Those who see what’s happening in today’s post-Brexit financial world will undoubtedly recognise that Luxembourg is serious about its role as Europe’s back office.
Luxembourg’s fund industry continues to transform and reinvent itself. Wedged in between Germany, France and Belgium, the country has clearly carved out a position in Europe’s financial services market as a platform where the multijurisdictional and multilingual expertise of its businesses, and the thousands of internationals who work here, can flourish.
International distribution is the latest addition to an already comprehensive service offering in the funds market. As Investment Officer’s readers have learned recently, FundRock and M&G are among the Super ManCos further innovating their business approach, expanding their reach beyond Luxembourg’s borders by distributing funds, and trying to be as efficient as possible.
Combining Ucits and AIFM
Technically, a Super ManCo acts both as a management company for Ucits funds, and as a manager of Alternative Investment Funds, as AIFM.
The concept of ‘Super ManCos’, or super management companies, has become popular in Luxembourg in the wake of the 2009 EU Ucits directive, transposed into Luxembourg law in 2010, that allows investment fund managers to operate freely throughout the EU on the basis of a single authorisation in one member state.
Luxembourg today is home to 20 of such Super ManCos. They are a powerful subset of some 300 Ucits companies and AIFMs operating in Luxembourg. Collectively they represent more than half of the national market and employ more than 1300 people.
A Super ManCo takes on all the key tasks for managing funds, except for the actual asset selection and the general decisions on investments. This includes operational oversight, regulatory compliance, risk management, and, increasingly, distribution support. It also takes care of the persons and directors designated to run the fund, all supervised by the national regulator CSSF as a “Chapter 15” fund entity.
Lean operating models needed
Business life as a Super ManCo however, is not always super. Against the background of consolidation in the asset management business, it is all about lean operating models.
More than ever, they need to finetune their operating models in a way that balances regulatory compliance with operational effectiveness, and without over-engineering, says a new survey among 18 of them.
“We’re seeing regulatory scrutiny enforced by the CSSF and the need to preserve competitive advantage to unlock economies of scale both impact ManCo’s governance arrangements, delegation strategies and operations,” said Alan Picone, Asset Management Risk and Regulatory Leader at KPMG Luxembourg, which conducted the survey.
“These challenges are opportunities for the Luxembourgish market to increasingly develop into a center of excellence for risk management, compliance and oversight professionals.”
Staff numbers up 14%
Because of that increased regulatory scrutiny, the 18 surveyed Super ManCos increased their staff numbers in terms of full-time-equivalence by 14 percent last year. The survey made clear there is a particular demand for experienced professionals in core substance functions, such as risk management, anti-money laundering (AML) compliance and delegation oversight.
The EU Securities and Markets Authority, ESMA, in recent years has pressed CSSF to greatly expand its on-site inspections. Three out of four Super ManCos surveyed have had at least one such inspection in the last three years, either as a general one or a thematic one, specifically looking at AML, risk management or IT security.
Only half of the Super ManCos felt they were ready for such a visit. “While regulatory scrutiny is at an all-time high, only every other ManCo feels well prepared for an upcoming regulatory on-site inspection,” the KPMG survey said.
Oversight, still by hand
ESG - environmental and social governance - is seen as another challenging aspect of the Super ManCo’s business strategy. In the survey, some 75 percent said they expect ESG will become an integral part of their business in the coming years. The survey claimed that “almost half of all funds” managed by the surveyed ManCos are “already” classified as an ESG or SRI fund under the EU’s SFDR sustainable finance regulation.
Technology, according to the consultants, is seen as a driver for achieving scalability. The adoption of technology however remains a challenge for Super ManCos. Believe it or not, the oversight of portfolio management and fund administration is still largely managed by hand, said the survey. Less than one third of the companies surveyed use tech tools to oversee delegates.
Only when it comes to distribution oversight, technology is deployed. That is exactly where further growth is being reported, and expected in the coming years.
Never too late to act
Luxembourg can pride itself in having created a solid home for some of Europe’s biggest Super ManCos in the last decade. Yet, with a remote reference to Superman’s mission statement, to achieve the goal of “a Better Tomorrow”, it is clear that the manco business still faces major hurdles. To close on a positive note, surveys such as KPMG’s also demonstrate that the industry is aware of what needs to be done. It’s never too late to act.
‘In flux’ is a regular column on Investment Officer Luxembourg that takes a closer look at specific developments relevant to the fund and asset management business.
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.
Related articles on Investment Officer Luxembourg: