Luxembourg financial supervisor CSSF, a long-time ally for Luxembourg’s booming fund industry, is drawing reluctant criticism from some people in the sector over its recently announced initiative to review pricing mechanisms for investment funds. Responding to press questions in this context, the finance ministry signalled that “certain features” of Luxembourg’s fund legislation will be modernised “in the near future”.
The grand duchy’s financial authority on 20 October ordered investment funds to review, and if necessary correct, the way they calculate the fees of their investment funds and report back before April 1 next year. Requests for industry comments on this CSSF’s cost review made clear that the topic of costs of investment funds is a highly contentious one, possibly also touching on Luxembourg’s competitiveness as a financial centre.
None of the three leading bodies representing Luxembourg’s financial sector - ABBL, Alfi and Luxembourg for Finance - was willing to go on record with a reaction. Finance minister Yuriko Backes also declined comment, although her spokesperson, elaborating in this context, drew attention to a coming update of Luxembourg’s legal regime for funds.
‘Modernising certain features’
“In this context, Luxembourg strives to be first-mover in implementing EU legislation and regularly updates its legal framework to strengthen its competitiveness and, where possible, provide new opportunities to the fund industry,” the spokesperson, press attaché Max Dörner, told Investment Officer via email.
“In the near future, for instance, the Ministry plans to submit a draft law to parliament in view of modernising certain features of the Luxembourg fund legislation in a targeted manner,” the finance ministry’s spokesperson said, underlining however that this initiative relates competitiveness of the fund sector in general, and should not be seen as a response to the pricing mechanisms.
Only when speaking without being identified, some industry participants were willing to give their opinion on the CSSF’s cost review, making clear that the industry is highly sceptical of CSSF’s approach, as also is the case when it comes to the supervisor’s enforcement of sustainable finance rules.
‘Excessive’
A private banker familiar with the thinking in Luxembourg’s industry told Investment Officer that CSSF “is getting it wrong” and “does not understand costs.” The banker, who asked not to be named, described the CSSF approach towards the discussion on costs as “excessive”.
Meanwhile, another person with a deeper understanding of fund management said the topic is “sensitive” and “subject to misconceptions” but stopped short of criticising CSSF.
Following a deep compliance check on costs and fees involving all national financial supervisors in the EU concluded in May, CSSF followed up announcing in October that it has started discussions with “certain IFMs”, investment fund managers, asking them to correct shortcomings that have been identified.
The EU review, a common supervisory action coordinated by EU supervisory body ESMA, learned that shortcomings were mostly found at smaller investment fund firms. Issues were found in eight EU member states, Esma said in May. Austria, Belgium, Ireland, Italy and Luxembourg are the most expensive EU countries for investment funds, Esma said, and Denmark, the Netherlands and Sweden as the ones with the lowest costs.
Entire sector ordered to check
Although few cost issues were reported at funds managed by larger fund managers, mostly with more sophisticated IT systems and clear governance in place, CSSF nevertheless asked all investment fund managers to conduct, by the end of the first quarter 2023, a comprehensive assessment “with regard to the compliance of their policy, approach and arrangements related to costs”. It said this applies to Ucits funds, of which Luxembourg hosts about 10.000, as well as alternative investment funds, of which Luxembourg has about 4.000.
In Brussels, Belgium’s national supervisor FSMA said that, following ESMA’s conclusion that Belgium is also among the most expensive countries for funds, it has this year expanded its research to include all domestic Ucits funds. An FSMA spokesman said costs will remain a strategic priority in the years ahead.
In Amsterdam, a spokesman for Dutch supervisor AFM addressing fund costs said that “too high is a relative concept” because a fund’s costs depend on a combination of different factors. “We can’t make generic comments about this,” he said.
‘Conducive environment’
Back in Luxembourg, addressing Luxembourg’s competitiveness in more general terms, the finance ministry said that it “continuously works on ensuring a conducive environment for the global fund industry, fully in line with EU regulations and international standards.”
Finding and retaining qualified staff is another major challenge for the Luxembourg financial sector. The finance ministry spokesman said this is “another top priority”.
“The budget bill for the year 2023 includes in this sense a couple of provisions to bolster Luxembourg’s incentive scheme and impatriate regime, thus giving companies more flexibility in attracting and retaining foreign talents,” he said.