How could Brexit affect the fund industry?

Luxembourg and the UK work closely together in the fund industry, with nearly half a trillion euros (16.7% of the Luxembourg market) from British funds based here. Will Brexit change this?

UK funds use the Grand Duchy because it is the world leader for cross-border distribution of these key savings products. From a central platform, funds are then sold around Europe and beyond.

Investment funds are important. Millions of people use them directly to save, and most of us use them indirectly for our state or private pensions, and for life insurance. How might Brexit change existing relationships? The outlook was discussed Tuesday morning by a panel of industry experts at the Association of the Luxembourg Fund Industry’s (ALFI) Global Distribution Conference.

‘Soft’ vs ‘hard’ Brexit

The panel was broadly optimistic that workarounds could be found, although much will depend on the details of any Brexit deal.

In the case of so-called “soft Brexit”, the UK could have a situation similar to that of Switzerland. Swiss firms have broad access to the EU single market because the country adopts EU laws, contributes to the EU budget and freely accepts EU workers into the country.

Much like EU-based firms, Swiss fund managers establish a hub in the EU (often in Luxembourg) and sell from there. On some occasions, the Swiss firm will need to have greater “substance” in their EU hub than would an EU firm. They achieve this by employing more people and carrying out more business there.

Even in the case of “hard Brexit”, the panel was hopeful that business would continue to flow. They pointed to the quite open relationship with Hong Kong as a model of how this could be made to work.

There would be the need to invest in beefing up EU-based offices, and there would be more regulatory hurdles to negotiate, but in general a way could be found. Mention was also made of the good working relationships that exist between the UK and Luxembourg regulators–personal links that are likely to persist.

How would Luxembourg be affected?

The implication of these moves is that UK firms would need to scale up their EU operations. Indeed, in her introductory speech, ALFI Chairman Denise Voss mentioned a growing number of enquiries by UK firms looking to expand or establish offices in the Grand Duchy.

On the down side, it may be that UK savers will transfer their money from Luxembourg to UK-based products. However, big City of London institutions are unlikely to follow this route.

Of course all of this depends on the details of the Brexit negotiations. However given a reasonable level of good will on both sides, the feeling is that business should not be greatly affected, and that Luxembourg could even benefit.