Luxembourg has been sidelined in Hong Kong's mutual fund recognition agreement with China. Camille Thommes of the Association of the Luxembourg Fund Industry talks to Stefanie Eschenbacher about the future of Ucits, alternative investment funds and socially responsible investment.
The much-anticipated mutual fund recognition agreement between Hong Kong and China is in its final stages, paving the way for the first real Ucits rival.
Hong Kong-domiciled funds will then be able to tap into tens of trillions of renminbi of household savings in China, which maintains strict capital controls.
Camille Thommes, director general of the Association of the Luxembourg Fund Industry (Alfi) says Alfi has been in a constant dialogue with the authorities in Hong Kong and China to demonstrate Luxembourg’s interest in joining the mutual fund agreement.
In recent weeks, however, it has become clear that Ucits funds will not be part of it.
“We would most probably not benefit from the scheme in the first stage,” says Thommes. “Maybe in the next stage, we will have the opportunity to offer Ucits products to Chinese investors.”
Thommes says the fact that Hong Kong and China are now working on mutual fund recognition does not suggest that Ucits has failed them.
However, he acknowledges that regulation across all parts of the financial services industry may have played a role.
Today, more than half of all Ucits fund sales happen outside Europe, but the decisions are made in Brussels.
“It is fair to say that since the outbreak of the financial crisis we have seen substantial amounts of reforms across the board,” Thommes says. “The pace of which these reforms were launched obviously created some unease in the markets where we distribute Ucits.”
There were two Ucits directives in the first two decades and another three in the five years that followed. Ucits V has not even passed yet and European regulators are already consulting on Ucits VI.
Thommes says that European policymakers should have better co-operated and communicated with regulators and asset managers elsewhere in the world.
“Regulators are taking a closer look at applications to get the necessary comfort that the product is well-managed, well-supervised, well-regulated,” Thommes adds.
Ucits funds are eligible for sale in more than 70 countries, but not in the largest markets in Asia – Hong Kong and China – or in the largest in the Middle East – Saudi Arabia – or the largest in Latin America, or the largest fund market in the world, the US.
“We see a growing interest from global asset managers in various markets to launch Ucits funds, either to sell them back into their home market or to pursue an international distribution strategy,” Thommes says.
Six Chinese asset managers and three Brazilian asset managers have launched Ucits funds in Luxembourg.
“It is clear that there are some markets that are more difficult for us to access for the time being,” Thommes says. “Our mission is to promote Ucits products in markets where they are currently not directly available.”
If the mutual fund recognition agreement between Hong Kong and China was the most significant international development over the past year, the Alternative Investment Fund Managers Directive was the local one.
The Commission de Surveillance du Secteur Financier, the Luxembourg regulator, has received 110 applications, of which 31 have been approved.
The regulator discloses neither how many applicants have had their application rejected or how many have withdrawn them from the process, nor how long it typically takes to receive an AIFMD licence.
NOT A RACE
Luxembourg was one of the first countries to embrace the Alternative Investment Fund Managers Directive and has since heavily market itself as an alternative investment fund centre.
Neighbouring France had initially been much quicker to approve alternative investment funds, but Thommes says jurisdictions should not be judged based on the number of licences granted because it is “not a race”.
“Asset managers still have some time before July to apply for a licence,” he says, adding that the number of applications is likely to increase substantially over the next couple of weeks.
Thommes says that there are grandfathering clauses, whereby old rules continue to apply to existing cases while new ones apply to future cases.
“There are also cases of smaller alternative investment fund managers that fall below the threshold but, for commercial reasons, would benefit from a licence,” he says.
Several new service providers have set up presences in Luxembourg over the past year.
This is something Thommes interprets as a sign that there is an interest among alternative investment fund managers to launch alternative investment funds out of Luxembourg.
“Overall, the mood is a positive one,” he says. “There are a certain number of challenges these asset managers face when it comes to complying with some of the technical requirements of reporting, but this is not specific to Luxembourg.”
Thommes says some of the larger asset managers have also set up cross-border super-management companies under which they can manage both alternative investment funds and traditional Ucits funds.
“In Luxembourg, we not only transposed the directive into national law but also added an alternative package,” Thommes says.
Luxembourg reformed the limited partnership regime from both a corporate and fiscal perspective, aiming to make the country’s limited partnership more attractive to asset managers, particularly those in private equity.
The government has also vowed to adopt measures to attract more front-office functions, including the reform of the carried interest taxation rules.
Luxembourg is also diversifying into new markets, which Thommes describes as the “third pillar” of Luxembourg: socially responsible investment, especially microfinance, and Islamic finance.
Thommes emphasises this it not done for image reasons, but there is real demand from institutional investors for such strategies.
“Our long-term ambition is to further develop socially responsible investment,” he says. “It is still a niche market, but it certainly deserves much more attention because investors’ attitudes have changed over time.”
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