ESA proposals could harm European fund industry warns Luxembourg fund body
Denise Voss, Alfi
The European Commission’s proposals to strengthen financial supervision are likely to prove costly and are trying to fix a problem that doesn’t exist, according to Alfi
The Luxembourg fund industry enjoyed solid growth last year and 2018 will bring plenty of opportunities for the Grand Duchy, but the body representing the country’s investment funds is concerned that increasing levels of regulation are throwing up roadblock in the way of the European asset management industry.
Plans to strengthen the European system of financial supervision risk adding an extra layer of regulation bringing additional costs to the asset management industry, warns the Association of the Luxembourg Fund Industry (Alfi).
Following a consultation, the European Commission published its proposal on the review of the European Supervisory Authorities (ESA), the upshot being a much greater supervisory role for the European Securities and Markets Authority, at the expense of local authorities.
Step too far
“We were quite surprised to see a number of items in the proposal that were not included in the initial consultation,” says Marc-André Bechet, director of legal and tax at Alfi. “We have a suspicion that the Commission is going far beyond what was expected at the beginning.”
The main issue at stake, he argues, is that there is no evidence of a problem that requires a solution.
“We believe the proposal goes against the principal of subsidiarity, which put simply is that you should not do things at a European level that can be more effectively done at a national level. All this wealth of expertise has been accumulated by national regulators over the past 30 years and it is not something that can be quickly transferred to ESMA.”
For example, Mr Bechet argues that in the UK, the FCA is better placed to supervise asset managers and investment products than ESMA.
We don’t see how this is adding value for investors, or what the benefits are
“We don’t see how this is adding value for investors, or what the benefits are. We think it will be cumbersome and time consuming. And the products will still be in the remit of the member states.”
This is not a problem for Luxembourg, rather the entire European asset management industry, he says, adding that the banking sector could be even more affected.
Brexit link
Although the links between the ESA proposal and the ongoing Brexit negotiations are in principal separate, a link between the two can’t be denied, says Mr Bechet.
“The starting point for this was ESMA saying we cannot have a situation whereby the UK exits the EU and financial services are provided from London, but using a shelf somewhere in the EU to access the market. That was the beginning, but then it went into a far larger discussion which is now out of control.”
Luxembourg is following the Brexit negotiations with interest, says Denise Voss, chairman of Alfi. “The City of London is Europe's leading financial centre and will remain so for years after Brexit,” she explains. “Its interconnection with the EU's financial and economic system is undeniable and future relations with the UK should be determined in this light.”
Luxembourg has a long standing working relationship with the UK, adds Ms Voss, illustrated by the fact that more than 17 per cent of assets under management in Luxembourg funds are managed by UK asset managers. “Our efforts will focus on how we can continue this constructive relationship even after Brexit.”
Appetite for alternatives
Luxembourg-domiciled funds breached the €4tn ($4.9tn) mark in September 2017, and by the end of November had seen growth of 12 per cent year to date. Seventy-three per cent of that growth was from new money being invested, mainly into Ucits funds, but alternatives such as private equity and real estate also proving popular.
“A large part of this is down to the attractiveness of AIFMD [the Alternative Investment Fund Managers Directive] and that regulatory framework that institutional investors see for alternative strategies,” says Ms Voss.
Alfi continues to work to expand the reach of the Luxembourg fund industry, and is targeting Latin America and Asia in particular.
“It is about opening up those markets and making Ucits funds accessible to investors resident in those markets, but it is also about providing a distribution platform to local asset managers to set up fund in Europe and to distribute to the world, both Ucits and alternatives.”
