Luxembourg loves the new new thing, especially when it comes to financial legislation. The big question is: what should be next? The Grand Duchy may have found the answer already.
In the late 1980s, the Grand Duchy successfully tapped into global investment fund markets by becoming the first EU member state to offer Ucits-passports to international investment funds. Today, three decades later, more than a quarter of Europe’s fund assets has its home here. The country has even become a leading global funds hub.
More recently, ‘today’ in a historical context, Luxembourg positioned itself to become an international powerhouse in securitised debt products. As Investment Officer’s readers know, the adoption of its new securitisation law in February creates more flexibility for financial services companies and broader choice for investors.
One lawmaker expressed hope that it will give Luxembourg a “first mover advantage, much like with Ucits in the 1980s”. To be considered in the background, there is fierce competition between secondary financial centres in Europe, such as Luxembourg and Ireland, for a piece of the pie. A pie that has grown considerably thanks to Brexit, which forced many financial services firms to shift away from London to the continent.
Solid transposition record for EU finance rules
Luxembourg’s friendly legislative environment underpins its development as a leading European financial centre. Investment professionals much appreciate it as a politically neutral investment centre, with an attractive, central geographical location - landlocked between France, Germany and Belgium in the heart of continental Europe.
What’s more, Luxembourg loves Europe. Not only is it home to EU institutions such as the European Court of Justice, the European Investment Bank, the European Stability Mechanism, and - next to Brussels and Strasbourg - the European Parliament, it also has a solid transposition record for EU legislation in the single market, as a front runner when it comes to EU economic and financial initiatives.
Honesty bids to say though that, especially in recent years, this enthusiasm is not as visible for European initiatives in the fields of the environment, transport and taxation, as the EU’s Single Market Scoreboard demonstrates.
Addressing financial sector representatives at a recent Luxembourg stock exchange event, finance minister Yuriko Backes encouraged the industry to contact her ministry with new ideas. “My ministry is certainly ready to modernise and improve our legislative framework to support capital markets, as we have done it recently with the upgraded securitisation law,” she told Luxembourg’s financial community.
Receptive ears
In some other countries, such a call for ideas would be prepared by dozens of bureaucrats and would need to be approved by committees. Here in Luxembourg, one can just walk up to the finance minister herself and find a receptive ear.
And yes, we really do need fresh ideas. Major challenges are coming from different directions, not only in Luxembourg. Digitalisation, sustainability and climate change, surging inflation, the need for resilience in Europe’s economy due to the pandemic, and now also the need for even more resilience because of Russia’s war in Ukraine, pushing up the cost of living and of raw materials while testing the EU’s coherence.
One particular EU dossier could offer a way to address a number of these challenges all at the same time: Capital Markets Union, known as CMU.
Yuriko Backes turns out to be a big fan of the CMU. The plan was coined in 2014 in Brussels by former British EU Commissioner Jonathan Hill. who was forced to step down after the Brexit vote in 2016. With its lead advocate removed from the scene, his CMU action plan has so far been implemented only half-heartedly.
Resuscitating CMU
Backes is keen to reinvigorate CMU. It can encourage growth in the finance industry, and broaden the range of finance sources for Europe’s SMEs and Europe’s innovators. It can have a positive impact, without building new fences around the EU single market.
“In regulating the financial sector, you need to ensure that it encourages cross-border financial services and products in the internal market while at the same time remaining open to the rest of the world,” Backes said. “Global challenges need joint efforts. We therefore must avoid creating a Fortress Europe.”
Of course CMU is not a completely new new thing. It once was a new new thing, one that - through Brexit and an anti-EU smear campaign - has become an indirect victim of anti-EU sentiment. Backes’ effort to resuscitate the plan certainly deserves support, as an old new thing that can take on new meaning in a different context, in Luxembourg as well as the EU.
The EU’s experience with Banking Union, and its powerful EU-level supervision, has been a positive one. CMU should take inspiration from this. Luxembourg is ready to initiate. An idea for a single supervisor for capital markets - an EU equivalent of the U.S. Securities & Exchange Commission - has already made it into Backes’ ears.
A European SEC. Now that would be a real new new thing.
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 InvestmentOfficer.lu. He has followed financial markets and EU regulation for more than two decades. Earlier in his career he was Amsterdam bureau chief for Bloomberg News, Benelux correspondent for FT/MarketWatch, EU correspondent for CNBC in Brussels, and until 2021 director of communications at the European Banking Federation in Brussels.