Funds Europe – The funds industry has seen sweeping changes to fund governance regimes in recent years, at the EU level and locally. What have been the main changes for the Luxembourg funds industry?
Lasch – Smaller management companies in Luxembourg had quite a lot of catch-up to do with regards to their governance. The regulator has already increased substance requirements, which in turn increased the barrier to entry for new players. Another effect has been that smaller ManCos reconsidered their presence in Luxembourg, some even leaving Luxembourg for their home countries, closing their ManCos here.
Of course, the flipside of this is that third-party ManCos have been getting more and more business. Most of them are also getting capital injections from private equity firms, which gives you an idea of how much money you need to run a ManCo. It also shows you that there is a high interest and a high value for those management companies.
Structurally now in Luxembourg, the trend is probably towards much larger management companies and third-party management companies. This is in contrast to the model we had ten years ago when there were very small management companies but plenty of them.
And by the way, I think Luxembourg has the advantage of being the market where this has evolved.
However, third-party ManCos have also started to implement themselves across the EU, certainly Ireland if not the UK, or Singapore in Asia. In their own universe, they’ve developed a global model. Third-party ManCos are a core piece of the industry at the moment – but there could be a conflict of interest on the AIFMD side because third-party ManCo clients are also the ones the ManCos are supervising – in other words the investment manager/initiator of the fund. We expect additional requirements coming out of the AIFMD review to better manage those conflicts.
Dowling – The number of management companies that exist in Luxembourg is considerably higher than in other fund administration centres of excellence such as Ireland and we’ve seen consolidation of some reasonably sized players coming together to create what we could call ‘super-ManCo’ groups. We’ll see more of this, I expect, certainly with the requirements that regulators have now in terms of people and technology.
We have robust governance in the marketplace and Luxembourg has a good reputation for this. Over the past year, we’ve clearly shown that governance that is flexible enough to adapt to what is a rapidly changing environment during the pandemic is essential. Good governance exercised by investment funds and ManCos is key to maintaining Luxembourg’s positive reputation.
One main topic within governance that we see increasing is environmental, social and governance (ESG) and the responsibility on fund boards to oversee the criteria that’s been set out in the Sustainable Finance Disclosures Regulation (SFDR), which came into play in March of this year and concerns ESG disclosure by investment funds.
Albrecht – Board evaluation is already in the Alfi [Association of the Luxembourg Fund Industry] Code of Conduct, and in Luxembourg we also have more and more independent directors on boards today.
In the Ucits regime, more than 90% of boards have at least one independent director.
The challenge for board members now is to be able to oversee all aspects discussed at meetings, which range from cyber security, distribution, delegated oversight – and now indeed to the SFDR responsibility. The range of skills and experience required has increased.
We are lucky in Luxembourg to have the ILA – the Institut Luxembourgeois des Administrateurs – which brings a certain professionalism to independent directorships. I think that’s a good practice and it should continue.
On the more negative side, certainly there is a lack of women in board roles. As an industry, we need to increase the diversity of boards.
Funds Europe – The funds industry’s adoption of technology has in the past been described as advancing at a “glacial” pace. Is this still true today?
Maurier – There has been an acceleration, if not a revolution. The adoption of new technology allows us to be much more agile. For example, as a firm we took the decision to migrate 80% of our IT infrastructure to the cloud by the end of this year. The cloud increases the speed of development and lets us capitalise on the digital pillar that our parent bank has to offer. It entirely transforms some specific businesses – such as with the development of new offerings here in Luxembourg for clients of our issuer and transfer agency services, and manoeuvring within regulatory constraints when it came to complying with CSDR [Central Securities Depositories Regulation], where we managed to turn around a solution very swiftly utilising new technology.
Also, we are capitalising on the open-architecture landscape hand-in-hand with fintechs, be it internal fintechs or external, but not trying to do everything ourselves – that’s old-fashioned – but adopting a best-of-breed model. There is not a machine revolution just yet, but I can tell you this is coming.
Lasch – We have moved to the cloud, too, a private cloud as a way of managing the cyber-crime threat and data-protection issues. Similarly, we are also working with internal fintechs.
Recently we announced the launch of a platform called Manaos, which is like a Play Store, a data aggregator, but in which you’ll find a lot of fintech apps providing services to asset managers and asset owners. It is open architecture, and BNP Paribas SS must be the first custodian to offer all these innovative services to all investors, not restricted to our clients. Starting with ESG services, we already have plugged three different providers and many others are on the roadmap to build the most comprehensive ESG app store. Investors can simply pick and choose an app and use it straight away as all their investment data is stored securely on Manaos.
In cooperation with another fintech, we are creating what I call Oversight 2.0, a strong risk-reporting system helping ManCos to oversee us as their service provider.
In the private capital space, we’ve taken a significant strategic stake in AssetMetrix to support investment in their platform and to roll out general partner and limited partner portals for data visualisation, investor reporting and analytics that are the next big thing in private capital fund servicing.
Dowling – I don’t believe the comment about ‘glacial’ is still true today. Certainly, the industry is moving away from building everything in-house and instead pursuing multiple tech pathways. Northern Trust has developed a ‘Whole Office’ approach which integrates proprietary architecture with innovative partners to facilitate client access to new technologies and capabilities across the entire investment lifecycle.
Within alternative asset servicing, we’ve launched a digital document capture capability for asset-owner clients that invest in complex private market and unlisted assets, and this is really a foundation of a multi-year investment in digitising alternative asset servicing. Digital document capture enables Northern Trust to streamline historically manual workflows by automating the receipt and processing of alternative asset documents and fund manager reports on holdings and performance of hedge funds, private equity and other alternative assets. We all see the flows that are coming into private market and unlisted assets, so we need to move past the manual work involved with supporting these asset classes – and certainly AI and other technologies to support that is important.
Albrecht – Private capital asset services have evolved much faster than those for liquid assets. Perhaps five years ago, working on an Excel spreadsheet was convenient for everyone, but now, due to the complexity of structures, the number of counterparties and the amount of data that needs to be shared, managers need access to technology that allows them to share information in one central point and to access data quickly to make better decisions.
We are in exactly the same situation with regards to open architecture, cloud, and the use of fintech partnerships. Covid-19 has been a catalyst of this transformation, where things have happened much quicker than expected – including the growth of fintechs. One of the challenges we have today is to determine whether we want to develop technology internally or purchase a solution from an external partner. Given the pace of technology development, a solution purchased today can be obsolete six months later, so it is challenging for members of the industry to make these types of investment decisions.
For example, at RBC we’ve developed a very specific share-class hedging dashboard which provides detailed information about performance. We have also partnered with BestX, a fintech which benchmarks FX execution, and this is something we are offering to our clients on request.
There are plenty of available solutions, but understanding which solution is the right one is critical.
Maurier – Fifty years ago, the quality of a custodian’s services was measured by the thickness of its walls around the assets that clients put in safekeeping with us. Now it’s about protecting assets and protecting customer data. I must say that I do not see other actors, other than universal banks or banking organisations such as those around this table, that are also delivering such high levels of cyber protection.