Luxembourg continues to reap Brexit dividends

Since the UK’s seminal vote to leave the European Union on June 23, 2016, private banks, wealth and asset managers have been relocating staff and resources to serve continental clients more efficiently.

Prior to 2016, Swiss banks had been gradually repositioning operations to London, to ensure transportability of investment services across EU borders. But since restriction of the UK’s access to European markets, triggered by the Brexit referendum, Luxembourg – a far from glamorous city state – has been going from strength to strength as a rising financial centre.

Luxembourg’s Kirchberg district, already a significant area for financial and EU institutions, is set to undergo further expansion, with the area now served by a free-to-ride tram system, connecting offices and their workers to the airport and city centre.

A new major residential quarter should be completed by 2035, including shops, restaurants, cafes and accommodation for 7,000 people. Offices for the European Commission and ArcelorMittal’s headquarters are both in the construction phase.

The country’s strategists play down the role of Brexit in this mass development, which has transformed the city, but acknowledge it has played a major part in the financial centre’s expansion.

Luxembourg has been going from strength to strength as a rising financial centre. Image Getty Images

“It is true that Luxembourg, along with other cities such as Frankfurt, Paris and Dublin, has benefited from Brexit, as financial firms relocated part of their European operations here or reinforced their presence in Luxembourg,” confirms Jean-Marc Goy, newly-elected chairperson of the Association of the Luxembourg Fund Industry (Alfi), highlighting his city’s expertise in both sustainable finance and alternative assets. “With Brexit, the EU has lost one of its leading financial centres.”

Some larger players, such as Citi, have expanded their firms outside the financial district to accommodate further growth. As a “post-Brexit wealth hub”, Luxembourg is used primarily as a booking and custody centre for Citi Private Bank. But it is increasingly becoming a home for client servicing teams focusing on nearby EU markets. Citi now has approximately 250 employees in Luxembourg, with the wealth division making up around a third.

“When Brexit came along, we spent some time really thinking about how we were going to refresh our model because it became very clear, very quickly that London wasn't going to be a jurisdiction that we could cover EU resident clients from,” says James Holder, Citi’s head of European private banking.

Following management level discussions, Citi bosses decided to scale up exposure to Luxembourg, where they already enjoyed status as the US bank with the longest history in the Grand Duchy. Mr Holder, who has spent much of his career based in Geneva, was then sent to spearhead the growing Luxembourg operation from the beginning of 2023.

“We took our time to think through what the options and opportunities were. Having been through that process, we landed on Luxembourg,” he adds, speaking to PWM in in the rural town of Bertrange, 7km west of the city, from where he oversees nine European country offices, including those recently opened in Paris and Frankfurt. “It’s somewhere that we knew and understood.”

Luxembourg, predicts Mr Holder, will remain the headquarters of Citi’s European wealth management business for “years to come”, serving “a relatively small number of ultra-high net worth families” across the continent.

Client numbers are currently growing by 10 per cent each year, as Luxembourg benefits from a more benign economic climate than nearby London, with Mr Holder convinced the jurisdiction appeals to this particular demographic. “That client segment is where we're at our very best,” he confirms.

Big ticket family office

For Citi, the notion of Geneva as a European private banking hub never really took off. Despite having a small number of vocal supporters internally, the Swiss lakeside city was seen as more of an “international club”, serving some domestic clients, augmented by business from the Middle East and Latin America.

The big ticket family office business was always covered predominantly from London, forcing the bank to come up with “an answer to the problem” of creating a new, pan-European hub post Brexit. “Geneva was never going to be an answer to that, because the Swiss have not solved getting financial services into the European Union,” says Mr Holder, leaving Luxembourg as a natural successor to the UK capital.

“The most important thing is that this is a very open, international, welcoming jurisdiction, and they've got a plan to attract business here. Our clients like it because, in a world where you're looking for a custody location, this is a really resilient jurisdiction and politically very stable,” he says. “Luxembourg is triple-A rated, so when the storm comes and the storm comes about every 10 to 15 years, this place is very, very resilient.”

Bankers also like the idea of a small country surrounded by major European markets of Germany, France and Belgium, defined by its ability to move products and services across borders into adjoining territories.

“Luxembourg certainly plays an important role for global wealth managers,” says former senior private banker Matthias Schulthess, now a managing partner at financial services headhunters Schulthess Zimmermann & Jauch. In a financial ecosystem which includes leading fund managers, custodians, legal and consultancy firms, more than 20 languages are typically spoken in the firms he recruits for.

European market access

“It offers market access in Europe from a cross-border perspective and select firms have developed a hub and spoke model. They provide product and investment advice across a number of European geographies to complement the local front office efforts,” says Mr Schulthess. “This move has required these organisations to build out the Luxembourg-based product and investment leadership functions.”  

Family offices, key client targets for the largest banks, are attracted to Luxembourg’s geographical position, regulation and mentality of its business leaders.

“Some really large, well-branded pan-European family owned businesses are here,” says one leading private banker based in the city. “They have evolved and built family offices that have spun out of family company Treasury teams, which is a very common path.”

Wealthy families are also reassured by a well-established funds industry, which creates tax-efficient vehicles to hold assets. “There's a whole industry here to administer and run these structures for complex families with members all over the world,” says the banker. “This is a good jurisdiction to do this kind of business.”

While the financial centre struggled during the challenging market period of 2022, when assets in its regulated funds declined from €5.9tn ($6.4tn) to €5.1tn, city leaders believe the ‘Eltif 2.0’ legislation, paving the way for long-term funds to invest in Europe’s real economy, will pay dividends. Luxembourg already enjoys a market share close to 70 per cent in this sector. Alfi’s Mr Goy believes a “flexible toolbox for legal forms and structures” in addition to “accumulated expertise and subscription tax exemption in relation to Eltifs” will ensure a “bright future” for this sector.

“We always need to be vigilant, not resting on our laurels and making sure that we remain sharp” - Claude Niedner, Arendt

“This will facilitate access of retail investors to long-term investments in the alternative investment fund environment,” says Claude Niedner, partner in the investment management practice at leading Luxembourg lawyers Arendt. “There is huge potential there.”

Luxembourg’s key speciality of private assets has been the most successful in creating jobs, enjoying double-digit asset growth figures over the last six years. “These are structures which have to invest,” he says. “That creates a lot of work in terms of the creation of the funds, capital calls and deployment of investments in terms of reporting obligation.”

Typically, one of the Grand Duchy’s larger Ucits funds – facilitated by a 1985 EU directive, encouraging cross-border distribution of investment funds – might be investing €50bn, buying or selling old-school shares on the stock exchange.

But a fund investing in “non-traditional” or “alternative” asset classes requires a higher number of specialist employees to oversee it. “If you have a real estate fund which has €10bn worth of properties, it's much more labour-intensive to get that actually invested and to manage this,” reflects Mr Niedner, who says it is vital for this more innovative culture in alternative investments to win through.

Vibrant start-ups

“There is a lot of work, which we will continue to develop in Luxembourg,” he says. “But we always need to be vigilant, not resting on our laurels and making sure that we remain sharp.”

Industry leaders also highlight three other major challenges to the centre’s growth. Firstly, Luxembourg’s vibrant start-up scene currently operates separately to the financial centre, and is yet to be more closely integrated into the wealth and asset management sphere.

“We have a great deal to learn about innovation and change,” admits Citi’s Mr Holder. “Some of these start-ups will become our clients in the future. We're very keen to help international digital businesses grow, but it's a case of understanding the trends and changes coming to our industry, so that we can build those relationships.”

Secondly, attracting the best, highly mobile staff can be difficult in an industry populated by several competing hubs. “Luxembourg has a lot to offer in terms of languages, cultural diversity, infrastructure and career opportunity,” says recruitment specialist Mr Shulthess. “However, historically it has remained a challenge to relocate senior international talent to Luxembourg, if they have not previously been linked to the region.”

The third, related challenge, involves defining Luxembourg’s offer as a financial centre on the international stage. “The Swiss have a service mentality which is ideally suited to private banking,” says a former private banker now working with fund companies, who divides his time between Switzerland and Luxembourg. “Luxembourgers do not have the right attitude to service wealthy private clients, it’s not in their DNA. They are better suited to custody and administration work.”

Some banks say they use the centre purely for clients’ diversification requests, rather than any specific speciality in wealth management. “Luxembourg is a booking centre, used to complement some domestic ones,” says Vincent Lecomte, global CEO of BNP Paribas Wealth Management. “For instance, French or Belgian entrepreneurs have their holding company in Luxembourg. They have some assets booked in France or in Belgium, but they also use Luxembourg. In fact, what we offer [from there] in terms of investment services is exactly the same.”

Where the jurisdiction appears to be ahead of its peers is in dealing with questionable funds. This has been a thorny issue in Switzerland, where many banks have been forced to “de-risk” their operations to minimise exposure to Russian clients connected to authorities in Moscow, following the invasion of Ukraine in early 2022. “One of our objectives is to remain a place where business can be done in a pragmatic way,” while falling into line with latest anti-money laundering and compliance requirements, says Arendt’s Mr Niedner. “I think it’s a challenge for Luxembourg to make sure we have the right tools.”

What most practitioners agree on is that a major opportunity has presented itself now that London’s previous dominant position has been surrendered. “Europe is searching for ways to respond to the fact that London used to be its single financial centre,” says Citi’s Mr Holder, with a multi-polar system now gradually replacing the long-term status quo.

“Paris is emerging as a trading hub, Frankfurt's as an investment banking hub, Dublin as a good corporate HQ and Luxembourg as a wealth hub. The response is that multiple jurisdictions are evolving at the same time, and the challenge for Europe is how to legislate for that,” he says, referring to well-advanced plans for capital markets and banking unions across Europe. “Today’s trend is about formation of planets over time. We’ve now got five planets forming, rather than one great big sun, that used to be in London.”