Opportunities and challenges for Luxembourg
Luxembourg, as a fund domicile, is one seemingly at a crossroads. The implications of the Alternative Investment Fund Managers Directive (AIFMD) on the city-state, domicile of choice for a sizeable percentage of the onshore funds industry, could be profound. Its service provider community is enormous – as was evidenced at the sheer number of stands at the Association for Luxembourg Fund Industry (ALFI) Spring Conference - and is well-established to offer help to firms hoping to become fully-compliant AIFMs under the Directive. The two and a half decades worth of experience these providers have in servicing UCITS funds ought to put them in an excellent position to work with AIFMs.
Those promoting Luxembourg never tire of expounding the virtues of AIFMD, most notably the cross-border distribution opportunities the Directive will potentially bring. The chairman of ALFI went even further during a lunchtime briefing. He pointed out that China had signed a cooperation agreement with the European Securities and Markets Authority (ESMA), which would enable Chinese AIFMs to market to European institutions come 2015. This, in theory, ought to permit European AIFMs and UCITS to distribute into China, although he conceded Beijing would only allow institutions and not retail to buy into these funds. While this might be somewhat ambitious, it does indicate that AIFMs, much like their UCITS brethren, could well become a global and not just a European brand.
Predictably, there are challenges on a European level with AIFMD. An executive at Citi Private Bank said he was becoming ever more limited in the number of hedge funds he was able to show to his high-net-worth clients in Europe because of AIFMD. While AIFMs can continue to market to European investors, they are subject to national private placement regime, which vary substantially across EU member states. Some countries such as the UK are adopting a relatively liberal stance towards private placement while others, namely France and Germany, are making it far more difficult to distribute alternative investment vehicles. US managers are seemingly reluctant to onshore their hedge funds despite the perceived benefits of the pan-EU passport. Many cite the lack of available investor capital within the EU, not to mention the onerous compliance obligations and initial AIFMD set-up costs.
Luxembourg itself faces a significant number of broader challenges. In November 2013, the Global Forum on Transparency, a body created by the Organisation for Economic Cooperation and Development (OECD) said Luxembourg had failed to live up to international standards on transparency amid criticism it had failed to live up to various information sharing agreements. Other countries found wanting in the Global Forum on Transparency’s report included Switzerland, Cyprus, British Virgin Islands, the United Arab Emirates and Botswana. To Luxembourg’s credit, it is in the process of implementing the EU’s automatic exchange of information rules and hopes to be fully compliant with the Global Forum on Transparency’s standards by the end of 2014. It also aims to have a FATCA agreement signed with the US by the end of the month.
Speaking at the ALFI Conference, Luxembourg’s minister of finance, also warned of the implications of the Financial Transaction Tax (FTT), a levy being proposed by 11 eurozone countries whereby share transactions and derivatives trades will be subject to a 0.1% and 0.01% tax respectively. The rules have alarmed the Grand Duchy although the minister highlighted member state negotiations on the FTT were proceeding at a snail pace while the actual implementation of the rules was likely to be difficult, if not impossible.