As European regulators reassess what Ucits funds should be allowed to hold, Luxembourg’s fund industry is drawing a clear red line: do not compromise a global brand that already works. The Association of the Luxembourg Fund Industry (ALFI) cautioned that proposals to tighten eligibility rules could push the framework backwards rather than modernise it.
The European Commission in June 2023 mandated the European Securities and Markets Authority (ESMA) to conduct an assessment of the Ucits Eligible Assets Directive and to provide recommendations on its revision. The EU’s Ucits directive, fully embraced by Luxembourg in 1988, covers the management and marketing of mutual funds to retail investors; the Eligible Assets Directive was published by the Commission 2007. Ucits have been a resounding success story for the grand duchy, which counted 5,140 brillion of Ucits assets under management in October 2025. That’s up from 1,660 billion at the end of 2006.
ESMA last June published its advice to the European Commission on eligible assets for Ucits, advocating for the application of a “look-through approach” to determine eligibility. It wants to introduce a strict look-through approach to ensure that Ucits are not gaining “exposures to ineligible assets wrapped in a securities form.” These ineligible assets could, for instance, include alternative assets like real estate or crypto. In its opinion, ESMA said that this approach would ensure a “high level of investor protection and transparency,” and would be “best placed to protect the reputation and trust in the Ucits brand.”
‘Don’t break what works well’
But Luxembourg’s fund industry is not convinced this is the best way forward. “Ucits are sold around the world,” said Corinne Lamesch, deputy CEO and general counsel at ALFI, speaking at a media briefing last week. “We should not stand to intervene with a product, or fiddle with a product, which is working very well.”
The majority of the respondents in ESMA’s call for evidence also rejected this look-through approach, according to the opinion published by the EU authority. Some respondents supported the look-through approach; others were in favour of a “middle way” that would involve a look-through approach that would “prevent significant indirect Ucits exposures to alternative assets” but left room for limited exposures with the aim of improving risk diversification and fund performance.
“No proposal is on the table yet,” Lamesch said, but there will be a review later this year regarding what assets Ucits can invest in. “We do not want to break something that is working very well,” Lamesch added. The ESMA opinion “puts into question investments which we have been doing for many years, being more conservative than what is currently in place.”
A consultation will be held on the subject later this year. Instead of this step “backwards,” ALFI plans to advocate for the modernization of eligible assets in which Ucits can invest. “We have seen investments in crypto assets being allowed indirectly in Ucits funds by the CSSF,” Lamesch pointed out, noting that the Luxembourg financial regulator published an FAQ document on the topic on 4 February.
No way around crypto
“There’s no way around crypto assets. Let’s be honest,” said ALFI’s deputy CEO. “To open it up a little bit is okay in our view, but the investments can only be indirect, meaning it has to be an instrument which is liquid, transferable, transparent. It has to actually be a transferable security in order to be eligible in a Ucits, like we have for commodities or real estate exposure. Those are not eligible assets in a Ucits fund, but you can get exposure if you invest in it via a transferable security which is liquid and can be transferred at any time.”
Luxembourg is not a “first-mover” in this domain, she added, with countries like Germany having already allowed this. French supervisor Autorité des Marchés Financières in December adjusted its regulations to allow crypto assets to be used as underlying assets for exchange-traded notes without a dissuasive warning for retail investors.