This week’s adoption of the updated EU regulation for long-term investment funds, known as Eltifs, raises hopes and expectations, both at a European level as well as on the ground in Luxembourg. Now it’s up to the industry to deliver. The fund ecosystem in the grand duchy is keen to embrace this opportunity.
The EU’s single market for goods and services marks its 30th anniversary this year, but when it comes to financial services, fragmentation is still all around. Although a Europe-wide supervisory framework for the hundred or so biggest banks has been created post-Great Financial Crisis, the financial sector still largely operates under national frameworks.
Country codes are part of your bank account number, either as a number or in letters. National supervisors like Luxembourg’s CSSF have a final say. In Europe’s financial markets, the historical bank-sovereign nexus still remains omnipresent. A real single market for financial products simply does not exist.
Debt finance vs market finance
In that context, Europe remains dependent on debt finance for its economy, unlike the United States, where risk-based market finance is a driving factor. Europe nevertheless, led by its banks, remains risk-averse.
In 2015, the EU launched a plan called Capital Markets Union, or CMU, seeking to encourage the uptake of market finance as an additional way to finance startups, SMEs, and listed companies. So far CMU has to live up to its promises. After all these years there is little success to show. A new EU plan to boost securitisation has done nothing to reverse the downtrend in this market in Europe.
With this week’s adoption of new Eltif rules for long term investment funds, the EU took a small step towards encouraging retail investors to take part in CMU. The Eltif reform is a first step in the EU plans to blow new life in this union, said European Commissioner Mairead McGuinness this week at the European Parliament in Strasbourg. Under a single passport - a Luxembourg one for example - these funds can be marketed in 30 countries.
100 billion euro potential
The coordinator of the amendments, Dutch conservative MEP Michiel Hoogeveen, said Eltif funds may add as much as 100 billion euro in additional financing for European companies now that red tape and stringent requirements have been removed. Now it is up to the industry to implement.
Luxembourg, keen to have its share of the Eltif pie, is already discussing a lighter tax regime for these new investment funds. It might help Eltifs become the next new Ucits, the widely popular type of investment fund that helped Luxembourg become a heavyweight in Europe’s fund markets during the last two decades.
In Luxembourg, hopes for Eltifs are high. That’s clear. There is however no guarantee for its success. Retail investors across Europe need to be convinced that Eltifs can be a better choice than a savings account. In a world where interest rates are rising, that will be a particularly tough nut to crack.
In Flux is a regular column on Investment Officer Luxembourg shedding light on the Luxembourg financial ecosystem. Financial journalist Raymond Frenken is Editorial Manager of Investment Officer Luxembourg. For tips, comments or suggestions, email him at raymond.frenken@investmentofficer.lu.
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