London’s loss is Luxembourg’s gain as funds face Brexit flux

Bloomberg

Britain’s Brexit limbo is helping to give Luxembourg’s booming funds industry a boost at the expense of jobs in the City of London.
UK funds are racing to set up management units in the EU to avoid being locked out of the soon-to-be 27 nation bloc come March 29. And many are choosing tiny Luxembourg, which has already carved out a niche as the world’s second-biggest fund market outside of America.
Brexit has also added impetus to outsourced hosting firms in the Grand Duchy that provide smaller funds with the key management functions required to ensure regulators let them continue to sell into the EU.
“If we crash out of the EU in March next year, it’s going to be a frenzy,’’ said Matthew Hudson, who runs MJ Hudson, a London consultancy with more than 500 asset manager clients, offering fund-management services. After the 2016 referendum result, he said he “immediately reacted, got the next flight out and set up a fund platform in Luxembourg.”
Brexit means UK firms will lose their so-called EU passport that allows them to service clients across the bloc unless they have a management company there. Luxembourg and Ireland, Europe’s biggest fund centers, are becoming even more attractive not just to register a fund, but also to set up what’s known in the industry as a ManCo.
The combination of Brexit and new EU rules for alternative investment fund managers, or AIFMs, has turned Luxembourg from traditionally the biggest European hub for mutual retail funds, known as UCITS, to just as big a center for alternative investment funds, especially in private equity and real estate.
Two years ago, the majority of the work in the sector would revolve around UCITS funds, and some alternative funds. “Now it’s like 50/50,” said Jerome Wigny, a partner at law firm Elvinger Hoss Prussen who specialises in investment funds and management companies.
A lot of this activity isn’t reflected in statistics, which show that several bigger firms, such as Blackstone Group LP and M&G Investments have made Luxembourg their post-Brexit choice. It’s a boon for a nation that no longer has the bank secrecy rules that helped it lure companies and has come under pressure over some of the fiscal deals it arranged with multinational companies.
While ManCos legally manage the fund, they oversee the investment strategies implemented by portfolio managers — often in London — rather than take the actual decisions.
“It is an overview,” said Alan Keating, head of European product for MUFG Investor Services, the global asset-servicing arm of Mitsubishi UFJ Financial Group Inc. “It’s not a day-to-day managing of a portfolio.” Their role typically includes being in charge of compliance, risk management, and the ManCo remains liable towards the fund and the inves-tor even if any functions get delegated to other firms.
In a push to avoid shell companies popping up in Luxembourg, Ireland or elsewhere in the EU as a result of Brexit, the European Securities and Markets Authority has set standards requiring “a common effort” from national regulators to ensure a “consistent supervisory approach.” Luxembourg isn’t new to the business of ManCos, but new strict requirements have raised the bar for such firms.
Luxembourg’s watchdog, the Commission de Surveillance du Secteur Financier, in August published a 101-page document, setting out in detail the rules management companies need to follow to get approved in the country. The main goal is to make sure they have “substance,” meaning a certain number of permanent staff.