Luxembourg sets sights on upper reaches of wealth ladder

Like other financial centres including Switzerland and the Channel Islands, Luxembourg has recently been in the news for all the wrong reasons. Last November, leaked documents describing the Luxembourg-related tax arrangements of more than 340 multinationals stoked debated over favourable fiscal arrangements offered by the Grand Duchy.

The so-called “LuxLeaks” revelations struck a severe blow to the jurisdiction and its citizens. Luxembourg officials say they are addressing these problems with the international community and European partners, agreeing to an automatic exchange of information. They point out that unlike issues in Switzerland, related to individuals using banks to evade taxes, LuxLeaks related purely to corporate structures, all perfectly legal. Some even put the story down to media hype and accusations from envious rival nations. 

In truth, Luxembourg’s private banking industry has been undergoing a radical shift, driven by changes in the regulatory landscape. With the end of private banking secrecy and global moves towards transparency, to be sealed by the OECD Common Reporting Standard (CRS) to combat tax evasion coming into force in 2017, the lure of the Grand Duchy as a jurisdiction for hiding undeclared assets has definitely waned.

As a result, there has been a clear shift in the types of private clients the country serves. While in the past it was mainly mass affluent segments from neighbouring countries banking there to minimise taxes, today it is the wealthier, more international and demanding clientele attracted by Luxembourg’s cross-border, multi-lingual expertise, claim the jurisdiction’s promoters.

“We see tax transparency as an opportunity,” says Tom Theobald, deputy CEO, Luxembourg for Finance, the agency for the development of the financial centre. “We got rid of this banking secrecy stigma and it is now much easier to promote the financial centre and easier for private banks to promote their services and solutions to UHNW clients,” he says, adding that banking secrecy was an “original sin”.

Sophisticated needs

“The most spectacular change is that we are moving up in terms of client segment,” says Olivier Leclerc, managing director of SGBT (Société Générale Bank and Trust) in charge of private banking activities in the country. “We have definitely departed from the traditional Belgian dentist we were used to serving in Luxembourg. We are really here to address the needs of UHNW clients, who have assets spread across several countries and more sophisticated needs.”

At the French institution, around 80 per cent of net new money today comes from the very wealthy clients, who look to Luxembourg to consolidate and structure their wealth for succession. At Dutch bank ING, UHNW assets account for 50 per cent of clients, compared to 5 per cent five years ago, states Sandrine De Vuyst, head of private banking at ING Luxembourg. This trend has accelerated over the past three years.

But this paradigm shift brings challenges in terms of recruiting skilled private bankers or retraining existing staff to meet more complex requirements of wealthier clients.

“Private bankers need to be more skilled than before, as they are targeting UHNW clients and the questions they face are immediately at the higher end,” says Ms de Vuyst.

“In the past it was easier to be a private banker just sitting in the office in Luxembourg and waiting for clients who, for good or bad reasons, would come and deposit their money,” explains Marc Debois, head of new and international markets at ING Luxembourg. But today the capability of networking and reaching new clients is key.

“After the financial crisis, when banks became a focus and Luxembourg fell under the spotlight as a financial centre, banks clearly had to start actively promoting their services and solutions much more,” says Carlo Friob, CEO Private Banking at KBL European Private Bankers.

KBL’s existing clients were contacted during the ‘onshorisation’ process which ended at the end of 2014, in order to regularise their position. But it is only since the beginning of last year the bank stepped up its efforts in training private bankers on subject matters such as regulation, risk, compliance and wealth planning. 

Present in nine different European countries, the bank has also launched the KBL University initiative, organising training programmes for the group’s 400 private bankers.

As opposed to the recent past, when private bankers catered to the more basic needs of affluent customers, today relationship managers are the client’s first point of contact, but need to be able to bring in specialists in wealth planning, lending, asset management when needed, and provide bespoke solutions clients require, explains Mr Friob. 

To respond to this need for skilled personnel, in September 2013, the Private Banking Group unit of the association des banques et banquiers, Luxembourg, (ABBL), in partnership with the Luxembourg School of Finance, University of Luxembourg, launched a masters programme in wealth management. The course is attracting students from all over the world. 

“In wealth management, we have to up our game and become more familiar with the demands of more sophisticated clients,” explains Jos van Bommel, director of the programme and associate professor at the Luxembourg School of Finance. 

“The wealth management sector needs new blood, younger wealth managers, speaking different languages and better trained,” he says, explaining the two-year course includes subject matter such as wealth planning, portfolio management, hedge funds, compliance and ethics, as well as soft skills. Each student is sent on a work placement at a banking institution in Luxembourg. 

Although local private banks generally support such initiatives, there is a belief Luxembourg could do more to attract senior private bankers from other jurisdictions. “Relationship managers from other banks in Luxembourg represent the biggest part of our new hires, and not many private bankers come from outside Luxembourg,” says Mr Leclerc at SGBT. “It is absolutely key for Luxembourg to become more attractive to CRMs in Switzerland, Monaco and other financial centres in the future.” 

He talks about a need for more international schools and improved transport facilities, although much has already been done in this space, and real estate quality must also be enhanced.

Salary cap

Another big issue which can prevent highly skilled people from coming to Luxembourg is the 30 per cent cap on variable salary, unlike Switzerland, where there is no limit, says Manlio Unfer, head of private banking Luxembourg at Banque Havilland. 

“We are fighting with other banks for the few very skilled people in the market and it’s a tough competition,” he says. Although recent lay-offs and redundancies, especially from big banks, have expanded the available labour force, skill levels are generally seen as not always adequate. 

Private banks face other challenges too. The shift in client base from mass affluent to more wealthy and sophisticated, puts pressure on margins. As revenues related to assets are decreasing, the cost to comply with regulation is rising. 

Moreover, with the ban on retrocessions, expected in MiFid II, private banks will have to give up a significant source of revenue flow, explains Olivier Carré, partner and Regulatory & Compliance leader at PwC. Also, owing to low interest rates, banks can hardly count on any revenues generated by clients’ deposits. 

Private banks are adopting different strategies for survival in this new environment, observes Mr Carré. 

In Luxembourg, the trend is for bigger institutions to diversify wealth management business by offering institutional banking businesses, such as credit, funds, or custodian services. 

This allows institutions to benefit from various sources of revenue along the value chain of solutions offered to clients, as opposed to only relying on advisory or discretionary portfolio management fees.

Increasingly, large banks are choosing Luxembourg as a regional hub for group activities, or nominating it as a centre of excellence for specific businesses within the group, providing operational services to other group entities. Some players with traditionally strong wealth management back offices, and operational know-how in Luxembourg, are using that expertise to support onshore banking in certain markets, where domestic operations are too small to justify investments. 

Along these lines, ING Private Banking Luxembourg went through a restructuring process. Since January last year it has adopted a new structure. It has divided “private bankers” seeking new clients, or ‘hunters’, in new and international markets, (including Southern Europe, UK, Central Europe especially Romania and Poland and also Russia) from “relationship managers”, the ‘farmers’, generally more senior, who look after existing clients in core markets. Many hires have been made recently, particularly in the hunters segment targeting new markets, but also to increase the coverage of Luxembourg’s wealthy residents.

These two groups of bankers are supported by a team of business specialists in credit, risk management, wealth planning and so on, which has also been strengthened. “In the past as ING Luxembourg, we were working on our own, as a separate entity,” explains ING’s Ms De Vuyst. “We were seen more as a competitor by our colleagues in neighbouring countries.” 

Indeed, ING offices in Luxembourg and neighbouring countries were targeting the same clients. But today, with changes in the regulatory landscape, mass affluent customers from France, Belgium and the Netherlands realise they have nothing to gain from banking in Luxembourg and have moved assets back to banks in their domestic markets. 

The plan is to propose Luxembourg as the centre of expertise serving wealthy clients with cross-border needs. “We know ING Luxembourg can offer products and services to HNWs and UHNWs that ING Belgium or ING Netherlands cannot, and on the other hand they can offer other services we cannot provide. It is important each office is aware of each other’s strengths,” says Ms De Vuyst.

At KBL, local brands in domestic European countries, where the institution is present, cater to domestic, inherited wealth, explains Mr Friob, making reference to historical brands of the group, including Puilaetco Dewaay in Brussels, Brown Shipley in London and Theodoor Gilissen in Amsterdam. 

In Luxembourg, on the other hand, the bank can cater to international clients, who may be seeking to finance real estate in London or have their wealth structured. The KBL focus is on growth both in terms of increasing assets under management with existing private bankers and also recruiting private bankers in all European markets where the group has a presence. 

Acquisitions are also on the agenda. These may be opportunistic, such as that of UBS Belgium, which added Ä3bn in client assets, the integration of which is expected to end in May, or more strategic. “In the private banking sector, margins are under pressure, and with increased costs due to regulation you have to clearly define your business case. Going forward you can only succeed when having a certain size,” says Mr Friob. 

A private banking operation should have at least Ä5bn in client assets in each country, he says, but in the future this minimum requirement is likely to increase to Ä10bn. In some European countries, such as Spain or France, KBL’s private banking operations are clearly sub-scale and it is in those markets the firm is actively seeing acquisitions.

Niche players

Specialist players, adopting a more entrepreneurial or family office approach are trying to capitalise on niche strategies and proximity to the client base, and differentiate themselves from the larger players by this ability to know a specific client segment and cater to its needs. These niche players adopt a “gatekeeper” strategy, acquiring clients through word of mouth, based on reputation, according to PwC.

For example, Banque Havilland, an independent, family-owned private bank established in Luxembourg in 2009, acquired Dexia private bank in Monaco in 2011, opened a branch in London, bought La Française Bank in Luxembourg last year, followed by absorbing Banque Pasche operations in Monaco, Liechtenstein and the Bahamas. 

A small local market means the bank looks at international expansion in growth markets, such as Latin America served by the Bahamas office or CIS countries, Russia, Ukraine and Eastern countries, served by Monaco and Liechtenstein. In Luxembourg, the bank also started to become active as depositary for investment funds, in order to diversify revenues.

The bank started these activities under the new paradigm of transparency, with very little legacy from the past, claims Mr Unfer, who advocates a niche approach, based on understanding entrepreneurial clients’ needs for wealth preservation. But none of this can be achieved without critical mass. 

“Size matters,” says Mr Unfer. “You need sufficient economies of scale and sufficient assets under management to be competitive. What is important is the mass at global level.”   

A changing landscape

With significant challenges ahead, due to increased cost of regulation, as well as decreasing margins, the banking sector in Luxembourg is going through a significant consolidation process. The number of banks has decreased greatly from 220 in 1995 to less than 150 today. 

However, new players have also entered the space, with all major Chinese banks setting up their European headquarters in Luxembourg in recent times. 

According to the association des banques et banquiers, Luxembourg, (ABBL), there are currently 60 banks active in private banking in Luxembourg. This figure has remained stable over the past five years. The vast majority of banks in Luxembourg have a universal banking licence under which they carry out a broad range of activities, with many also active in custody, fund administration and securities services, retail banking, international loans, corporate banking and commercial banking.