Assets under management in private banking have increased from €271bn in 2007 to €599bn in 2021, despite the implementation of the automatic exchange of financial information and against all expectation by its neighbouring countries, Fabio Mandorino, senior advisor at the Luxembourg Bankers’ Association (ABBL) noted in an interview in Kirchberg on 9 August 2023.
Who were the presumed tax dodgers in Luxembourg?
“The mass affluent clients, largely from liberal professions in neighbouring countries (France, Germany and Belgium), accounted for more than half of the clients of the private banks in Luxembourg in 2013,” said Bernard Lhoest, a former banking leader at EY, now retired, in Delano’s office on 28 July 2023. “Tax evasion was enormous.”
Lhoest added that “after 2013, there were no more interest for them to stay.” The private banks were nervous about the adverse consequences of potentially losing so many private clients classified as non-residents.
Contrary to Switzerland, where small and large banks have been impacted by stiff penalties from the US Department of Justice, the non-resident “American private clients were few in Luxembourg as its private banks were focussed on Europe,” Camille Seillès, secretary general at the Luxembourg Bankers’ Association (ABBL), told Delano during an interview in Kirchberg on 26 July 2023.
“The end of banking secrecy for non-residents in Luxembourg accelerated the positioning of some private banks and certain evolutions which were anyway unescapable,” stated Seillès.
“As more than half of the banks in Luxembourg had no private banking activities […], the end of banking secrecy did not raise concerns, a non-event, on the financial system’s stability, but rather raised doubt about the permanent nature of certain [pure-play] private banks,” said Seillès.
[Liberal professionals] were replaced by the ultra-high-net-worth individuals, or UHNWI, with several millions in assets.
He noted that many shut down while other have struggled to adapt. He recalled Jean Guill, former director general at Luxembourg’s financial regulator, who said in April 2012 that private banks with a business model based on non-declared assets were unsustainable.
New opportunities for private banks willing to adapt
The end of banking secrecy has also created opportunities, as part of the financial assets deposited by non-residents under grey motivations and/or for rainy days were suddenly opportunities for Luxembourg bankers who could start discussing remaining assets in based in other countries with comprehensive solutions for their clients.
“Instead, they [liberal professionals] were replaced by the ultra-high-net-worth individuals, or UHNWI, with several millions in assets,” said Lhoest. Indeed, Mandorino noted in a research report published by the ABBL and KPMG that the greatest growth was in the >€20m band, a group that accounted for 61% of the private bank assets in 2021 against 41% in 2011.
Mandorino thought that this clientele is complex with multijurisdictional issues. Facilitated by the introduction of the regulation on the exchange of information and a knowhow built upon the success of Ucits (undertaking for collective investment in transferable securities) products, he observed that Luxembourg private banks can deploy a team of experts to address international tax and legal challenges to offer a palette of services that cannot be found, he claimed, in France or Germany.
The Luxembourg toolbox
Lhoest explained that Luxembourg’s private banking hub, life insurance hub and asset management industry were a powerful combination. The so-called “Luxembourg toolbox” enables UHNWIs, such as successful entrepreneurs, to structure their assets with various products (SCSp, alternative investment funds (AIF)) to minimise the annual tax charges and to efficiently manage succession planning while staying transparent and within the law. Mandorino also mentioned that the société de participations financiéres, or Soparfi, is a preferred structure in the wealth management industry, accounting for 30% of financial constructions.
As part of the Luxembourg toolbox, Mandorino explained that the so-called “hook products” enabled private banks to complement their offering with philanthropy structures and facilitate the management and financing of art collections through the freeport at Findel.
Mandorino noted that local private banks saw an increase of assets coming from the UK and Switzerland on the back of Brexit to maintain access to the single market, from Italy and Spain due to their unstable regulatory framework, and from Eastern Europe but at a low level.
Neighbouring countries have tried to replicate the Luxembourg toolbox, but Luxembourg has managed to stay ahead of its competitors thanks to an ecosystem of specialists (consultants, tax advisors, lawyers) that meet regularly to discuss challenges, as well as the creation of new products to keep the toolbox at the vanguard, explained Mandorino.
No groundbreaking regulations. Just a helpful evolution
Lhoest explained that regulation on SCSp (Luxembourg) and AIFs (EU) greatly helped Luxembourg over the last 10 years to attract new type of clients. He thought that the success of Ucits contributed to the success of AIFs in Luxembourg, which now “account for 10% of the world’s private equity assets against zero 15 years ago.”
Lhoest observed that private investments have become an integral part of the offering of private banks after setting up their own desk or after having established partnerships with external asset managers.