Luxembourg has successfully reoriented its financial sector towards domiciliation and administration of investment funds. Regulation has changed so management companies now have a real responsibility for the funds they host. Financial consultants at Origo Consulting point out how this creates some problems.
Luxembourg has changed in the past decades, and nowhere more so than in the financial sector. in 1994 ago more than 220 banks were offering investment advice to wealthy clients abroad.
Today, the mainstay of the Luxembourg financial sector is the many investment funds domiciled here. With the strong growth in EU and international regulation, the sector now employs many specialists in compliance, risk and anti-money laundering. But most investment professionals have left since year 2000, as numerous foreign investment companies simply relocated their Luxembourg operation, most often back to the headquarter of the company’s home country.
Kim Asger Olsen, who manages Origo Consulting, sees a problem here. “Luxembourg has wanted to make investment funds its main business. But without a healthy base of investment professionals it’s at the risk of distancing from the underlying investment business”, Olsen says.
“Keeping the banking secrecy was not possible. Putting investment funds at centre of the long-term strategy was logical and successfully executed”, adds Frank Dan Jensen, who founded Origo Consulting 10 years ago together with Olsen and a couple of other partners. “But the change away from the social skills required in the heady days of private banking is not without its problems”.
When a fund is domiciled in Luxembourg, it most often becomes a client of a specialised Fund Manager (also known as ManCo’s or AIFM’s), who takes the responsibility that the fund is run according to law and regulations.
For many Fund Managers, simply being able to perform this oversight professionally has meant employing compliance specialists, risk managers and, over the past couple of years, anti-money laundering experts. While technological developments may help a bit, the demands on the Fund Managers will continue to grow in a world increasingly focused on transparency and good governance.
According to the founders of Origo Consulting, the gradual disappearance of investment professionals is a problem. “A couple of years ago, CSSF introduced a new focus area, oversight of the investments in the funds. It is even spelled out how this oversight should be done. We do not see how the Fund Managers will find the right people for the job. Not many are left in Luxembourg” says Jensen.
The people behind Origo Consulting have been active as investment professionals for decades, as portfolio managers, as treasury managers, in management of investment teams and investment firms, as owners of an investment firm and as board members.
“I think that between us, we have spent more than 30 years of investing under the strictly controlled fund regulation in Luxembourg”, Olsen estimates. “Because of our background and experience, we now have Fund Managers asking us to help describing the investment processes in the funds and with creating procedures for the investment oversight”.
“This cannot easily be left to a law firm or one of the big four. It is hard to know the risks and the pitfalls if you have never actually managed an investment portfolio. This is not just a question of complying with a law or a regulation. This is about acting responsibly with other people’s money”.