At the beginning of the 1980s, the European financial centre was facing headwinds on its main pillars, the petrodollar and Eurocredit markets. It was time to diversify its activities. Two paths were chosen: private banking and the investment fund industry.
The two avenues would benefit from a boost from legislators, who offered an attractive framework. The growth of private banking was linked to the adoption of and the non-taxation of non-residents’ savings--two regulations that play on offshoring, a principle that had guided Luxembourg’s financial legislation since 1929. On the other hand, the growth of the investment fund sector would not make use of niches of sovereignty, but will take full advantage of the benefits of European integration.
And Luxembourg authorities would make up for the painful scandal, a ‘shameful’ preamble to the glorious start of the fund industry.
In contrast to the private banking industry, which did not start from scratch, the Luxembourg fund industry appeared to be marginal in terms of volume. In 1983, the net assets managed by Luxembourg collective investment funds amounted to 300 billion Luxembourg francs. For the record, one euro was worth 40.3399 Luxembourg francs. That is €7.43bn. This figure is indicative and does not take inflation into account. Today, according to figures from the Luxembourg financial regulator CSSF, as at 31 May 2022, the fund industry had nearly €5.4trn in assets under management and is the world’s second largest centre for investment funds, after the US. And even number 1 if you consider that in the United States there are several financial hubs active in funds, the main one being Boston.
How did we get here?
On 20 December 1985, the EU’s Ucits directive was adopted. Ucits stands for Undertakings for Collective Investments in Transferable Securities. For the European Commission, as part of a single financial market strategy, the aim was to create a ‘European passport’ for investment funds to facilitate a cross-border market. A fund that obtained home country approvals on Ucits standards could be marketed in all EU countries. And to encourage the growth of this type of financial product, the Ucits directive set strict rules to protect retail investors, the natural target of this investment vehicle. Asset diversification to limit risk, monitoring measures, valuation rules and fund liquidity originated or were enshrined in the Ucits directive.
The first mover strategy
Luxembourg was the first EU country to transpose this directive, on 30 March 1988. This was a key date in the development of the Luxembourg financial centre. The triumph of the strategy of rapid transposition of European directives in order to gain a competitive advantage as a ‘first mover’. The same strategy that would be duplicated many times over. “By being the first country to transpose the Ucits I Directive into its law, Luxembourg was the only country at the time to offer the ‘European passport’. Many investment fund promoters come to domicile their funds in Luxembourg and use the country as a distribution platform”, the CSSF its website.
In December 2010, Lucien Thiel--president of the Luxembourg Bankers’ Association (ABBL) and then the CSV MP who was rapporteur of the Ucits IV transposition bill--recalled how being the first to have transposed the Ucits I directive had allowed Luxembourg to lay the foundations for the pre-eminent position it occupies today in the fund industry at European level. Luxembourg would later be the first country to transpose Ucits IV. “Being able to offer access to the European market to operators before all others had triggered the meteoric rise of Luxembourg as a centre for fund administration, distribution and management,” he explained in the Wort.
Waiting for Ucits VI
The directive was amended three times. In 2002, directives 2001/107/EC and 2001/108/EC, known as Ucits III, were adopted. III and not II. The various proposals for amendments made in the early 1990s were never adopted. Ucits III widened the spectrum of investments and eased some restrictions for index funds. Directive 2009/65/EC--Ucits IV--was transposed in December 2010 and focuses on investor protection and balancing competitiveness with regulatory cost containment. Finally, Directive 2014/91/EU--Ucits V--which entered into force in March 2016, aligns the obligations and responsibilities of fund depositaries and the remuneration requirements for fund managers with those of the Alternative Investment Fund Managers Directive.
A Ucits VI Directive is currently being developed. This proposal focuses on the issues of , liquidity risk management, regulatory reporting and depositaries. The aim is to align the current regime more closely with that of the AIFMD.
Let’s hope that Luxembourg will transpose it quickly.
Read the original French version of this article on the site