TA cooperation reigns in the grand duchy

Luxembourg’s transition to become Europe’s hottest fund centre has gone hand in hand with the growth of a community of back office providers in the Duchy including fund accountants, custodians, administrators and, most importantly, transfer agents.

Today there are around 80 different transfer agents in Luxembourg but the huge investment needed to service the increasingly complex requirements from fund managers means consolidation is on the menu. Taking into account industry statistics that highlight increasing assets inflows into Luxembourg-domiciled funds – indeed, current volumes are expected to double in the next few years – as well as the demands of new regulations, it is essential that transfer agency (TA) providers keep their technology up-to-date.

In 1999, the TA community decided to establish the Luxembourg TA & Distribution Forum, a working committee linked to the Alfi Distribution Committee. Today, membership of the forum spans more than eight countries and 18 nationalities. The 135 members represent 88 different companies.

‘If you are sitting in Luxembourg you are not that happy with the EU savings directive because each country has been allowed to choose its method of managing it’ - Richard Willis, Bank of New York

Richard Willis, a member of the forum’s steering committee, says a key issue under discussion is automation and standardisation. “Obviously, with Swift introducing the XML standards in the next two years it will be very important for the TA world to see if some standardisation in the order routing and processing takes place,” Mr Willis says.

The impact the EU savings directive is having on the sector is another area they are currently looking at. “If you were sitting in Brussels you would be probably quite happy with it,” says Mr Willis, who is vice-president and product manager for continental Europe at the Bank of New York in Luxembourg. “But if you are sitting in Luxembourg, in the hub of TA, you are not that happy because each country has been allowed to choose its method of managing the savings directive.”

The directive lacks clarity, he feels, forcing the industry to work on assumptions. “In addition, the fact that countries can choose how they deal with it, is a challenge because it means we have to enhance our systems in order to offer the level of flexibility required. I’ve always nick-named it ‘one regulation too far’, and many transfer agents will be questioning their position simply because of the implementation costs.”

Implementation costs

Proof of this can be seen in the recent acquisition of a smaller TA. “Shareholders saw that the cost of doing business for a small transfer agency that deals with one or two funds was too high”. He explains that in Luxembourg, for instance, firms other than banks wanting to offer TA services need to attain professional of the financial sector (PFS) status. “This costs ?1.5m in capital which has to sit there doing nothing,” he says.

Such operational costs means that, despite the large number of TAs operating in the market, the largest accounts are managed by the six players that can cope with the sector’s changing regulatory demands.

Cross-border standards

“I’ve been in this business since what I call the ‘Wild West’ days of transfer agency. In the early and mid-1990s, we were receiving thousands of Italian applications on paper,” he remembers. “Today we are smarter, more automated, but we still need to raise the level of automation and to standardise across borders so that when we deal with an Italian or German bank we are using the same file format, the same fees and they are receiving the same confirmations. In this way Luxembourg will be able to cope with future growth.” But automation comes at a price, again showing that the trend is towards further consolidation.

‘For a number of deals won in the last 18 months we also got a lot custody and accounting mandates, principally because of our transfer agency’ - Jim Clark, State Street

At State Street Bank in Luxembourg, Jim Clark, director of sales and marketing, agrees that TA operations can be expensive: “The costs of being a transfer agency are significant, and the cost of getting into the business is quite high,” he says. “You find people who are not in transfer agency but are very strong in custody and fund accounting and some of them try to get into this business.” Large institutions such as State Street are finding that TA is one of the fastest growing business within their organisations, as well as an important requirement for winning custody mandates.

“We are the largest transfer agency in the world and this part of our business is extremely important because it is a big part of our revenues,” Mr Clark says. “Also transfer agency fits into the overall range of services of companies such as ours.”

He explains how in many cases having the right TA capabilities is helping providers win custody mandates from the same client, especially in countries such as Luxembourg and Ireland where fund managers tend to buy TA, custody and fund administration as a package.

“For several deals won in the last 18 months we also got a lot custody and accounting [mandates], principally because of our transfer agency.”

Members of the TA & Distribution forum, and the sector as a whole, will have to work closely to develop the right framework to help guarantee the success of cross-border fund transaction, open architecture and third-party distribution.

“The greater the complexity the more difficult it is to standardise,” Mr Clark comments. “With open architecture you are looking at having multiple fund products held by single investors, and it is our job in the back office to have the technology and support the way that fund managers want to distribute their products.

“We do everything we can to improve automation and ultimately deliver lower costs to asset managers so these savings can be passed on to investors.”

There is a general consensus that the industry must work together to develop the right practices for the sector’s future. “The industry is working closer than ever before, while at the same time remaining competitive,” Mr Clark adds.

Luxembourg should continue being Europe’s TA hub for the foreseeable future although Dublin is on the march. However, says Mr Willis, the Irish capital is 10 years behind Luxembourg. Players who moved to Dublin have detected its relative lack of experience in the market, he notes.

Nevertheless, Dublin has an important role to play in the TA arena, he says, in the specialisation in niche segments such as hedge funds. “We have a big operation in Dublin and we use it as a centre of expertise [for this niche], and that allows Luxembourg to focus on its core fund business.”

Spreading the load

The consolidation of Luxembourg as a TA centre does not mean, however, that Luxembourg itself is unprepared to share some of its tasks with other jurisdiction. Whether this is with Malta, central or eastern Europe or South Africa, outsourcing some of the processes currently being carried out in Luxembourg is a trend that will continue. “There will be more business coming into Luxembourg but some of the processes will be carried out in other less expensive centres while still being managed and controlled from here.”

The TA & Distribution forum, which meets several times a year, will continue discussing these issues and will hopefully overcome some of the challenges TAs are facing. In the mean time what Mr Willis describes as “the most front office of back offices” will continue being a complicated, demanding and competitive business, but a very profitable one for those who can cope.

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