Finance Minister Luc Frieden explained the motivation behind his decision like this: “I am not giving someone the authorisation to speak in my name without knowing what the topic of these discussions will be. It was also said that we need to adapt the European taxation system so that it takes into account the latest trends. The problem is that I did not get an answer from my finance minister colleagues when I asked what these international tendencies would look like".

"Anyway, I don’t agree with the EU-Commission saying that the current trend is towards the automatic exchange of information”. He agreed that this was indeed the position of many countries in 2003, but circumstances and trends have changed since then. According to Minister Frieden, several models coexist today.

“The G-20, for instance, didn’t retain the automatic exchange of information as an international standard. The OECD, for its part, has foreseen the exchange of information on demand. Recently, Germany and the UK have signed agreements with Switzerland which do not foresee the automatic exchange of information, but a withholding tax system. It is interesting to note that in 2003 Germany and the UK were both advocates for the automatic exchange of information and today they are signing something completely different”.

Mr Frieden completes his series of arguments by adding that since 2003, 20 out of 27 member states of the European Union have introduced internal withholding tax systems. He thus demonstrated to the press that there is not one trend, as the Commission affirms, but several ones coexisting simultaneously.

Falling on deaf ears

Luc Frieden deplored that the EU-Commission has stuck to its position, though he did make a compromise proposal. He suggested opening discussions with third countries and to extend the scope of the directive  to other products. His proposal fell on deaf ears. “If all the countries want to introduce the automatic exchange of information, third countries included, we will do the same. It is not that Luxembourg is blocking this dossier".

"Luxembourg does want to open discussions on what is the best system for Europe in order to achieve two goals: to guarantee the free circulation of capital and to achieve the most efficient taxation of savings income.” He made it clear that this discussion had nothing to do with tax evasion or hidden black money and at the same time he deeply regretted that European countries are unable to debate on what is the most efficient system to tax savings income.

Attack on TV

There was another topic touched upon at the press conference. Recently, two reports on French and British television have attacked the Luxembourg financial centre. The one in France was an attack against the structuring of investments, one of the five pillars of the Luxembourg financial centre. The other attack, which aired on the BBC, was against the private banking industry, another one of the five pillars, as Minister Frieden resumed.

“The report on French television was much worse than the one on the BBC. The French program was extremely tendentious, dishonest and full of myths and clichés about Luxembourg. The questions from the journalist were very leading, so the goal of the report was not to inform the audience but to strengthen the clichés that exist in France about Luxembourg”.

The objective of the report was basically to explain how multinational companies are being taxed. Minister Frieden underlined that these companies organise their financial flows in such a way that they are subject to taxation in the country that offers the most favourable environment for taxes and economic development. These firms discuss their situation with the tax administration while respecting the Luxembourg tax laws.

“This practice is of course legal; it conforms to European tax laws and to international agreements between tax administrations. This report shows a lack of knowledge and analysis of our economy and its companies, both of which are global. I would like to point out that there are other European countries that have similar or even more attractive tax regimes than ours. Countries like the Netherlands, Ireland and the UK have very interesting yet legal vehicles to structure international investments".

He expresses that this report is all the more regrettable because Luxembourg not only has very tight relations with the French government, but it has also signed a double-tax treaty with France. He closed by saying that, “Luxembourg does not accept to be treated as a country that is living at the expense of others, and certainly not when it is operating in compliance with European laws and international agreements”. CW

Download Ministry of Finance press release

“This regulation wave is not a tsunami but an avalanche, because you can survive it if you are prepared and if you know what to expect”, Charles Muller, KPMG Partner and European Investment Management Regulation Centre of Excellence, said in his opening remarks. He underlined that since the beginning of the financial crisis in 2007 and 2008, the spirit of the EU-Commission has changed.

“Before the crisis you had an EU-Commission that consulted the industry in order to have efficient laws. You had white papers, green papers and consultancy meetings in order to get the regulation going. With the beginning of the crisis and at the same time the establishment of a new Commission the Alternative Investment Fund Managers Directive (AIFMD) was implemented unilaterally, with no white or green paper or consultancy meetings but just the objective to get the directive out.”

He added that this was the new attitude the finance industry would have to get used to: speedy regulation, more regulation and directives that are effective immediately, without implementation periods. Apart from the wave of new regulation the industry is facing, there is also an element of punishment to the new regulation, as Charles Muller put it.

“There is no difference made between banks and investment funds, because the whole industry is considered as being responsible for the financial crisis. That is why the Commission wants to talk about sanctions. All the texts I have seen will include sanctions. These go up to 10% of the turnover of a company. The financial transaction tax is the ultimate sanction for the bad guys out there. We shouldn’t forget that this tax is not only paid by the bad guys but also by the pensioner who holds money in his pension fund.”

Too complex and risky?

Another trend highlighted by Charles Muller is the fact that more and more decisions are not being taken in Brussels, but at a global level. “At several meetings EU-Commissioner Michel Barnier made it clear that his main objective is to implement the G-20 decision agenda. Up to now, every country praised itself for the excellent laws adopted on local level and the “bad” decisions coming from Brussels. Now Brussels applauds its own good decisions and blames the G-20 and other international bodies for the “bad” law texts.”

Charles Muller warns that the European finance industry shouldn’t be naïve and monitor what is going on at the Financial Stability Board, which makes recommendations about the global financial system or at IOSCO, the International Body of Regulators, because once decisions are taken at an international level, it is impossible for Europe to adopt laws contradicting them.

As a fund industry, Luxembourg will face the UCITS 5 Directive with three topics on the agenda: depositaries, remuneration and sanctions. He talked about the lessons learned from the Madoff crisis. “One of the questions to be raised is: what is a retail product? Have we gone too far in Europe with our UCITS regulation? We have to ask ourselves if there are products that are too complex or too risky for retail investors”.

Talking about investor protection, Charles Muller wouldn’t be surprised to see the EU-Commission coming out with its own version of the Volcker Rule. The Volcker Rule consists of the idea that a bank that has clients’ deposits should not invest in an exceedingly risky manner. This rule is part of the Dodd–Frank Wall Street Reform and Consumer Protection Act originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker. CW

About 2,000 employees so far are working in the Luxembourg Private Equity industry. This number will increase by 20% in the next three years. Together, these experts manage 100 billion euros in assets under management (AuM) –in structuring vehicles. Hans-Jürgen Schmitz, President of the LPEA, estimates an increase in AuM by 30%, also in the next three years. These were the main figures announced at the press conference on the occasion of the LPEA’s general assembly.

However, the sector faces some challenges. Although Luxembourg has a long tradition in private equity (PE), its main role consists of structuring PE investment funds. Above all, the LPEA wants to attract the PE investment funds to the Grand Duchy. Though all ten major PE houses do have a local presence in Luxembourg, very few investment funds are set up here. It is hard to break this cycle, because “such funds are only set up every three or four years”, Schmitz says. Furthermore, PE houses prefer to stay in their domicile once they are used to its legislation and once they can sell themselves to their clients in an advantageous way. The music is playing elsewhere, in London or Ireland.

An initial step in the right direction has been the implementation of the Alternative Investment Fund Managers Directive (AIFMD) into national law. Furthermore, measures must be taken to end the reform of the “Limited Partnership regime”, as well as to push the creation of fiscal incentives for PE investment fund managers. The latter would attract PE managers too, and thus be the ideal case, because Luxembourg could promote itself as the centre of choice for the whole value chain, namely PE managers, funds and structuring.

All in all, Alain Kinsch, vice-president of the LPEA, remains positive: “Private equity is an industry that will probably never disappear”. Although the industry has been having a difficult time because of the crisis, its level of activity and performance have remained stable. He is confident that the main problem of PE houses, raising money from banks, will soon change for the better.

According to Kinsch, the green sector, where the Luxembourg PE industry is already very active, is one of the most promising sectors of the future. “Private equity is a robust model”, Kinsch says, because it is very close to the customer. Specialists work hand in hand with companies on the spot in order to develop the best solution.

Both Schmitz and Kinsch agree that behind juridical or tax efforts, the industry has to create an overall image of Luxembourg as the place to be for private equity business. In this context, the LPEA also wants to sharpen the senses of the PE houses in Luxembourg and teach them how to effectively promote their business, as well as offer training. EK

LPEA press release (in French)

During the press conference of IMF experts in Luxembourg, Alex Hoffmaister addressed another topic linked to fiscal sustainability, specifically, the widening fiscal deficit. “The worrying part of this trend is the increase in current spending, the wage bill and social benefits. And this is coming at the expense of public investment.” The IMF recommends that Luxembourg rationalise current expenditure, including binding expenditure ceilings for all levels of government.

Another area with room for improvement is the pension system. Alex Hoffmaister applauds the efforts undertaken with the so-called “pension à la carte” that seeks to increase the effective retirement age by three years. “A step in the right direction, but a very small one,” the IMF expert said.

Much more needs to be done in order to place the old-age pension system on a sustainable footing. Eliminating complementary periods and limiting benefit indexation to cost-of-living adjustments are two of the measures recommended by the international body.

Fit for the job

Another topic raised in the IMF’s preliminary conclusion is the promotion of growth and employment. The experts of the International Monetary Fund strongly recommend that the Grand Duchy find countermeasures to stop the worrying trend of long-term unemployment that accounts for about 40% of overall joblessness.

One thing is for sure: the measures so far have not been efficient enough “Often, people have been trapped in inactivity and that has made them unable to return to the labour market. In order to guarantee long-term growth, Luxembourg needs to use all of its resources in the best possible manner”. Alex Hoffmaister adds that it is better to put people in training rather than keeping them inactive.

The expert from the IMF said that the financial sector has endured the crisis and that measures have been taken to strengthen its stability. Market conditions have hurt securities portfolios but banks have remained profitable. Furthermore, the volume of assets under management in Luxembourg’s investment industry has recovered following the financial crisis.

While the IMF applauds Luxembourg for its progress in improving its regulatory framework, it urges the country to boost cross-border supervisory coordination. This certainly makes sense for a financial centre that is outward oriented due to its small domestic market. CW

IMF preliminary conclusions

The ASEAN member countries are planning the creation of an ASEAN Economic Community (AEC) by 2015. The AEC will transform ASEAN into a single market with 5 core elements:

• Free flow of goods
• Free flow of services
• Free flow of investment
• Free flow of capital
• Free flow of skilled labour.

As a single economic entity in 2015, it can be estimated that ASEAN would rank as the world’s 10^th largest economy, the 3^rd largest market in the world in terms of population, the 5^th largest trading bloc and the 10^th largest in terms of FDI inflows.

ASEAN also supports the creation of a regional ASEAN-EU free trade agreement. The presentation ended with an interesting slide comparing ASEAN and the EU. ES

The success of microfinance as a socially responsible investment option led to a dramatic increase in the number of funds that invest globally in microfinance institutions. Luminis is the single resource that provides investors with objective data and analysis, enabling them to identify, compare, evaluate, and monitor microfinance funds.

The Luminis platform contains fund profiles and reports along with fund search tools and industry research to help investors understand microfinance investment. To evaluate these impact investments, the Luminis team analyses performance, risk, social, and management (PRSM™) dimensions of each fund. This data is presented in detailed fund profiles and the analysis through in-depth fund reports.

Luminis provides information on 80 microfinance funds with detailed PRSM data on 23 of those funds.

The Luminis List

 1. Alterfin

2. ASN-Novib Fund (Triple Jump)

3. Dexia Micro-Credit Fund - BlueOrchard Debt Sub-Fund

4. Dual Return Fund - Vision Microfinance Local Currency Sub Fund

5. Dual Return Fund - Vision Microfinance Sub Fund

6. Dutch Microfinance Fund (Annexum)

7. Etimos Fund Global Microfinance Debt

8. Gawa Microfinance Fund I (Treetops Capital)

9. Impulse Microfinance Investment Fund (Incofin)

10. Incofin cvso (Incofin)

11. Locfund L.P. (Bolivian Investment Management)

12. Luxembourg Microfinance and Development Fund – Social Venture Capital Sub-Fund (ADA)

13. MicroVest I, LP

14. MicroVest Short Duration Fund, LP

15. MicroVest+ Plus, LP

16. responsAbility Global Microfinance Fund FCP

17. responsAbility SICAV (Lux) Microfinance Leaders Fund Sub-Fund

18. responsAbility SICAV (Lux) Mikrofinanz-Fonds Sub-Fund

19. Rural Impulse Fund (Incofin)

20. Rural Impulse Fund II (Incofin)

21. SNS Institutional Microfinance Fund

22. SNS Institutional Microfinance Fund II

23. Triodos SICAV II-Triodos Microfinance Fund

“Investors will now be able to evaluate microfinance funds as a part of their larger impact investing strategy,” stated Sebastian von Stauffenberg, CEO of MicroRate. “We are excited to see how Luminis will facilitate investment into microfinance, ultimately improving financial access for billions of micro-entrepreneurs around the world.” ER

More information about the partner organisatons.

About Luminis

Luminis answers investors’ demand for greater transparency and objective analysis of microfinance investment vehicles (MIVs). Luminis is a web-based analytical service of MicroRate that provides professional investors and researchers with the necessary tools to identify, assess, and monitor MIVs that meet their individual requirements.

About MicroRate

MicroRate is the first microfinance rating agency dedicated to evaluating performance and risk in microfinance institutions (MFIs) and microfinance funds, also known as microfinance investment vehicles (MIVs). As the oldest and most well-respected organization of its kind, MicroRate has conducted over 600 ratings of 200+ MFIs throughout Latin America, Africa, Europe, and Central Asia. MicroRate is a leading social rater and has also become the largest MIV evaluator in the industry.

About LuxFLAG

 The Luxembourg Fund Labelling Agency (LuxFLAG) is an independent, non-profit-making association created in Luxembourg in July 2006. LuxFLAG supports the financing of sustainable development by providing clarity for investors through awarding its Labels to eligible Microfinance Investment Vehicles (MIVs) and Environment-related Investment Vehicles (EIVs). Its objective is to reassure investors that the labelled investment fund invests most of its assets, directly or indirectly, in the microfinance or environment sectors. The MIV/EIV may be domiciled in any jurisdiction that is subject to a level of national supervision equivalent to that available in European Union countries.

Definitions are also a preoccupation in the wider field of sustainable and socially responsible investing. “The European Responsible Investing Fund Survey” commissioned by ALFI and carried out by KPMG identified no less than 1,236 investment funds marketing themselves as socially responsible, with assets under management totalling EUR 129.49 billion.

More than half of the total number of funds identified – 704 – are cross-sector “ESG” (Environment, Social and Governance) funds that invest in multiple sectors. Most of these funds use either negative screening (simple exclusion strategies, such as tobacco or arms) or positive screening (e.g. “best in class” strategies and cross-sector funds with an engagement policy) to select their investments.

When it comes to particular investment sectors, asset managers tend to favour environmental themes. Climate change/renewable energies, environmental/ecological, carbon and water are the four largest thematic sub-categories in terms of assets under management, totalling EUR 30.49 billion. The 42 funds identified as Sharia-compliant funds, account for EUR 0.94 billion.

Social Impact funds, which deliver a direct, measurable impact on one or more projects, are emerging from the bottom of the list. However, the concept of social impact is still blurred and overlaps with other themes.

The boundary between microfinance funds and social impact funds is grey and open to debate. Lack of reliable and accurate data still constitutes a barrier to evaluate the real size and potential of this new market, the report says.

France and Luxembourg are the most important domiciles for European SRI funds. Together, these countries occupy a 45% market share.

The conference brought together 220 professionals from 14 countries to discuss themes all the way across the responsible investment spectrum, ending with a presentation of the draft European Social Entrepreneurship fund delivered by Sophie Auconie, a member of the European Parliament.

“It is the finance industry with its lack of judgement and its unrestrained greed have plunged us into this crisis. That’s why we need to find other ways of holding the financial sector, which is responsible for this crisis, accountable.“ At the same time, he underlined that the regulation of financial markets has to continue without strangling financial activities. Mr Juncker also said that Luxembourg aims to rely less on the financial centre in the future: diversification of the economy is key. Activities in the logistics, IT and biotech sectors will be boosted.

A large part of his speech was dedicated to the future of the European Union and its shrinking influence in the world. He reminded the audience of the fact that at the beginning of the 20th century, 20% of the world population was European. In the year 2050, they will only represent 7% of the world population. This figure will fall further with a projected 4% Europeans accounting of the total world population by the end of the 21st century.

This trend has, of course, to be put into  the context of economic power. Jean-Claude Juncker remarked that while in 2010 Europe and the USA  accounted for 41 % of global GDP, in 2050 both continents will only represent 18%. The Asian continent will at the same time have doubled its economic strength. That is why he made an appeal that the European Union has to be strengthened and that Luxembourg has to be a leader in this integration movement.

Mister Euro and his Eurobonds

Mr Juncker broke a lance for a Europe that needs to consolidate its national budgets but also needs consistent economic growth. “You must be blind not to see that saving money without improving the living conditions of the population is tiring and doesn’t help the economy to pick up”. To boost investments in Europe, he pleaded for a capital increase of the European Investment Bank and the launch of Eurobonds.

Mr Juncker also addressed Luxembourg residents. He asked them to get rid of their provincial way of thinking. “Luxembourg has always relied on foreign capital to get its economy going. For a long time, that capital has been German, French or Belgian and later, American. Now this money is Asian, Russian or from the Gulf States. We don’t mind doing trade with these new players and we don’t mind earning a lot of money with exports. But it seems as if we often have doubts when companies and capital from these regions come to us”.

In his conclusion, he said that we want a country that is pro-European, diversifies its economy, sees budget consolidation as a necessity but not as a State objective and is not afraid of reforms. The Luxembourg Prime Minister in the end hopes that his country will remain the country where a great deal of emphasis is placed on solidarity and social dialogue. CW

So far, there are only two jurisdictions in the world where family offices services are regulated: the USA and Dubai. Luxembourg could be the third country on this exclusive list. Serge Krancenblum is vice chairman of L.A.F.O., the Luxembourg Association for Family Offices. He said at the Deloitte conference that if the bill on family offices is adopted by Parliament, the country could uphold its reputation as a sound financial centre and put itself on the map for family office activities. There is another important argument to be considered, “At the same time, once the law is passed, clients would be protected because professional secrecy would be imposed”. The bill is likely to be adopted in 2012.

In order to render Luxembourg more competitive in this area, you have to know what the local market looks like. That is why Deloitte Luxembourg has conducted a survey, where 35 players have been interviewed. There are 4 different types of players: single-family offices, multifamily offices, banks and other service providers like lawyers and notaries. Interviewees most often defined a family office as a coordinator and supervisor with the ability to deliver a global view of the family’s matters. Stéphane Césari is Partner, Audit, and PSF Industry Leader. He underlined than more than 75% of interviewees said they only speak about financial wealth and he named three existing categories of clients: wealthy entrepreneurs, wealthy families and medium wealth individuals with less than 2 million euros at their disposal. He stressed that for clients, qualitative factors are more essential than quantitative ones. “There is a simple reason to this. You find yourselves in a situation of trust and confidence, at the end of the day you are dealing with people. Because wealthy clients are strongly educated and well-informed, tailor-made solutions are preferred rather than prêt-à-porter ones”. He added that cost transparency is the most important factor for the client, more than the independence of the family offices. “In order to remain competitive, family officers should not forget what their mission is: to advise, not to sell”, he remarks. Frédéric Ribler is Senior Manager, Audit at Deloitte. He confirmed that the notion of a coordinator is a recurring concept throughout the survey, as well as that of a director, leading the office like a conductor leads an orchestra. He said that the main countries of origin for clients are Benelux, Switzerland and France. But there are two other trends not to be neglected: “Eastern Europe is coming on strong, with countries like Russia; beyond that China and Monaco are also becoming more relevant. In addition, we see new target markets like Germany, Singapore, Hong-Kong and Latin America, especially Brazil”.

Separate yourself from the crowd

Stéphane Césari underlined the importance of  long-lasting relationships between family offices and their clients. Some have lasted more than 20 years. The measurement of satisfaction was one of the key factors in the Deloitte study. Stéphane Césari revealed the most important ones to the audience. “A long-term relationship is the most important satisfaction indicator. If a family office manages the transfer of wealth from one generation to another, it has succeeded in its mission. The second factor is network efficiency. Word of mouth marketing is undoubtedly the most powerful tool. So it is crucial for family offices to be recommended to other potential clientele by its current clients”.

Ruth Bültmann is Partner, Strategy & Corporate Finance and Family Office Co-Leader at Deloitte. She spoke about competition between different financial centres, likely to play an important role in family office activities. “There is a competition between Switzerland, the UK, Luxembourg and Singapore. Every centre profits from location-specific advantages. Switzerland is perceived as a private banking centre, the UK and Channel Islands for asset management activities, Luxembourg is a hub for private banking and investment funds and Singapore and Hong Kong are hubs for South East Asia”. A wealthy family’s country of residence is one of the factors driving competition between different financial centres, a – by the majority- very subjective and individual one. The choice of location of the family office is, on the other hand, a very rational one.

One-stop-shop

According to the 2012 Wealth Report by Citibank and Knight Franck, the most important criteria for wealthy families are personnel safety and security, openness, social stability, housing availability, presence of other wealthy families, an excellent educational system and access to other cities.

Ruth Bültman sums up Luxembourg’s strengths and weaknesses: “Luxembourg has a competitive advantage in its business and regulatory environment as well as a pragmatic and a solution-driven framework. Its other assets are its legal certainty and well-established service providers. Areas of improvement include limits in transportation infrastructure, access to customers and labour costs. The differentiation factors are the vehicles and structuring, but also the tax-related aspects”.

The Deloitte experts suggest that the country’s strategy to excel in the family office business has to include taking advantage of its wide range of investment vehicles and its favourable tax treatment. Regarding soft factors, it would be helpful to offer luxury housing facilities, improve transportation services and provide upper-class education. All in all, the conclusion is that Luxembourg has all the assets necessary to become a premium wealth management centre, but it needs to change its model for wealthy families from a purely analytical and passive model to a one-stop-shop solution that can address all of its clients’ needs. CW

Deloitte brochure on Family office services

At the same date, LuxFLAG awarded the Microfinance Label to FEFISOL, a Luxembourg company managed by Solidarité Internationale pour le Développement et l’Investissement (SIDI), a French NGO. FEFISOL focuses on providing local currency funding to microfinance organisations in rural areas, mainly in Sub-Saharan Africa.

So far 24 MIVs have been granted the LuxFLAG Microfinance Label, representing some USD 3.5 billion in assets under management as at April 2012.

The Label has always been available to funds of international origin, but with most of the widely distributed MIVs being domiciled in Luxembourg, demand has come from the promoters of these funds – be they from Switzerland, France, Germany or elsewhere. The choice of Luxembourg as a domicile has been driven by the existence of regulated structures that permit the investment activities specific to an MIV.

LuxFLAG is a Luxembourg based agency that supports sustainable finance by granting a recognisable label to investment funds. Two such labels are currently available from the agency: Microfinance Fund and Environment Fund. The Label assists capital raising by reassuring investors that the fund really invests the majority of its assets in the sector identified and in a responsible manner.

Details of the labelled funds are available on the LuxFLAG website. The website also contains details of the eligibility criteria and an application form that can be downloaded by entities wishing to apply for either of the two LuxFLAG Labels.

Alternatively, you can contact:
Daniel Dax, daniel.dax@luxflag.org
Sachin Vankalas, sachin.vankalas@luxflag.org
Tel: +352 22 30 26 - 1.

ER