While the acute phase of the coronavirus crisis is still playing out, what might we expect long term as new market stresses work their way through the system? Will there be a “weeding out of badly run mutual funds from well-run mutual funds,” as suggested by Tobias Adrian, director of the monetary and capital markets department at the IMF, quoted in a recent edition of the Financial Times?

Threats and opportunities

While it was common for investment managers to stress-test their portfolios against scenarios akin to previous market crashes, few envisioned an economic crisis of this nature. “Some of the risk models may not have been as appropriate as they might have been, particularly when you have such extreme movements in the market,” noted Yannick Arbaut of Allen & Overy, a law firm.

It is possible that some fixed income funds and real estate funds could be particularly exposed. With many business models upended, questions are being asked about the long term sustainability of many firms when state bailouts and central bank activism tails off. From retail, to tourism, to leisure and more, we don’t know how investors and consumers will behave in the coming years. There will be winners too, and private equity funds in particular are seeking opportunities to back fundamentally strong businesses experiencing short term funding problems.

Few doubt that fund industry cost pressures will ramp up to an even greater extent than they were pre-crisis, putting greater onus on Luxembourg’s service providers to provide value for money. There is also the chance that regulators may feel obliged to add more layers of rules as they did after the 2008 debacle.

A fresh perspective?

Fund industry advocates are keen to point out their products once again withstood a financial crisis without the creation of threats to the wider financial system. Previous industry calls to tone down the rate of activism from global and European regulators might have greater weight when rules come up for review.

“The proximity of the [Luxembourg financial regulator] CSSF and the government proved to be a determining factor in deploying much needed planning certainty and relief,” said Gilles Dusemon, partner at the law offices of Arendt & Medernach. “The crisis showed that that there is a national dimension which cannot be addressed from Brussels or Paris.”

The shift to remote working may have broken a range of taboos, from working practices to the way administrative procedures are carried out. Previously when colleagues worked from home this was often mentioned with the use of ironic air quotation marks and a knowing wink. However this crisis has demonstrated how effective this way of working can be, even if it is unlikely to result in radical change.

Yannick Arbaut of Allen & Overy. Picture credit: Allen & Overy

Might this mindset also extend to other areas? “We could move to greater use of electronic signatures,” said Arbaut. This could apply to procedures such as incorporating companies and account opening. The CSSF has been moving towards paperless working for a while, and has just launched its new website that aims to facilitate this trend. The crisis could drive a greater push at the European level to see more cross-border standardisation and remote access to services.

Change in some areas might remain hard to achieve, however. For example, it is difficult to see how, say, fund board meetings could go fully online over the long term. As the world returns to normal, the imperatives of proving substantial activity is taking place in the home jurisdiction are likely to return.