“People do not always realise the importance of AAA ratings, a stable political and economic system coupled with gradual and gentle implementation of fiscal changes,” said , a recently retired former banking leader at EY, in Delano’s office on 28 July 2023.
For instance, there are discussions on reforming the pension system in Luxembourg, a process that could run for three to five years through extensive explanation and public education, expects Lhoest. “There won’t be any surprises.” “In France, the pension reform is announced [and] in two weeks, there is fire in the streets and there is a civil war.”
Catch me if you can
Lhoest expressed some concerns that European forces may continue to put obstacles on the way for Luxembourg to continue its sequence of successes. As such, the country continues to suffer from a perception problem despite its compliance with recent European reforms.
After the global financial crisis, for instance, heavily indebted governments were looking for money in tax havens, explained Lhoest. The situation is similar nowadays on the back of additional financial burdens due to covid. He thinks that the eventual implantation by a domestic or European legislation that would “tax inheritance could change many things [in Luxembourg].”
The number one focus for a private client is cost, not performance
Brexit enabled some large countries to beef up their private banking by attracting large participants and private bankers from London to their countries, coming in direct competition with Luxembourg. “Paris has been very successful in attracting foreign private banks while Germany welcomed UBS and Pictet,” said Lhoest.
Filling the gaps
Given the evolution of the business targeting ultra-high-net-worth individuals, or UHNWIs, client relationship managers have been required to up their game to better serve these more sophisticated clients. Consequently, a master in wealth management was set up at the University of Luxembourg “to prepare for the private banking of tomorrow,” said , senior advisor at the Luxembourg Bankers’ Association (ABBL), during an interview in Kirchberg on 9 August.
As a small country, the main market participants in an industry can easily meet to overcome challenges. Mandorino cited the case of the private banking group, which is supported by the ABBL, includes 22 banks and accounts for 95% of assets under management. It regularly meets to find solutions to common industry issues.
Private banking: a high-cost business
“The number one focus for a private client is cost, not performance,” said Lhoest, citing research from EY and KPMG. As of 2021, there were 48 private banks, compared to 66 in 2015. It is difficult to survive with less than €5bn in assets under management, said Lhoest, on the back of various costs related to transparency, regulatory pressure, compliance reporting, IT upgrades or the war for talent, to name a few. Twenty-one of the 48 banks had less than €5bn in assets under management.
Mandorino suggested that it is fair to expect that many of the private banks with less than €5bn in assets under management will either not survive or will be integrated into larger groups, despite having diversified into other businesses.
Hence, large banks will likely become larger, as seen recently when , which aims to reach a better profitability on the back of lower cost.
AML: costly but solutions in the making
Lhoest is particularly concerned about the regulations on anti-money laundering, or AML, “which cost a fortune and penalise the development and the agility of banks.” Given the overall perception of Luxembourg, he acknowledged that the “country must demonstrate a high level of AML accuracy,” a situation that increases costs and slows down the business.
Yet, Lhoest is hopeful for the future as the remaining banks are getting larger, are in better position to absorb the costs, and may benefit from new processes and technologies developed by the regtech or the fintech industries. He suggested that local companies such as I-Hub, a go-to firm for AML matters serving financial institutions, will contribute to dampen the cost burden.
Virtual tax evasion
The Directive on Administrative Cooperation 8, or Dac 8, in the final stage of writing, has enlarged the .
In an interview with Delano in Kirchberg on 26 July 2023, , secretary general at the Luxembourg Bankers’ Association, suggested that new iterations are necessary to “avoid that some asset or tools may be used for tax evasion.” He added: “I think that the Dac 8 will bring credibility and serenity on those products.”