ESG, digitalisation and artificial intelligence, talent attraction and retention, innovation and competitiveness were some of the topics of discussion at an Elvinger Hoss Prussen conference dedicated to the future of Luxembourg’s financial centre, which took place at the Banque de Luxembourg on 7 June 2023.

The conference featured panellists from the grand duchy’s financial sector--the chairwoman of the Association of the Luxembourg Fund Industry , CEO of the Luxembourg Bankers’ Association (ABBL) , managing director and executive committee chairman of the Banque de Luxembourg , former finance minister and CSV lead candidate for the legislative elections  and Elvinger Hoss Prussen partner , and was moderated by Elvinger Hoss Prussen partner --as well as a keynote speech from the director general of the CSSF, Luxembourg’s financial regulator, .

Financial industry faring well, despite difficult environment

“We are in a very difficult environment,” began Marx in his speech, which touched upon points mentioned by the panel and featured his personal comments. It’s “an environment that I certainly cannot remember,” he added, despite his “grey hair.” Russia continues to wage war in Ukraine, , Silvergate Bank, Signature Bank in the US collapsed in March, --one of the world’s 30 global systemically important banks--also collapsed in March, interest rates are rising sharply, and recent negotiations regarding the US debt ceiling caused uncertainty in the financial sector.

And despite all this, the industry has fared well, said Marx. “That’s not a coincidence. I think that is a combination of some good regulation, in terms of stress testing, capital requirements, but also the discipline,” he said. “For those who have followed the bank failures in the US, you have seen that there were huge governance issues. There were things that we believe are common sense that were not being followed.”

“And so I think we should just keep in mind this. When I hear all the issues and challenges, they are all true. But I think also here we are still in a good situation.”

Luxembourg’s financial centre “built on trust”

Many of the panellists touched on technological challenges, as well as digitalisation, artificial intelligence and cryptoassets as they talked about the future of Luxembourg’s financial centre and how to move forward.

Alfi’s chairwoman Lamesch, for example, said during the panel that she “really thought that we would also see new products emerging like virtual asset products in Luxembourg,” referring to a  that explored why virtual asset funds haven’t boomed. “What we found is that the whole ecosystem around is not yet mature enough,” she added.

“The CSSF is technologically neutral and open to new technology. I think we have worked on a number of things already, and I’m happy to work on more,” said Marx. “It was mentioned that we are not first movers in crypto or virtual assets. That is true. I’m not so sure for this particular one that we should have been first movers here.”

“The reason why I mentioned this is because in my view, this market is not only mature, as was said. But it is simply too dangerous for the moment for a centre like Luxembourg that is built on trust,” he said. “The two industries that dominate this centre here is private banking and asset management--and that’s all about trust.” Marx reminded the audience of recent charges brought by the US Securities and Exchange Commission against crypto exchange Binance (which it denies), as well as the FTX bankruptcy.

“It’s alleged that Binance artificially inflated its trading volumes, diverted customer funds, failed to restrict US customers from its platform, misled investors about market surveillance, and so on and so on,” said Marx. People are innocent until proven guilty, but all this is “serious stuff,” he added. “I’m wondering, in your funds, you know, on whom are you going to rely to buy the crypto currencies? And so on, and so on. I think this is still to be sorted out.”

“I think we ought to be very careful,” Marx concluded on the topic.

Embrace change, both on technological and management levels

But banks will have to “embrace” technological changes in order to survive, said Marx. “As far as digitalisation is concerned--DLT [digital ledger technology], tokenisation, automation, robotisation, increased use of AI--yes, all this will be there, and it’s only the beginning.”

“It requires a huge investment, in addition to very often replacing core banking systems, or core systems. That is a very expensive task, but it needs to be done,” he said. And even if the decision-makers of large companies are not here--panellists had referred to the fact that decisions are often taken in New York or Singapore, for example--it’s not an excuse for not having knowledgeable people in technology and ESG on boards and senior management teams here.

“When I look at those, unfortunately, this hasn’t even started. We still have the white old males like me sitting there, with their either legal background or financial background,” said Marx. “But we should change. And we can also change this in Luxembourg.”

The digitalisation issue could also be tackled as a private-public partnership, said Marx. “I like very much that idea. And I could easily imagine even a forum where the industry and the regulator all sit together to exchange ideas on, you know, ‘what’s your view on this? Or what’s your view on that? Or how would you deal with this?’ We have done this in the past, by the way, but maybe it was a bit too early because there was clearly not a lot of interest at the time from the industry to pursue this.”

“I think that we could do [this] quite easily if there was an appetite there.”

Investment in cybersecurity

Cyber risk is an emerging risk, noted the panellists, and this is something “certainly still to be tackled,” said Marx.

“We are lucky that we have not witnessed a lot of serious cyber attacks to date,” he added. “But I do not exclude that they will not come. And it is fair to say that we are underprepared. We are underprepared in Luxembourg. We are also underprepared at EU level, as per the ECB. Certainly we have to do a little investment in this space.” It comes back to the importance of trust, he said. “I think we should be keeping this in mind.”

Is sustainable investing an opportunity for Luxembourg? “Clearly yes”

ESG and its impact on the banking and investment fund world was extensively discussed by the panel. Is sustainable investing an opportunity for Luxembourg? “The answer is clearly yes,” said Alfi’s Lamesch. “It’s a big opportunity for Luxembourg. But there are also risks and threats.”

“The first opportunity is that the financial sector can play a role in the real economy, and also to help companies transition to a sustainable business model,” said Lamesch. “It’s even better for the alternative or the private asset sector where we can also do a real impact if the private assets sector invests into sustainable projects, infrastructure projects, which are green and have to transition. We know that the public sector alone cannot finance the transition.” The threat, however, is that the financial industry get “politicised,” said Lamesch. “We cannot be used as a political instrument. So politicians need to continue to take their responsibility.”

There’s a lot of client demand for ESG products at the moment, among institutional investors and retail clients. But retail investors may not necessarily understand what they’re investing in. “Our prospectuses have tripled in size. No one is reading this,” said Lamesch. So how can retail investors play a part and put their money in sustainable investments? “We have a big, big, big exercise to do with financial education, to educate the retail investor” on sustainable products.

Lamesch’s third point referred to the assets classified as sustainable in Luxembourg. About half of assets in the grand duchy as classified as sustainable and Luxembourg has a big market share in the fund industry. “If we get it wrong, it’s not going to be good for reputation,” she said. “And we can get it wrong in many ways. Because this is such an evolving topic.” The industry lacks data, clear definitions, clear regulation, and the risk of greenwashing is high, she added.

ESG: think outside the box

ESG was discussed extensively by the panel, “and for good reason,” said Marx. “We have an opportunity to be in that space, if we want. We need probably to think a little bit out of the box, because ESG, on the one hand, is an extremely complicated subject.”

“But there are still things to be done in terms of product innovation,” he said. Everybody seems to be talking about topics such as article 8 vs. article 9 (re)classifications, the EU taxonomy or greenwashing. “How will the investor get trust into this space? How will the investor want to invest in that space? Today, people are very cautious.”

What about a product where you can demonstrate that an individual investment in that particular product contributes to keeping global warming below 1.5 degrees, Marx suggested. This could be combined with “a labelisation system that we have in Luxembourg that is underserved--Luxflag--and which has been a proven good system for the past 15 years.” The combination of a product with a meaningful target, plus labelisation or certification, is probably an idea that the decision-makers in head offices would want to promote, he said.

If you had a magic wand, what would you wish for?

To wrap up the panel, each participant was asked for one “wish” to help advance the financial sector in Luxembourg.

For the ABBL’s Grbic, one wish would be that Luxembourg would develop a strategy so that “competent people have a say in all the different European institutions in order to defend Luxembourg on the European level.”

Lamesch managed to mention two wishes. The first was to rethink a tax on funds, so as to remain competitive compared to Ireland. Her second wish--making it easier to open bank accounts in Luxembourg--was met by thunderous applause from the audience, and would be another way to keep clients from taking their business to a competing country.

“People, people, people,” was the wish of Banque de Luxembourg’s Ahlborn. “We need the best people,” he declared. “We must do more to attract talent, but we also must do way more for those who are working here in Luxembourg. Transporting them in way better conditions and giving them the opportunity to live a decent life here in Luxembourg.”

For the CSV’s lead candidate Frieden, who mentioned during the panel that he was “optimistic about the future of the financial centre” but that the sector needed to develop in a “coherent manner,” his wish was to have after October a government that would make Luxembourg the leading financial centre.

Important to “get it right”

At a networking lunch held after the conference, Delano checked in with the two Elvinger Hoss Prussen partners who spoke during the panel--Henri Wagner and Pit Reckinger--to get their thoughts on the discussion.

“My first thought is that exchange and communication are key. I think that was one of the lessons that I took from it,” said Reckinger. “Where do we go? What can and should we do?  Be it in terms of ESG or in respect of technology and digitalisation. You have to get it right and not wrong, and therefore we need to exchange, and I was very happy about the outcome of these exchanges.”

Wagner, who mentioned that he hoped this would become an annual event, said: “I was impressed by the fact that most panelists were aligned in relation to the key topics we identified. There seems to be consensus in the financial sector of the advantages, and about the threats and opportunities. I think that is one of the beauties of Luxembourg: you have this micro-system where people pull on the same string, and where people work together to find solution. I think that is probably a differentiator between Luxembourg and other jurisdictions--in this country, decision makers and key stakeholders are sort of closer and see what is for the benefit of Luxembourg as a whole. I think this was a very nice demonstration of that sort of situation.”