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Magazine Issues » September 2020

Luxembourg: The "heavy process" of anti-money laundering

Funds Europe – The UK recently introduced an ‘Assessment of Value’ regime to tighten fund governance in the interests of investors. Do you anticipate similar action in the EU in general and in Luxembourg in particular? Is Luxembourg’s existing fund governance regime up to scratch?

Thommes – This question does not necessarily and exclusively relate to Ucits, but when you consider the combined effect of MiFID II and also the recent Esma supervisory work on costs in Ucits and in AIFs, I think UK investors certainly are equally protected as for the value assessment requirements. 

As regards whether Luxembourg’s fund governance regime is up to scratch, you wouldn’t be surprised if I say, ‘Definitely, yes.’ Not only does the Ucits directive regulate the organisation, the management and the oversight of funds, as does the Alternative Investment Fund Managers’ Directive, but in addition, our regulator had issued a number of circulars in the past which provide for strict guidelines on rules of conduct applying to managers. 

Grenner – You have certain retail investors also in alternative funds, which triggers another discussion of whether there should be retail investors in alternative funds at all. I know certain countries answer this with a yes, others with a no, and some take a position inbetween. For me, this regime is another step towards enhanced investor protection – one of the reasons for introducing AIFMD in the first place. 

That is fine for alternative funds where retail investors are permitted to invest, but I think the new UK regime is taking this a step further, in taking away the responsibility of investors to take decisions themselves. I expect from an institutional investor that they do their due diligence, that they have the tools and systems to do so as well, to be able to assess the value of the fund they are going to invest in. 

If I look at these documents in detail, I am wondering how much time people have actually invested in putting these reports together, and then there is still the question of if investors are actually going to read it. But, who at the end is paying for this? It’s another burden that an asset manager has to shoulder, for a document which I doubt is going to reach all investors. First, it is the business of institutional investors to figure out in which funds they want to invest in and second, if institutional investors require more information from alternative asset managers they will ask for it, so for institutional investors I cannot see an added value in this document.

Brimeyer – We need to be careful to strike the right balance here, creating sufficient transparency to market these products to retail investors who need to have a much more straightforward way of comparing products. 

Having said this, I don’t believe that alternative investments is a space for many retail investors, given the liquidity mismatch between investor expectations (open-ended funds) and the assets (often highly illiquid).

Trying to fit an investor base into an asset class that fundamentally does not share the same liquidity requirements than the potential investor is creating a very big burden in terms of trying to create transparency on costs and on performance, which I believe will be very expensive to comply with. 

AIFMD has already introduced quite a lot there and governance around the funds as we know it in Luxembourg is very strong. 

Mouftaou – We already have the AIFM directive giving a lot of transparency, we have the GDPR rules, we have the 5AML directive, we have MiFID II, and locally we have further initiatives, regulatory pressures and follow-up, so we already have everything we need in terms of fund governance and transparency. Adding this layer doesn’t give anything more, but we should think about what Luxembourg’s relationship with the UK is going to be after January, because that’s probably the open question for those incentives. 

Funds Europe – With regard to Alfi’s five-point priorities for the next five years (the development of cross-border savings and pension products, promoting sustainable products, extending the global reach of Ucits, broadening access to alternative investments, promoting digital innovation): which ones are most relevant to your firm?

Brimeyer – For me, it’s a very easy pick. Given that we’re specialised in alternatives, I will absolutely promote any initiative linked to alternative investment. I believe Luxembourg is well positioned to continue building its influence in global markets in this area.

Then I would certainly opt for promoting digital innovation. Especially in the alternative space, where the level of maturity is not yet at the same levels as in the Ucits fund space, I think there is a big potential for more standardisation. 

Mouftaou – I would probably pick ‘promoting digital innovation’ and ‘sustainable products’. IQ-EQ has aligned its strategy to those two priorities. 

That being said, even though many things are now possible (like the use of digital signatures), some players are not there yet in terms of adapting their own internal procedures and harnessing those new possibilities. I am confident, however, that the conversion of all will come very fast.