Our expert asset servicing panel defends Luxembourg over a recent investigation into the Grand Duchy’s anti-money laundering framework,saying the country has pioneered openness. Plus, we talk about the evolution of technology and consider the review of AIFMD.

Kieran Dowling (Head of client coverage and new business implementation, Northern Trust Luxembourg)
Jeremy Albrecht (Managing director, head of Continental Europe (global client coverage), RBC Investor & Treasury Services)
Mathieu Maurier (Country head of Luxembourg, Societe Generale Securities Services)
Georg Lasch (Head of offshore sales, BNP Paribas Securities Services)

Funds Europe – How are fund services evolving against the backdrop of technology, regulation, Covid-19 and Brexit?

Kieran Dowling, Northern Trust – There was a convergence of these factors over the past 18 months and while the world is profoundly impacted by the Covid-19 crisis, I think you can say that the investment fund industry fared better than many other industries. This was thanks to the fund boards and the ManCos [management companies], and the service providers, who all reacted quickly, and to regulators – such as the CSSF in Luxembourg – who played an important role in maintaining stability.

The focus now is on applying a lot of the positive lessons and adapting them for the future.

Mathieu Maurier, SGSS – Many of these topics – such as technology – were in hand before the crisis. But, yes, they have been accelerated in the past year and what we see now is a greater energy and capacity to affect transformation. For example, many players are moving to the cloud because we all recognise an opportunity to be much more agile when it comes to industry challenges.

Georg Lasch, BNP Paribas SS – Technology is certainly accelerating and did do during the crisis when we realised just how much it could support us. We have discovered an environment in which we were required to work in a purely digital mode. It starts early on in the customer experience – how documents are signed, how accounts are opened, and how documents are sent. Digital signatures were adopted quickly. They’ve become a standard.

But innovation goes much further today, for example in how we deliver data to clients. There has been an emergence of data aggregators and reporting platforms.

Jeremy Albrecht, RBC I&TS – The regulator was able to adapt rules around data and working from home, and in doing so they have been a true catalyst for digital adoption and technology. Suddenly we were able to implement projects in a month that previously would have taken a year! That has been the big change.

To be fair, I don’t think the technology was ready ten or 15 years ago. Things would have been more challenging if Covid-19 had happened earlier.

Finally, I would mention the growing interest in digital assets such as tokenisation, central bank digital currencies, decentralised finance and the general use of distributed ledger technology. RBC is actively reviewing the evolution of these assets, associated technologies and regulatory approach to ensure that any solutions we develop align with our risk appetite.

Funds Europe – This year the EU is reviewing the Alternative Investment Fund Managers Directive (AIFMD). How far-reaching is this review and what changes can the industry expect once the ‘AIFMD II’ is finished?

Maurier – There is a consensus that changes to the AIFMD will not be to the Level 1 text of the Directive. This is good as Level 1 changes would require tremendous time and energy, and parliamentary approval. More likely are Level 2 and Level 3 changes, changes to Esma [European Securities and Markets Authority] guidelines and changes proposed by fund associations in Luxembourg and other countries.

Dowling – One key benefit of AIFMD has been the ease of distribution for alternative investment funds (AIFs) due to the AIFMD passport, which ultimately allows EU investment funds to be distributed across the region with fewer restrictions. One of the big open questions is whether AIFMD II will contemplate a marketing passport for third-country managers and funds.

When AIFMD was first implemented, it set out a timeframe for third-country provisions. With the UK’s decision to leave the EU, the region has evolved and this is an area that we will be watching.

Albrecht – Another development could be that the AIFM [alternative investment fund manager] licence could be extended to smaller AIFMs, and AIFs could be made available to a larger pool of investors. AIFMD II could see well-informed investors, if not quite pure retail investors, able to access AIFs.

Further to this, and for our fund manager clients, I expect to see increased alignment of AIFMD and Ucits regulations and licensing for AIFMs and Ucits fund managers. This trend is being driven by increased demand for both hybrid alternative funds and traditional, liquid funds leading to the standardisation of reporting requirements and risk calculations.

In addition, I expect AIFMD II will tighten the regulatory and capital requirements for depositaries. AIFMD saw the emergence of so-called non-financial depositaries whereby non-banks have started to provide depositary services for non-financial assets. Everybody potentially benefited from that competition; however, I think AIFMD II will tighten the rules for these non-banks.

It is also widely expected that Esma will strengthen the divisions between service providers – that is, the AIFM, the depositary, the board of directors, and the administrators – in order to manage conflicts of interest. For example, when the ManCo and the depositary are under the same roof.

Maurier – I agree the duty and role of the depositary is likely to be re-enforced and what we may see here are movements to do with digital assets including cryptocurrencies. As we go into the next decade the importance of who should be a depositary needs to be clearly re-enforced to ensure the highest levels of protection for investors.

Dowling – In connection with the depositary function, we are not expecting substantial changes but we might see some clarifications around control functions and look-through responsibilities in the case of private equity and real estate held by special purpose vehicles (SPVs) as well as clarifications regarding the relationship with prime brokers and some other technical areas.

Lasch – Harmonisation between Ucits and AIFMD is also needed on data and reporting, which would help supervisory authorities and ManCos. Affecting ManCos could be a review of delegation and substance, particularly where ManCos outsource some functions outside the EU, or even to another member country. Esma is clearly talking about “critical functions” – core functions of a management company that should be provided directly by the AIFM or by the Ucits ManCo.

Keep in mind that, post-Brexit, there are ManCos that outsource a large chunk of their activities still to the UK. I think it could have a wider ripple effect on delegation and outsourcing more generally in Luxembourg. This may be the first step to saying a certain percentage of core functions must be performed in a given country so that the responsibility of the ManCo is more easily and clearly supervised by the regulator.