From the beginning, 2013 has been, for the Luxembourg financial centre, a year dominated by sustained activity around the fiscal and regulatory framework (AIFMD, EMIR, FATCA, MiFID I and II).
The peak was reached in the first half of the year, in April, with the Prime Minister’s declaration that from 1 January 2015 Luxembourg will introduce provisions for the automatic exchange of information within the European Union (within the scope of the 2003 EU Savings Directive, limited to interest income). Shortly thereafter, in May, the Ministry of Finance announced the ratification of the Intergovernmental Agreement (IGA) Model I to allow for an automatic exchange of information between the Luxembourg and U.S. fiscal authorities on bank accounts held in Luxembourg by citizens and residents of the U.S.A. As a result, Luxembourg will be among the 50+ countries in the world to comply with the Foreign Account Tax Compliance Act (FATCA).
On the one hand, going on-shore was a historical decision for Luxembourg with direct impacts on the Private banking industry; a real change of its business model which was initially founded on confidentiality imposed by the Banking Law and geographically circumscribed mostly to continental Europe (specifically to neighbouring countries). It also represented a factual opportunity to develop a new and innovative model fostering international diversification of the client base and growth in the product range.
Yet, on the other hand, there is a potential risk weighing on the sector: measures such as the automatic exchange of information, in order to be 100% effective, must be implemented at a global level. If this effort remains limited to the European Union, with no level playing field amongst global financial centres, investors looking for confidentiality will simply delocalize their assets outside the EU.
Globally speaking, the wealth management industry in 2013 showed an increase of complexity in performing banking activities: new variables, both known and unknown, are going to make the task of achieving profitable growth more difficult. Players, at all levels, should be aware of the various trends and use them to their advantage to trace the best strategy for the future.
And this is perfectly applicable to Luxembourg where private banking activities are being reshaped and refocused. Today, Luxembourg is the first private banking centre in the Eurozone and the country wishes to improve its international reputation as a centre of excellence in wealth management.
In order to accompany the on-going private banking restructuring process, a multi-dimensional approach should be useful in better understanding and addressing the local challenges:
Clients: Focus lies on the UHNWI and HNWI segments, which will be the primary sources of new wealth.
Traditional value propositions are decreasing in importance; it is essential to meet the changing needs of this type of sophisticated clientele, which relies on expert advice as well as on cross-border expertise embracing full transparency and integrity.
Wealth managers’ decision to sign the ICMA Wealth Management Charter of Quality represented a significant milestone in this evolution of Luxembourg private banking: a formal commitment to quality of service by adhering to the highest standards of integrity, transparency and professionalism. For clients this provides assurance that financial institutions fully observe the rules of law pertaining to their banking relationship. A complete list of ABBL members and related members that have signed the charter can be found on our website.
Markets: New geographical markets are being explored (Russia, Latin America). Private banks need to think about customers’ demands in these new markets, develop more sophisticated service offerings and take into considerations compliance rules.
Pressure on margins: Under the current macro-economic scenario, we are experiencing a deterioration of profit and revenue margins in an environment of low-rates and increasing regulatory pressure. In addition, competition will increase not only locally but also at international level. This will lead to a reduced number of players with growing polarization between leaders and laggards.
Regulatory Supervisors: In this uncertain and shifting landscape, financial institutions need to closely monitor the activity of their Regulatory Supervisors and reach a shared understanding of what is required to meet the higher standards.
Regulatory changes could have a direct impact on the business model of a bank; it becomes extremely crucial to be up to date on a regular basis.
People: For individual banks, but also for the financial centre as a whole, training competent managers in Front / Middle / Back office is essential. As a result, in 2013, the University of Luxembourg and the Luxembourg School of Finance, in collaboration with the Private Banking Group Luxembourg (PBGL), launched a Master in Wealth Management to provide future wealth managers with the knowledge and skills that the client advisors of tomorrow should have. This comes in addition to the Executive Programme in Wealth Management, offered by the same Institutions, and the Certified Private Banker qualification offered by the IFBL.
New Technology: Clients today expect more interaction and more collaboration than ever before.
Private banking clients are getting wealthier and more globally diversified; they are also constantly on the move.
Banks should take these trends into consideration: without this change of mind-set, they will face some difficulties in wealth management today.
Intangible Assets: Luxembourg, as a financial centre willing to attract new clients, seems to have all the right features in place: comprehensive private-banking capabilities, specialized expertise, high-quality service, discretion, as well as being a domicile with relatively high levels of economic and political stability. But to compete at international level (for instance with London, New York, Switzerland, Singapore) it probably needs more. Improvements could be made in the areas of life style, education and medical care.
In June 2013, a new governance has been set up within the PBGL: Yves Maas, CEO and Managing Director of Credit Suisse (Luxembourg) SA, was elected Chairman of the Executive Board of PBGL and Head of the Private Banking Group, Luxembourg, replacing Luc Rodesch, Banque de Luxembourg, who had filled this position for two consecutive terms of two years.
The main focus of the PBGL is to promote private banking industry’s positions on key banking developments and issues locally and at international scale. To do so, the Cluster has created ad hoc working groups to temporarily focus on some issues, and undertake in-depth analyses and reviews. Current active working groups are: Promotion, Training, Business Intelligence & Statistics and Wealth Planning.
If 2013 laid the foundations, 2014 should be the year for strategy implementation and for seeking new opportunities.
By Fabio Mandorino, Adviser – Economics, Commercial & Private Banking, ABBL
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Doing Private Banking in Luxembourg: Necessary changes to adapt and configure the business to meet future challenges
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