The Luxembourg funds industry continued to expand over the last 12 months despite the eurozone crisis and declines in major stock indices. The number of funds in Luxembourg rose by 4.84% to 3,833 and net sales amounted to EUR16.998bn. While total AUM decreased over the period by EUR101.453bn, mainly as a result of market depreciation, total assets under management were still a steady EUR2,059.419bn, second globally only to the US.
The increase in net sales and funds enabled the Luxembourg fund industry to continue to maintain and even create employment in 2011. The Luxembourg financial centre, of which the fund industry is a key part, is a motor of the Luxembourg economy, with over 43,000 employees working directly for Luxembourg financial sector companies and many more working for non-financial companies that provide goods and services to the financial centre.
Marc Saluzzi (pictured), Chairman of ALFI, says: “The fund industry has for many years been a force for growth and stability in Luxembourg and the fact that it has managed to provide employment opportunities at a time of great financial uncertainty is testament to its strength. The industry has worked hard together with the government and the regulator to create what we believe is the world’s most respected and progressive fund centre.”
2011 was a watershed year in that the economic and financial instability of certain countries in the Eurozone started to affect their ability to distribute UCITS. Saluzzi says: “Luxembourg is recognised for its financial stability so, in this context, it’s important that our decision-makers keep on running the country well.”
There was also a heavy regulatory agenda in 2011, with a number of new rules coming into being, including UCITS IV and AIFMD. Luxembourg was well prepared and the process of transposing each into national law is already completed or well underway. Besides the European rules, we saw laws and rules emerging in non-EU countries that will strongly impact our industry, such as FATCA or the Volcker Rule in the US.
Looking ahead to 2012, the global macroeconomic situation is hard to predict but markets are likely to remain volatile and investors, both retail and institutional, will probably remain cautious.
At the same time it is certain that regulatory pressure will increase. As in the past, ALFI will continue to advocate policies that are beneficial to the funds industry and its end-users and actively take a stand against others. ALFI is particularly concerned by the Volcker Rule and the Financial Transaction Tax (FTT).
The Volcker Rule, a proposal within the Dodd-Frank Act to reform the financial sector, restricts US banks or banks active in the US from making certain kinds of speculative investments. But, as it currently stands, it creates an uneven playing field and should be amended. It notably prohibits banking entities, with certain exceptions, from acquiring or retaining an ownership interest in, or sponsoring, a hedge fund or private equity fund. However, while US mutual funds are not caught by the rule, there is no similar exclusion for non-US retail mutual funds. This discriminates against non-US regulated retail funds such as UCITS. “At the minimum, we believe the definition of the funds affected (“covered funds”)in the final rules should be amended to exclude European regulated funds in the same way as their US counterparts,” says Saluzzi.
As regards the FTT, ALFI believes it has the potential to curtail the distribution of UCITS outside Europe and to significantly reduce the assets of European funds. Moreover, ALFI does not accept the argument that it would result in the financial sector making a positive contribution to the economy and to society as a whole, especially if it is not imposed globally. Financial institutions will try to reduce the impact which might result in a widescale relocation of trading activities and/or the passing on of the costs to end-consumers, including individual savers and those participating in pension plans. The impact on the fund industry would be significant, not just because the proposed headline rates are high, but also because the proposal gives rise to multiple taxation at the level of the fund, its portfolio and its investors. Mr Saluzzi says: “The benefit to the economy or to society is doubtful if it requires people to save a larger part of their earnings, retire at a later age and receive a significantly reduced pension in retirement for absolutely no tangible fiscal uplift.”