Street, whose Luxembourg HQ is situated close to the airport, there is less of a bias towards this particular funds domicile for cross-border clients. The company line is that there is very little to differentiate Luxembourg and Dublin as fund domiciles, although State Street employs 2,000 fund processing staff in Dublin and just 800 in Luxembourg, reflecting historical links with Ireland for many US companies. Dublin numbers are also swollen by State Street's Irish hedge funds processing business.

“We don’t dictate to our clients where to put their products,” says the bank’s head of business development David Kubilus. “That’s what their sales teams are for. We just support them wherever they want to go.”

Many clients may have products domiciled in five or six different regulatory regimes, not just one or two, says Mr Kubilus. “Custodians must position themselves not just to meet regulatory demands, but to take advantage of them,” he says.

“The regulatory environment will determine where the growth goes. You hear talk about an Asian passport for funds and that could have significant implications for Luxembourg.”

Georg Lasch,

BNP Paribas Securities Services