How come Luxembourg is such a financial hub

You are an individual willing to increase their wealth? You are a company willing to set up your structure in the best environment possible? You are a management company willing to set up an investment fund? Look no further than in one of the smallest countries in the world, yet one of the greatest places to build wealth and incorporate a legal structure.
Welcome to Luxembourg! A tiny nation squeezed between France, Germany and Belgium. Luxembourg has now been long renowned for being Europe’s first financial center, a place of choice for the incorporation of multinationals European headquarters or financial subsidiaries, and a place of excellence for individuals willing to boost their wealth.
I invite you to bear with me through this short article, in which we will discuss what makes Luxembourg so appealing to thousands of individuals and companies.

One may think that the Covid-19 crisis would have crushed the activity in the small EU member country, but it actually proved very resilient and it is now, in 2021, poised for a recovery, if not already experiencing a growth in its activities : +22% growth in the Luxembourg Stock Exchange Index and +2.5% inflation growth at the time of writing (Aug ’21).

The favorable regulatory environment in Luxembourg is surely one of the many reasons the market trusts the country. The Commission de Surveillance du Secteur Financier (CSSF) is the regulator of financial activities in Luxembourg. It is a pioneer in designing and enforcing regulations that protect investors, all while boosting the economic activity. It is helped in doing so by the second local regulator, the Insurance Commission (CAA). We may add other regulators who contribute in making Luxembourg a top tier financial center, such as the European Banking Authority (EBA) and the European Securities and Market Authority (ESMA) among others.

Standing at the heart of Europe, it is only right Luxembourg is a trendsetter in European regulations, all while benefiting from these. Regulations such as MiFID II/MiFIR or PRIIPs are European efforts put in place by the regulator to provide the best possible protection framework for retail and professional investors.

Another legal framework worth mentioning is the European directive UCITS V, which provide funds with a ‘passport’, which makes them even more attractive for the investor. A UCITS product is an investment product that meets a series of legal criteria, all for the best interest of investors. UCIT labeled funds are now the reference in terms of investment funds all across the globe.

The evidence of the huge success of UCITs funds in investors’ portfolios lies in the numbers.

Not only do UCITs funds find a home in Luxembourg, but so do AIFs (Alternative investment funds) among others. According to EFAMA (European Fund and Asset Management Association), 27% of UCITS and 18% of AIFs in Europe are domiciled in Luxembourg.

According to statista.com, the number (in units) of investment funds in Luxembourg went from 9,473 to 14,808 between 2006 and 2019.

Needless to say, so much investment activity also attracts Banks, Management Companies and other legal financial structures, by the dozen. Indeed, as much as 127 Banks were registered in Luxembourg for the year 2020, most of them being foreign groups (US, China, Australian, etc.).

Such a substantial amount of financial professionals in one place is also a testimony of the know-how that has been developed in Luxembourg during its past decades of exceptional growth.

As seen previously, the Regulatory Environment and the top of the class Asset Management industry in place in Luxembourg all participates to create a comprehensive Wealth Management ecosystem. The AAA rating from the top 3 notation agencies (Fitch, Moody’s, Standard and Poor’s) also provide the security and assurance needed to families and individuals to help fructify their wealth in Luxembourg.

Another concept called “The triangle of security” adds another layer to investors protection. It consists in the following: Insurance companies should have sufficient funds to cover all their contractual liabilities. Secondly, the underlying assets must be deposited with a custodian bank that is approved by the regulator. Lastly, assets deposited should be segregated from other assets and held in separate accounts.

D’un point de vue bancaire, l’impact de ces deux exemptions liées à la gouvernance reste somme toute limité pour les entreprises qui ne sont pas des fabricants de produits en tant que tels. Ces modifications pourraient potentiellement impacter la capacité des établissements financiers à recommander certains produits.

In a world which constantly gets more and more international, complex financial engineering is increasingly sought after by families and individuals having to deal with numerous family members and assets in different jurisdictions, governed by different law regimes (common law vs. civil law).

For example: An individual who is a French citizen (civil law country), but who spent their last years in the United Kingdom (thus has residency in a common law country) may want to know whether they can and should invest in an “Assurance-Vie” (life insurance) or a “Trust” structure. These 2 do not protect the beneficiaries nor involve the same tax implications, so this is where a wise financial strategy and engineering play a key role. This is where Luxembourgish professionals’ know-how comes handy.

The insurance market in the Grand Duchy is also one of the most developed internationally. As seen above, it has a unique and dedicated regulatory branch, the “Commissariat aux Assurances” (CAA) which oversees the continuously flourishing Luxembourgish Insurance Market.

More than 40 life insurance leading firms are present on the territory. These highly versatile and sophisticated products allow for the best cross-border wealth planning. The number of non-life insurers is also one to keep an eye on. It has been growing since Brexit, with an impressive jump of +240% in the amount (more than €11 billion) of direct premiums collected in the international non-life market.

The reinsurance market is quite impressive as well. Being the biggest captive reinsurance market across the EU, it has approximately 200 undertakings in Luxembourg. Again, the ability of Luxembourg to implement regulatory has surely helped as the EU Reinsurance and Solvency II directives were both transposed into Luxembourgish legislation.

I hope this article will have help you realize how Luxembourg has been able to reach the top spot as a main Financial/Investment/Wealth hub. Its pioneering regulatory framework, its international and highly educated work force all make it the perfect cocktail for attracting investors looking for top wealth management companies, insurance providers and banking services.

We may add that Luxembourg is also embracing innovation through digitalization and the numerous FinTech initiatives available in the country, but this would require its own article.

Par Anthony Somian, Senior Consultant chez Square.