, chairman of the Luxembourg Bankers’ Association (ABBL), who also serves as the CEO of Edmond de Rothschild (Europe), a private bank operational in the grand duchy since 1988, highlighted the vital role private banking plays within Luxembourg’s broader financial ecosystem. In an interview with Paperjam, Stein argued that private banking is a cornerstone of the country’s financial sector, standing alongside retail banking, corporate banking, custodian banking, payment and e-money institutions, investment firms, fintechs, law firms and consultancies.

Sectoral growth

“Over the past decade, Luxembourg’s private banking sector has undergone significant transformation,” emphasised Stein, with many initially predicting a decline in the sector following the introduction of the automatic exchange of financial information. However, according to Stein, the sector has not only withstood these challenges but flourished. “We have evolved from serving a predominantly personal banking clientele to catering almost exclusively to ultra-high-net-worth individuals (UHNWIs).” He added that while the focus used to be on wealth preservation, the bank now advises entire families on a broader range of holdings, including financial capital and real estate. This evolution has led to increasingly complex situations that demand a higher level of expertise.

The growth of Luxembourg’s private banking sector has been impressive, with assets under management rising to €628bn. Stein also noted a geographic diversification in the client base, with 55% of clients now coming from across Europe and beyond. “Luxembourg’s private banks are proving their value to an increasingly global audience,” he said. He pointed to potential growth opportunities in Southern Europe and Latin America, noting that the appeal of Luxembourg’s banking model continues to attract clients from ever more diverse regions.

Regulation

While the sector’s evolution presents exciting prospects, it also comes with its own set of challenges. Stein acknowledged, “Since the 2008-2009 financial crisis, the banking sector has faced an unprecedented wave of regulation in both density and scope. While these measures have undeniably contributed to greater stability, the reality is that banking is now one of the most heavily regulated industries in the world.”

Compliance costs

Stein recalled a study by the European Banking Federation, stating that European banks collectively spend approximately €100bn annually on compliance, with 10% of their workforce dedicated to these tasks. Furthermore, an ABBL study, conducted in collaboration with EY and published in 2021, that Luxembourg banks alone invest an average of €548m per year in compliance. Stein highlighted the financial strain of these requirements, emphasising the impact on agility within the private banking sector.

“The key question, then, is how to remain both competitive and compliant in the long term,” Stein remarked. This challenge is made even more difficult by the rising regulatory demands, spanning areas such as sustainability and cybersecurity, at a time when there is an urgent need to finance both the sustainable and digital transitions, as well as to enhance European economic autonomy.

“If a client expressing interest in an investment must navigate over 300 compliance checkpoints before releasing capital, there is a high risk of losing them along the way--or worse, deterring them entirely,” he added. The ABBL is currently updating this study and expects to release new findings later this year.

Innovation and competitiveness

Stein also discussed how regulatory constraints could be holding back innovation, especially in areas such as sustainability and impact investing. He advocated for easing certain regulatory constraints to support more entrepreneurial business models. “The recently announced European ‘Competitiveness Compass’ highlights the complexity of current regulations and the urgent need for simplification. Now, it is up to policymakers to take responsibility and find solutions to Europe’s financing challenges,” he urged. He further stressed that, for Luxembourg’s private banking sector to remain competitive in the long term, regulators must adopt a more proportional approach to regulation. “And it is also a regulatory framework that better accounts for proportionality that Europe’s private banks will remain competitive in the long run.”

ABBL’s role

The ABBL plays a key role in helping Luxembourg’s private banks navigate the increasingly complex regulatory landscape, noted Stein, stating “A key part of this effort is ensuring that banks have a clear and consistent understanding of both the legislation and the expectations of our regulator.” Stein highlighted the association’s advocacy efforts at both national and European levels “through continuous and constructive dialogue with the ministry of finance and the Financial Sector Supervisory Commission (CSSF).”