Regulation is bittersweet, but it’s undeniably necessary. We know good will is the ideal; it still cannot win the battle against the human tendency to break the rules.
Brexit was a bucket of cold water that made us rethink what the Europe we all want should be. We haven’t finished yet.
But both regulation and Brexit are positively influencing Luxembourg’s labour market growth. For instance, management companies (ManCos) seem to feel at home in the Grand Duchy. Indeed, 2018 witnessed 19 new entities establishing here.
Few can challenge that Luxembourg is a preferred asset management hub in Europe, but it’s still common to read in the media, even in the most renowned ones, the expression “tax paradise” attached to the country’s name. Luxembourg is more than the tax advantages for which it is still known, and Mancos acknowledge that.
The ManCos who settle here see agility to implement EU or international frameworks, institutional stability and connectivity of the financial services industry as key Luxembourg virtues, or unique selling points (to use the nation branding terminology). To that, we can add an experienced workforce – diverse and multilingual – and unbeatable cross-border expertise.
What has led the PwC ManCo Index to increase by 4.5% from 2018?
In December 2018, the Manco Index marked 203 points, an increase of 4.5% over a year and the highest level ever reached so far. This positive trend hasn’t reached the peak yet.
A sort of butterfly effect, regulation calls for compliance and, in turn, this requires a dedicated workforce. The main booster of the index’s positive result has been, beyond doubt, UCITS ManCos employment.
In summer 2018, the CSSF Circular 18/698 entered into force. In summary, its main purpose is to define the conditions for obtaining and maintaining the authorisation for all institutional investment managers (IFMs) presented within one single document.
With the functions that IFMs have to perform in the country already clarified, ManCos require more personnel to cope with the circular. In fact, 45% of PwC Manco Survey 2019 respondents said they would need to recruit more staff to do so.
The Circular 18/698 aims at providing further clarifications on certain conditions for IFMs authorisations, more particularly in the area of the shareholder structure, own fund requirements, management bodies of the IFM, arrangements concerning the central administration and governance, and rules of delegation.
ManCos are to recruit additional crews to fulfil gaps in different functions.
CSSF on-site visits are also driving the need of having more professionals to guarantee that the required substance is in place and in shape.
The binomial influencing ManCos’ growth
Beyond the Circular 18/698, two factors are also influencing the growth of ManCos. One is linked to the evolution of the business in itself, the other is related to political phenomena, or more directly, to Brexit.
In 2017, 12 new ManCos were seduced by Luxembourg. These businesses and the ones that came before are growing, and they increasingly want to diversify investment services. One way is asking for MIFID II licenses to offer clients products related to MiFID financial instruments (such as shares, bonds, units in collective investment schemes, and derivatives.)
They also want to embrace new investment strategies bv adding new fund types (UCITS or AIFs). When a ManCo embraces both, it becomes a “supermanco”. Rather than providing cross-border services for either a UCITS or AIF, these dual-authorised businesses fulfil compliance and operating requirements for both.
Workforce growth goes hand in hand with business growth.
MiFID II services could include investment advice to clients, management of client portfolios, execution of clients’ orders on financial instruments, reception and transmission of orders on financial instruments, dealing with own account, market making, underwriting, placing of financial instruments, and operating trading facilities.
The second factor of the binomial is Brexit and the still uncertain outcome. If you aren’t sure about the latest Brexit events, you are just joining the vast majority of people. Financial services businesses don’t know precisely how to act, but paralysis is a symptom that should be avoided against all odds.
The x-ray of a feverish UK shows that, while once an example of diplomacy and pragmatism, what we now see is polarisation, and the oblivion of consensus as a political tool to solve disagreements. In contrast, Luxembourg’s current image is a synonym of openness, stability and increasing transparency.
More than 20% of the new ManCos established in Luxembourg in 2018 came from the UK.
ManCos don’t want to be the sleeping beauty
Complacency as well as paralysis aren’t allowed at this moment in time when the search for disrupting something, whatever it is, seems to be the holy grail.
Regulation cannot be disruptive by definition, but a force that unifies, standardises and brings clear game rules instead. However, it cannot be seen as a sustained “source of growth” either.
What if, any time soon, artificial intelligence finds its way to ManCos and changes operations and management forever? Or could “outsourcing” certain operations to countries where labour costs are cheaper diminish ManCos’ prosperity?
ManCos don’t want to be the sleeping beauty. Brexit will go, but the need for upskilling the workforce, embracing new technologies, reimagining business models and befriending AI will stay.
While Luxembourg ManCos are set to grow in number and investment activity, they are also feeling a squeeze on fees, and they may face a potential stagnation trend in assets under management.
The evolution of AuM by ManCos, for example, demonstrates a flattening over the one-year period as of 31 December 2017. At the end of December 2018, the total AuM of Luxembourg ManCos (in billion Euros) reached 3,398, whereas of 31 December 2017, the total AuM of Luxembourg ManCos reached 3, 401. This flattening is still positive in comparison to the global evolution of AuM in Luxembourg funds which decreased slightly within the same period (-95 billion Euros).
Staying positive and looking to the future with eyes wide open is always desirable, but ManCos don’t want to lose the pace of regulation, new technologies, and the political and social forces reshaping our present.
What we think
Laurent Carême, Director at PwC Luxembourg
This year’s Observatory for Management Companies Barometer shows again a clear evolution of people employed. The fact that the PwC ManCo Index has increased by 4.5% over the year is mainly driven by the number of staff and we can expect this positive trend to continue into 2019 as ManCos recruit additional resources to fulfil gaps in different functions.
Take a look at out Observatory for Management Companies Barometer here!
