Suchta said Luxembourg banks are increasingly unwilling to provide basic banking services to corporate clients, including foreign companies that want to set up funds in the grand duchy. The main reason is the increasing regulatory burden and high costs associated with anti-money laundering and know-your-customer processes that have made offering banking services financially unviable for many Luxembourg banks.

The situation is further complicated by the Luxembourg legal framework, which requires firms setting up shop in Luxembourg to use a Luxembourg bank account. “In the process of setting up a company in Luxembourg, you need to pay the share capital and then present the blocking certificates to the notary. The notary, in most cases, only accepts a certificate issued by a Luxembourg bank,” Suchta said.

Some companies that were refused a Luxembourg bank account initially turned to online alternatives, including electronic money institutions (EMIs) and payment institutions (PIs). However, Luxembourg’s financial regulator, the Commission de Surveillance du Secteur Financier (CSSF), issued a last October stating that Luxembourg funds cannot use EMIs and PIs to maintain cash accounts for their funds.

Suchta doesn’t expect the regulator to change its position. However, he said the requirement to open a Luxembourg bank account, when so few banks are offering their services, presents a major challenge for smaller players looking to set up a fund here. “It limits the pool of possible service providers further and, given the laws of economics, it means the few entities that offer bank accounts are overcharging for the very simple service of opening and maintaining an account.”

He warned the rising cost of establishing a company in Luxembourg could erode the country’s competitiveness over time and force managers to consider other jurisdictions such as Malta. “Five years ago, it would be reasonable for a €20 to €25m fund to access the Luxembourg market. Now it's no longer the case. Many clients are forced to choose another jurisdiction, even though their first choice is Luxembourg.”

Suchta advised managers that plan to set up a fund in Luxembourg to make opening a back account a top priority. “If you're in the process of setting up a fund, the first thing you should do is make sure that you will be able to find a banking service provider and that you will be able to pay the cost that’s related to it.”

This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .