ALFI Spring Mag 2016 by Maison Moderne

ALFI SPRING MAG 2016

"The best way to predict the future is to create it" PETER F. DRUCKER

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Current Trends in FinTech in the world of banking and finance

10 The Big Data Boost 11 Blockchain technology 13 Multi-manager platforms 15 Robo-advisors 17 Distributed ledger technology (DLT)

23 25 27

Meet the Millennials Diversity for growth and innovation Responsible Investing sending Traditional Investment into niche? Female Board Pool Luxembourg

Reserved alternative investment funds (RAIF)

ELTIFs offer Luxembourg the opportunity 37 to help drive European growth 38 BEPS 41 MiFID II costs and charges

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Editorial

The wave of regulation that has occupied the asset management industry over the last years has barely started to abate, and yet, new hot topics continue to emerge that have the potential to fundamentally impact the investment funds business for years to come. The tremendous progress that is currently being made in the area of technology, including data collection, transfer, storage, analysis and dissemination, the opportunities arising with the efficient exploitation of “big data” and the rapidly growing use of mobile communication devices driven by tech-savvy Millennials will challenge the way asset management and corresponding advisory and financial services are delivered. These developments will put even more pressure on fees and pricing structures. The topics addressed at ALFI’s 2016 Spring Conference reflect this shift of emphasis towards technology and its potential impact on the investment fund value chain. The message is clear: the asset management industry must question its traditional business models and innovate to adequately meet the rapidly evolving needs of both today’s and tomorrow’s investors. As a modest contribution to this need to innovate, ALFI has issued the ALFI Spring Mag 2016, which brings forward and deepens key topics addressed at this year’s Spring Conference, looks into factors that drive market trends and how those dynamics ultimately affect the investment fund business. In compiling this magazine, ALFI has leveraged the wealth of diversity of thought engendered by the broad range of professional backgrounds and experience of its members, who represent the entire value chain of the investment fund business. I hope that you will find our magazine both instructive and enjoyable to read. I look forward to hearing your feedback. DENISE VOSS ALFI chairman

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Innovation for efficiency & ease of doing business

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Some call them optimists. The founders. The builders. The producers. The doers. Making good the many challenges of our times. We call them progress makers. And we’ve made it our job to believe in their ideas. Be they multinationals wanting to invest in Luxembourg or Luxembourg companies looking to expand into markets around the world. Wherever they come together to create or to build something, we’re there to help make it real.

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Current Trends in FinTech in the world of banking and finance FinTech â&#x20AC;&#x201C; a buzz word in the world of banking and finance

< LYRON WAHRMANN Head of Innovation Center Citigroup, Tel Aviv

More and more entrepreneurs are looking for the industryâ&#x20AC;&#x2122;s pain points to come up with new and innovative solutions that will help consumers and businesses get financial services in a simpler and immediate way. Today, it is integral part of all of our lives. The digital wallet, purchasing via the Internet, virtual credit clearing, will change the way we use money in the coming years, as we conduct most of our financial activity by pressing a button. >

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SO, WHAT CHALLENGES DO FINANCIAL INSTITUTIONS FACE? AND WHERE SHOULD ENTREPRENEURS LOOK FOR OPPORTUNITIES? LEGACY SYSTEMS – Some of the technological infrastructure of financial institutions in the world was developed in the 1960s and 1970s. The process of upgrading this infrastructure is complex, expensive and lengthy. The customers, on the other hand, are accustomed to receiving everything, here and now. This is also true when it comes to finances. Customers want to conduct transactions in “real time” and immediate see them executed, and sometimes the banking systems are not built technologically and with the timing to meet these demands. The changing needs of banks and customers present opportunities for entrepreneurs. Those who wish to take advantage of these opportunities for advanced digital services must contend with a complex development environment that requires patience and, most importantly, demands an in-depth knowledge of the needs of customers and financial institutions. Entrepreneurs who aspire to succeed usually need to work in collaboration with large organizations. Technology, as good as it might be, will not break through if it fails to adapt to the bank’s existing systems. The financial

entities that are aware of the new needs and wishes of customers are leading collaborative efforts in the Open Innovation framework. The banks are adopting innovation by opening interfaces to entrepreneurs, enabling them to develop on the banks’ existing infrastructure. USER INTERFACE – In recent years, there is growing awareness of the importance of the user interface in technological systems in general and in financial systems in particular. A system may be sophisticated and loaded with functionality, but if it is not easy, accessible and ready for immediate use, it will not be embraced by the users. Technology today makes it possible to greatly simplify existing interfaces, and to make it easier and faster for users to conduct transactions. More and more transactions – such as opening an account, transferring money, and depositing a check – do not require visiting a bank branch. The real challenge of entrepreneurs is not only to create an easy and accessible user interface, but also to make sure that it meets all of the regulatory demands of the authorities in regard to financial activity. DATA PRIVACY – The world’s largest companies today are wrestling with questions concerning the use of private information. On the one hand, the loss of pri-

vacy enables the provision of services that are more focused. On the other hand, there is growing criticism about the use of private information for other purposes. The financial giants, and the banks in particular, also have to contend with this issue. Banks have tended to use limited information to manage risks and make business decisions. Today, banks are considering a wider use of information in order to improve the customer experience. As a customer, would you want the bank to offer you a specific loan when your child enrols in university? APPROACH TOWARDS BLOCKCHAIN – Despite the enormous public relations invested in virtual currencies, primarily Bitcoin, most of us do not use this option to make payments or transfer money from one place to another. The start-up industry understands that there is huge market potential here, but fulfilment of this potential is still far off. Today, most of us are already making purchases via the Internet. What guarantees us that the product will arrive after we enter our credit card information or use our PayPal account? If it were possible, for example, to deposit the money in an account and only execute the transfer of funds when the product arrives, I assume most of us would use this option.

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A blockchain is what makes this process possible – accessibility of the money, secure transfer from one place to another, without intermediaries. The entrepreneurs’ real challenge is to simplify the process for users who view virtual currencies as something exotic and impractical. The solution must become simpler, more accessible and more secure for the customers. REGULATION – As we know, there is inherent tension between regulating financial systems and developing technological systems designed to make life easier for the users. Regulation does not always manage to keep up with the rapid pace of technology, which changes and develops from day to day. The regulatory authorities are even more fearful after the crisis of 2008. Legislation is stricter and there is tension between the desire to protect the stability of the system and the desire to develop solutions to meet customer needs. Technology races forward, and there is good reason for the flourishing of technological start-ups in the fields of P2P loans and mortgages, payments, capital market, and more. My recommendation to entrepreneurs is to work in collaboration with financial institutions and use their help in contending with regulatory impediments.

INNOVATION LAB The Innovation Lab was established after identifying the potential of merging Citi’s well established position in the global financial markets with Israel’s innovative, entrepreneurial and fast paced culture. The Lab is supported by the Israeli Ministry of Finance. The main objective of this newly founded unit is to understand and define new needs and opportunities in the financial arena and provide a cutting edge tools for the financial markets. Currently, the lab focuses on Mobile, Security, Risk Engines, Data Intelligence (DI) and Automatic Trading. Those disruptive innovations are essential in maintaining Citi’s dominant position as a global leader in the ever evolving and changing financial markets and provide Citi’s solid and traditional organization leverage in a modern and technology oriented environment. In 2013, Citi expanded its activities within the local community to include an Accelerator program for Israeli start-ups specializing in Financial Technologies (FinTech). The program is geared towards understanding the needs of global financial institutions and the financial industries market. The program is open to companies at any stage and in all fields of FinTech. The Accelerator further holds regular Meetups hosting Financial and Business Leaders that are open to all.

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The Big Data Boost FinTech is shaking up the AM industry with sophisticated data analytics

GRĂ&#x2030;GORY WEBER > Director, FinTech Leader PwC Luxembourg

Every day, we generate 2.5 quintillion bytes of data-so much that 90% of the data in the world today has been created 1 in the last two years alone . The proliferation of data, along with new methods for capturing it and the declining cost of doing so are having a profound impact on the investment world. PwCâ&#x20AC;&#x2122;s global FinTech survey, titled Blurred Lines, polled more than 500 top-level players in the Financial Service (FS) sector to understand how new technologies, including big data, are reshaping the industry. Respondents in asset and wealth management identified the increased sophistication of data analytics used to quantify risk as the most prominent trend, followed by the automation of wealth management and client interaction via platforms like robo-advisors and online interfaces. New uses of data analytics span the spectrum from institutional trading and risk management to small notional retail wealth management. These technologies are reducing the asymmetry of information between small and large-scale financial institutions and investors, with the latter

taking advantage of automated financial services solutions. Sophisticated analytics also uses advanced trading and risk management approaches, such as behavioural and predictive algorithms, to enable the analysis of all transactions in real time. Asset and wealth managers have a particular interest in adapting to these new technology-led approaches not only to better serve their customers, but also to address a potential sea change in the role of traditional financial advisors. The incorporation of automated advisory capabilities empowers customers to self-direct their financial decisions, thereby posing a competitive threat to operators in the traditional investment space by putting pressure on advisory services and fees, as well as transforming the delivery of advice. On the other side, wealth managers are increasingly using analytics solutions at every stage of the customer relationship to increase client retention and reduce operating costs. By incorporating broader and multisource data sets, financial advisors can form a more holistic view of customers to better anticipate and satisfy their needs. This is vital in an environment

of changing customer expectations that are forcing FS providers to seek value propositions where experience, transaction efficiency and transparency are key elements. Additionally, leveraging new data sources to obtain a more granular view of the risk will not only offer a key competitive advantage in a market where risk selection and pricing strategies can be augmented, but will also allow asset and wealth managers to explore unpenetrated segments. As digitally driven solutions emerge among competitors, the ability to differentiate will be a challenge and players that do not keep pace with the competition will lag behind. The PwC survey shows that over 20% of FS business could be threatened by FinTech companies by 2 2020 . With the rate of change now occurring at increasingly faster intervals, no FS business can afford to sit on its laurels. When faced with disruptive technologies, the most effective players thrive by incorporating them into the way they do business. 1

IBM.com, Bringing big data to the enterprise. PwC, Global FinTech Survey, 2016.

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Blockchain technology Challenges and opportunities

< PATRICK LAURENT Partner, Technology & Enterprise Application Leader Deloitte Luxembourg

Blockchain is one area of financial technology that has received considerable attention from the financial industry given the large number of potential applications and its strong potential to remodel the industry. Blockchain is a distributed ledger where transactions between participants are processed and validated by several machines via a cryptographic process and not by one or few central trusted parties. This means that events or transactions that are recorded on a blockchain are securely and irreversibly stored in a ledger that is accessible to every party and trusted by all without the need for a central trusted entity to ensure the authenticity and integrity of the transactions. WHAT ARE THE OPPORTUNITIES? The potential of blockchain technology cannot be underestimated – faster interbank clearing and settlement, lower transactions costs, reduced counterparty risk and increased transparency are only a few examples of the possible benefits of such technology. Blockchain technology can change the financial industry by enabling disintermediation through greater transparency and tracking of transactions and assets, which will certainly be the basis

for further innovation and transformation. In the investment fund industry specifically, blockchain has the potential to make trading and post trading processes much more efficient, improve regulatory control and eliminate unnecessary intermediaries. We can imagine changes to the Know Your Customer and Anti-Money Laundering Registries and Surveillance, an increase of transparency across multiple applications and the simplification of customer and regulatory reporting, amongst many other opportunities. WHAT ARE THE CHALLENGES? Notwithstanding the infinite opportunities, the challenges with implementing blockchain are numerous. As far as the investment fund industry is concerned, the biggest challenges are certainly the current lack of legal and regulatory framework or best practice for the industry to follow, increased by the uncertainty of how regulatory bodies are going to respond to the changes. Blockchain technology will also put into question the role of intermediaries, such as – but not limited to – custodians and transfer agents. As blockchain remains for the moment an unproven technology coupled with an

uncertain regulatory status, it is difficult to predict when stakeholders will cease to rely on legacy systems. OPEN QUESTIONS Despite the open questions, blockchain technology has the potential and power to profoundly reshape the way we all do business. That is certainly the reason why many large companies have already invested in blockchain technology to better understand its impacts on their own business and operating models as well as on the broader industry globally. The recently published Green Paper on retail financial services: better products, more choice and greater opportunities for consumers and businesses by the European Commission shows that the continued increase in the digitalisation of financial services has also caught the attention of the European institutions and is being monitored. We believe that those who are already analysing the market opportunities and technical possibilities of this technology, will be very well placed in the future. Hence our question – where would you see the impact of the blockchain technology and how are you adapting to it?

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PROTECTING AND LEADING YOUR BUSINESS THROUGH EXCELLENCE IN FUND SERVICES

Fund

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Risk Oversight Compliance Knowledge

We offer a robust and extensive solution for UCITS and AIFâ&#x20AC;&#x2122;s, leveraging on unparalleled track record in fund governance, market leading technology as well as broad and deep expertise. www.fundrock.com

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Multi-manager platforms The myths and realities

The multi-manager platform model is maturing, providing new options for those seeking a quick, reliable, secure path to access the market and raise assets. To these traditional virtues platforms are adding greater agility, but none offers a “one-sizefits-all” solution. So what are the myths and what are realities about working with platforms? SPEEDY MARKET ACCESS – REALITY Platforms enable asset managers to plugand-play instantly into road-tested infrastructure. There are no big start-up costs, just a manageable, regular fee. THEY’RE A CHEAP OPTION – MYTH There might be some marginal savings to be had, primarily in set up costs, but platforms are mostly about providing value for money access to a robust, tested control environment and established distribution channels. They enable asset managers to focus on growing their core business. Once a fund has exceeded $250m thoughts might then start turning to establishing their own fund structure in-house or through a third-party management company. THEY CUT RISK – REALITY Small fund managers feel the burden of increasingly stringent substance and control requirements. Rather than doing this themselves they can off-load complex, specialised tasks like governance, risk, compliance and distribution to experienced teams of dedicated professionals by using a platform. THERE IS AN OPTION FOR EVERYONE – MYTH Some boutique funds have highly specia lised strategies, tightly targeted distribution channels serving existing relationships, and niche branding which may not fit per-

REVEL WOOD Chief Executive Officer FundRock Management Company S.à.r.l., Luxembourg

fectly with the generic nature of the platform. As mentioned, managers might prefer to establish their own Manco/AIFM once they reach a certain size. Alternatively, they could leverage the services of a third party provider to continue to benefit from established infrastructure with lower barriers to entry. THEY HELP BOOST SALES – REALITY Post crisis, investors’ value strong governance and control and well-established infrastructure to support agile asset managers. Once a niche client need is identified, a reliable fund can be up and running within weeks. Here are some examples of value propositions offered by platforms: • Fundrock in conjunction with Standard Chartered offers a platform as an incu-

bator to give Asian managers room to grow until they have the scale to provide their own infrastructure. As with other platforms listed below, this provides complete infrastructure including a full licence to operate, a distribution network, an established operating model with all third party providers in place, plus a robust compliance, risk, control environment. • Goldman Sachs International’s platform provides hedge fund managers with a full service model; from the provision of robust infrastructure and structural expertise, through to a bespoke distribution model providing access to their client franchise. • Momentum Global Investment Management gives their investors access to specialist investment management expertise. This is delivered through outcome-based, risk-profiled, multi-manager solutions across a variety of jurisdictions and fund structures. • Lyxor Asset Management’s hedge fund managed account platforms give access to over 60 managers. In a segregated fund supervised by Lyxor, a mandate is given to a fund manager to replicate its hedge fund (subject to specific investment and risk guidelines and with full visibility) into trades and positions granted to Lyxor. Using this information, each managed account is valued independently, and with multiple verifications, on a weekly basis by both the fund administrator and Lyxor. • Other examples include options for, say, a pension plan or an asset owner who uses the platform for asset pooling, and then assigning sub managers to manage specialist strategies.

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FinTech Lion Awards Luxembourg’s first FinTech awards www.fintechlionawards.lu

In partnership with

www.kpmg.lu

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© 2016 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Robo-advisors FinTech’s newest agents of disruption

ALEXANDRE ROCHEGUDE Partner, FinTech Evangelist, KPMG Luxembourg

An analogy is often drawn between robo-advisors coming to disrupt financial advisory firms to the same extent that Uber has disrupted what seemed to be a stable and unshakeable taxi industry. The analogy may hold water. Not unlike other industries, the evolution of the asset management industry features long-running technological innovation, from the first discount brokerage introduced in 1975 by C. Schwab, followed by the introduction of index funds by Vanguard, and then exchange-traded funds (ETFs). It seems that the emergence of robo-advisory, with its algorithm-driven advice based on machine calculations, is the natural 1 continuation of a long-term trend.

The underlying working principle for most robo-advisory platforms is based on Modern Portfolio Theory (MPT) and Efficient Market Hypothesis, with additional questions for the risk-profiling of the customers. This approach may not seem unique, but it draws its power from being automated and computable by machines. We have already seen the disruption caused by new entrants like Wealthfront, Nutmeg, and FutureAdvisor, but the robo-advisory market is still in its early days. Now we are starting to see the major players bring their muscle to the market, either developing their own core processes (such as Schwab and Vanguard have done) or by acquiring FinTech companies. Recently we have seen BlackRock acquiring FutureAdvisor and Schroders acquiring a stake in Nutmeg. Whilst the trend may be clear, it is only the beginning, and substantial changes are yet to come. The penetration of robo-advisory services in the asset management industry currently accounts for only 0.02% of all AuM, or slightly over USD 14 billion. According to some projections, robo-advised AuM will rise to USD 2 trillion in 2020, which is almost 6% of 2 all US investments. It is therefore not surprising that, despite being a relatively young FinTech area, robo-advisory is gaining more visibility on venture capitalists’ radar and attracting more and more funds. For consumers, robo-advisory companies are attractive because their services are much cheaper and more accessible for end users. Firms such as Wealthfront, SigFig, and Betterment are offering inexpensive automated advice and account

management over the Internet, and customers, naturally, like to receive high-quality, reliable advice at low costs. Since robo-advisors have much less need for human capital, the average fees they charge represent a mere third of what established financial advisory firms ask for. Indeed, robo-advisory platforms typically charge around 0.3% of assets managed, while we see so many traditional firms charge closer to 1%. Of course this is a tempting factor for the affluent mass consumer space, especially Millennials. Considering that the fee pressure is especially relevant for this market, and customers are increasingly seeking value for money, the robo-advisory technology could be a game-changing solution for many. One leader on the market, Wealthfront, imposes no minimum deposit requirement for investment on its clients, which opens an opportunity for microinvestments and allows it to target customers with any wallet size. Robo-advisory is clearly gaining in popularity and used by discerning customers, so in time the whole financial advisory landscape is going to adjust accordingly. While the competition is just heating up between the “challenged” and the “challengers”, we are only going to witness the players vying more and more for advantages: refining their strategies, building their brands, creating trust, differentiating themselves by meaningful services, and, in short, riding the digital and demographic wave. 1

https://www.washingtonpost.com/news/the-switch/

wp/2015/11/05/robo-advisers-are-here-whats-a-humanfinancial-planner-to-do/ https://www.washingtonpost.com/news/the-switch/ wp/2015/11/05/robo-advisers-are-here-whats-a-humanfinancial-planner-to-do/

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CENTRALIZED EXCHANGE OF FUND TRANSACTION AND INFORMATION

Cross-border fund distribution is undergoing constant change as all actors strive to standardize, streamline processes and increase efficiency We offer a flexible and responsive infrastructure to enable operational effectiveness across the entire distribution chain. Our added-value services for funds cover: • information • order management • regulatory compliance As a subsidiary of the Luxembourg Stock Exchange, Fundsquare operates as a fund market utility

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www.fundsquare.net

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Distributed ledger technology (DLT) A new frontier for the fund distribution model

< PAOLO BRIGNARDELLO Head Product Management and Marketing Fundsquare, Luxembourg

OLIVIER PORTENSEIGNE > Managing Director and Chief Commercial Officer Fundsquare, Luxembourg

Distributed ledger technology threatens to disrupt the business model of many financial sector players, including much of the fund industry. Transfer agents, custody, fund accounting, distribution and more, are likely to suffer, as are clearing and settlement houses, payment system providers, and stock exchanges. In short, anything in the financial sector that can be summed up as data duplication and reconciliation is vulnerable for disruption. The blockchain technology underpinning Bitcoin is proving to be a perfectly secure and tamperproof way to share any type of data. As this technology and its use has matured, so Bitcoin and other crypto currencies are gaining a reputation for reli-

ability. Distributed ledgers use the block chain to track ownership of any financial, physical, or electronic asset: bonds, equity, currencies, commodities, fund shares… Anyone with permission can update and access data on the distributed ledger, with all users able to see who has changed what, when and by how much. Counterparties could keep these ledgers up-to-date in real time, without the need for an expensive third party. This would eliminate the need for many of the firms that currently thrive in Luxembourg and elsewhere maintaining and reconciling lists of more or less the same data. Blockchain means software developers too will have to rethink their methods.

It is being taken very seriously by several key players. For example, America’s leading post-trade financial services company the Depository Trust & Clearing Corporation (DTCC) has indicated that distributed ledgers have the potential for “modernising, streamlining and simplifying the ‘silo’ design of the financial industry infrastructure.” They see room for greater standardisation, efficiency, faster processing, transparency, and security. Also, NASDAQ has just made its first share trade using blockchain technology. The potential disruption for fund administration and distribution is clear. This technology would allow an asset >

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TRADITIONAL FUND DISTRIBUTION MODEL... Client servicing

Data vendor

Asset manager

Investor

Transfer agent

Distributor

PAYING AGENT

Bank

Custodian

Bank

CLEARING

... VERSUS BLOCKCHAIN DISTRIBUTION MODEL DISTRIBUTED LEDGERS Master data Securities issuance Trade contract recording Clearing and Settlement Asset servicing DISTRIBUTED SMART CONTRACTS

manager to work directly with clients or the retailer by offering investment services via a digital “smart” contract. All the third party services could be automated and accessed directly in a peerto-peer fashion (see diagram). The whole distribution supply chain would be visible and available for all registered users to track and manage the lifecycle of their financial transactions. And this at a fraction of the cost. Regulators too would like a process that is transparent which potential cuts the risk of systemically important failures. “Clearing, settlement, custody and registration services all add a significant cost

burden to issuing, trading and holding securities,” said the writer and consultant Dominic Hobson (COOConnect). He cited an estimate that the global finance industry pays around $65 billion to $80 billion per year in post-trade costs. A recent Deloitte/Fundsquare report pointed out that Europe’s cross-border fund industry alone could save nearly 1 billion with improvements to the fund distribution supply chain. The DTCC has highlighted the following areas as being ripe for improvement by distributed ledgers: • Master data management • Asset/securities issuance and servicing

• Confirmed asset trades • Trade/contract validation, recording and matching for the more complex asset types that currently do not have strong, existent solutions • Netting and clearing • Collateral management • Settlement In all this, distributed ledgers promise to reduce the need for third parties and extra layers of processing, particularly in the fund sector. This could be on public blockchains or proprietary systems. This technology is coming and will make changes. The only question is how fast this change will be.

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Robo-advisory is clearly gaining in popularity and used by discerning customers, so in time the whole financial advisory landscape is going to adjust accordingly. < JEREMY ANDERSON

Chairman of KPMG's Global Financial Services, CBE

The digital wallet, purchasing via the Internet, virtual credit clearing, will change the way we use money in the coming years, as we conduct most of our financial activity by pressing a button.

Distributed ledger technology threatens to disrupt the business model of many financial sector players, including much of the fund industry.

LYRON WAHRMANN >

Despite the open questions, blockchain technology has the potential and power to profoundly reshape the way we all do business.

< OLIVIER PORTENSEIGNE

< PATRICK LAURENT

As digitally driven solutions emerge among competitors, the ability to differentiate will be a challenge and players that do not keep pace with the competition will lag behind.

The multi-manager platform model is maturing, providing new options for those seeking a quick, reliable, secure path to access the market and raise assets. < REVEL WOOD

GRĂ&#x2030;GORY WEBER >

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What matters today â&#x20AC;&#x201C; what is important for tomorrow

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www.pwc.lu/am

Millennials in asset management Innovators in investing

To stay competitive and relevant, traditional asset managers are seeking alternative business models: • Client service models • Customer lifetime value • Client proﬁling and demographics • Social media & big data • Brand management • Product strategies

Your contacts Steven Libby

Asset Management Leader steven.libby@lu.pwc.com +352 49 48 48 2116

Nathalie Dogniez

EMEA Asset Management Regulatory Leader nathalie.dogniez@lu.pwc.com +352 49 48 48 2040

Pierre-André Honnay

Asset Management Marketing Leader pierre-andre.honnay@lu.pwc.com +352 49 48 48 6068

Over the next decade, the average investor base proﬁle will change dramatically. Known as “Millennials”, they represent the next big wave of investors for the asset management industry and with them, they bring radical shifts in client demographics, behaviours and investment expectations. Understanding and executing the necessary changes in business and client service models to accommodate these shifts will be critical for asset managers as they seek to remain competitive and relevant to this emerging millennial investor base.

© 2016 PricewaterhouseCoopers, Société coopérative. All rights reserved. In this document, “PwC” or “PwC Luxembourg” refers to PricewaterhouseCoopers, Société coopérative which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. PwC IL cannot be held liable in any way for the acts or omissions of its member firms.

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Meet the Millennials How is this influential demographic changing financial services?

STEVEN LIBBY > Partner & Asset Management Leader PwC Luxembourg

Ask a Gen Xer or Baby Boomer for financial advice and the answer you’ll get will likely involve pursuing home ownership and socking away money for retirement. But if you ask a Millennial, you’ll hear something different. And that difference is turning the financial industry on its head. Millennials, people 18-34 years of age, are emerging as the biggest source of global income, wealth and spending. By 2020, this group will comprise half the world’s population and outpace Baby Boomers as the largest consumer group in history; by 2025, 1 it will account for 75% of the workforce. So who are these people that will lead the new economy? Unlike previous generations, Millennials have a natural advantage in the realm of technology and an aptitude for social media that is unique to their demographic. Nearly half of them check their mobile devices within the first 2 five minutes of waking. They want tailored services that allow them to conduct business through their phones, yet deliver personal input at the touch of a button.

Moreover, they are poised, along with their Gen X predecessors, to come into some serious investing resources; the two generations combined could see their wealth grow to USD 28 trillion in the next five years as they earn more and claim 3 their inheritance. But the hard truth is 53% of Millennials don’t think their bank offers anything different than any other bank, one in three are open to switching banks in the next 90 days, and 71% would rather go to the dentist than listen to what their banks are 4 saying. In fact, they typically hold more 5 than half of their assets in cash. Hence, alternative digital financial services are becoming increasingly popular with Millennials, who are looking for easy-to-use options that provide value at low or zero cost. There are countless FinTech start-ups ready to cater to this generation’s diverse needs from buying into venture capital to investing leftover change. Clearly, there is an opportunity here. Traditional asset managers must boost ser-

vices into the digital age and leverage existing FinTech solutions and new technologies. Given the marketing and referral power of some of these FinTechs, the urgency of creating new business models and ecosystems to interface closely with them should not be underestimated. The key to reaching digital natives lies in leveraging big data to understand their needs and respond with customised service. This will require traditional financial services players to rethink their strategies with new technologies in mind. At a first glance, it might seem like Millennials are asking for the moon, but if you think about it, they are just demanding what the rest of us want. In short, the financial services industry must make digital the new normal. 1

Bank of America, Merrill Lynch, Thematic Investing, Generation Next, July 2015. Mobile Commerce Press, Mobile Tech is being used at an addictive Rate, Julie Campbell, September 11, 2015. 3 Barrons, On the Rise, Jacqueline Doherty, April 2013. 4 Viacom Media Networks, The Millennial Disruption Index, 2013. 5 PwC, Millennial Banking, February 2015. 2

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Exceptional Client Service Assured Financial Strength With award winning client service and over 100 years’ experience delivering specialist asset servicing solutions, RBC Investor & Treasury Services helps institutional investors around the world mitigate their operational risk and maximise their operational efficiency. To discover how we can help support your market and product expansion, visit rbcits.com

Distribution Services | Securities Processing & Administration | Information Management | Transaction Banking | Optimisation © Royal Bank of Canada 2016. RBC Investor & Treasury Services™ is a global brand name and is part of Royal Bank of Canada. RBC Investor & Treasury Services is a specialist provider of asset servicing, custody, payments and treasury services for financial and other institutional investors worldwide. RBC Investor Services™ operates through two primary operating companies, RBC Investor Services Trust and RBC Investor Services Bank S.A., and their branches andaffiliates. In the UK, RBC Investor Services Trust operates through a branch authorized by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. ® / ™ Trademarks of Royal Bank of Canada. Used under licence.

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Diversity for growth and innovation Embracing Diversity and Inclusion as core company values

< SÉBASTIEN DANLOY Managing Director RBC Investor & Treasury Services, Luxembourg

RBC’s diversity and inclusion initiatives are guided by the “RBC Diversity Blueprint” which is based on three pillars: • Talent and workplace • Marketplace • Community The aim is to have a diverse workforce in an inclusive working environment with the opportunity for all employees to create value, deliver a superior client experience and develop innovative solutions for the markets and the communities served. RBC intends to help create better futures for its many stakeholders. It is not only a social imperative, but is also a source of competitive advantage. RBC Investor & Treasury Services (RBC I&TS) in Luxembourg is a founding member and partner of the Lëtzebuerg Diversity Charter, established in 2012. In response to the charter’s objective of encouraging organisations to guarantee the respect and promotion of diversity in their workforce, RBC I&TS has put in place a Diversity Leadership Council whose role is to advance diversity and inclusion

throughout the workplace both in Luxembourg and across Continental Europe. The council deploys sustainable actions to achieve locally identified goals, including the promotion of gender equality with a focus on increasing the representation of women in leadership, and encouraging active leadership in diversity within a multicultural workplace. The council arranges a number of activities to help achieve these objectives including the arrangement of guest speakers to share their experience and advice. In addition, frequent networking events take place where employees are given the opportunity to meet with senior leaders at RBC to discuss and gain career advice. RBC also supports the “Dress for Success Luxembourg” initiative, the non-profit organization helping to build women’s confidence, donate suits for interviews and help them back into the employment market. Under the presence and sponsorship of Corinne Cahen, Minister of Family and Integration, RBC I&TS was honoured to be part of the pre-jury selection of the first Lëtzebuerg Diversity Awards that high-

light and reward diversity best practices. RBC I&TS was pleased to welcome Corinne Cahen to the firm’s Luxembourg offices, located in Esch-Belval, to mark the country’s first Diversity endeavours. In addition to these important initiatives, RBC I&TS holds National Day celebrations which highlights each month one of the 29 nationalities of the RBC I&TS Luxembourg employees to promote cultural differences in the workplace. Diversity and growth are not just integrated, but inseparable. This belief is at the heart of RBC’s Value of “Diversity for growth and innovation”. Making the most of our diversity has always been the right and smart thing to do. RBC is proud of what has been achieved in our diversity journey and we’re motivated by a strong sense of purpose for what is still to come. We believe diversity and inclusion strengthen us and we are committed long term to progress in our company and the communities we serve. Simply having diversity is interesting; doing something with it is powerful.

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YEARS Be confident that your money is invested in a responsible manner!

ÂŠADA ALFI_book.indb 26

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Responsible Investing sending Traditional Investment into niche? Change in investors’ attitude bears its early fruits in the RI sector

< ANNEMARIE ARENS General Manager LuxFLAG

While world leaders concluded a historic but non-binding agreement at COP21 to tackle climate change, the conference revealed the rise of a global awareness on individual and collective level: the former generation is showing a growing interest in Environmental, Social and Governance (ESG) issues; Millennials as the upcoming new generation of investors are keen on boosting this trend. Joint efforts of both influential age groups, willing to use finance beyond traditional approaches to target investments matching their values, could lead to a major step towards sustainable development. The change in investors’ attitude bears its early fruits in the Responsible Investing (RI) sector, which has known a growth at

rapid pace in the last years. Social lenders realised that initiatives such as Microfinance focusing on women can be an effective way to give communities a longterm way out of poverty. The creation of LuxFLAG in 2006, as an independent non-profit association, has been an early call for action to meet responsible investors’ needs and to promote the financing of sustainable development through the award of transparent Labels. Current developments now raise the question whether Responsible Investing, formerly seen as a niche asset class, might supersede Traditional Investment in the upcoming years. Indeed, ESG is moving mainstream: Responsible Investing can no longer be stigmatised as a sacrifice of returns but can

track and even outperform the market alongside a non-financial return, as studies show. Corporates are embedding Corporate Social Responsibility in their core strategies; ESG screening and Engagement processes are increasingly used as risk management tools. Climate change is moving up on the investors’ agenda: the UN PRI Montréal Carbon Pledge, launched in 2014, mobilises over 120 investors with over $10 trillion AuM to measure, disclose and reduce their portfolio carbon footprint. Social considerations like gender equality are now gaining attention as key indicators for judging ESG commitment. Studies reveal that female investors and advisors show an outgrowing interest in Responsible Investing. Changes to the gender balance towards more diversity on Boards might drive the lead to further boost investments in RI sectors. But how can investors be sure that a fund truly invests in a responsible manner? As an international and independent labelling agency, LuxFLAG provides clarity and gives confidence to investors by awarding transparent Labels to eligible Microfinance, Environment and ESG funds. LuxFLAG Labels certify that a labelled fund complies with strict eligibility criteria and fulfils its commitment to invest responsibly. LuxFLAG seeks to encourage transparency by investment funds on ESG performance and aims to drive forward developments towards sustainable finance.

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Female Board Pool Luxembourg Board Ready for the Fund Industry

Still underrepresented in the higher governing bodies of companies and organisations, women are slowly but surely moving away from the image of the “weaker sex” that Gandhi already considered defamatory. Meanwhile, and still for a few more generations to come – when this will not even be questioned – initiatives are multiplying to improve women’s representation in executive positions. BUILDING A BOARD READY NETWORK SINCE 2010 The Female Board Pool concept was launched over 11 years ago in Switzerland, under the guidance of the International Center for Corporate Governance at the University of St. Gall, Switzerland. The Female Board Pool is basically a platform that enables the contact and connection between experienced and current & future female board members with corporations and organisations. The Female Board Pool model landed in Luxembourg in 2010 at the initiative of the consultant Rita Knott. The Female Board Pool Luxembourg (FBPL) was launched in March of that year and since, over the last five years, in cooperation with the Luxembourg Ministry of Equal Opportunities, has built a centralised database of some 500 female “board ready” candidates. The FBPL offers the transmission of relevant board ready profiles, following an optimum selection criteria on a “free-of-charge” basis to interested companies and organisations. The FBPL aims to considerably increase the percentage of competent and committed women at Board of Director levels in Luxembourg across all sectors be it in; 1) the profit sector for private and publically listed companies; 2) the public sector and 3) the Non-profit organisations and NGOs.

< RITA KNOTT Director, Female Board Pool Luxembourg, Maison du Coaching, Mentoring et Consulting a.s.b.l., Luxembourg

FBPL’s goals are to confirm that diversity in Executive Management teams generate better economic results. Furthermore, the FBPL aims to: • Increase the visibility of competent and committed board ready as well as board active women in the marketplace • Create a sustainable and focused network • Create contacts “off the beaten track” for the benefit of organisations and companies Over the last two years, there has been an increasing interest with some key achievements in matching and placing FBPL candidates in Luxembourg listed companies and in the public sector. Today, there are ten pending requests in the process with a further 65 profiles transmitted for potential matchings. In an ideal world, I would like to see all newly constituted companies and investment funds to contact the FBPL to seek those highly educated and committed female board-ready and/or board-active candidates in Luxembourg. As a lot of the FBPL contenders come out of the financial industry, the Female Board Pool

Luxembourg would be more than happy and willing to receive even more requests from the fund industry in future. As quoted recently by Steen Foldberg, Managing Director of Julius Baer Investment Services Luxembourg: “The debate about regulation increasing Gender Equality in the Boardrooms starts to have an impact. Senior executives are beginning to realise the benefits of increasing the share of women in senior positions. At the same time, women’s confidence is growing in expressing their ambitions, and in taking on bigger roles and board room positions. I have been impressed by the Female Board Pool Luxembourg programme, and not least the level of talent that I meet. The Female Board Pool is an excellent platform for women to meet, be trained, share experiences and build a beneficial network. At the same time, the platform offers companies an easy access to women, who are capable and ready to take up board room responsibilities.” www.icfcg.org www.female-board-pool.org

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In an ideal world, I would like to see all newly constituted companies and investment funds to contact the FBPL to seek those highly educated and committed female board-ready and/or board-active candidates in Luxembourg. < RITA KNOTT

Millennials, people 18-34 years of age, are emerging as the biggest source of global income, wealth and spending. By 2020, this group will comprise half the worldâ&#x20AC;&#x2122;s population and outpace Baby Boomers as the largest consumer group in history. STEVEN LIBBY >

Joint efforts of both influential age groups, willing to use finance beyond traditional approaches to target investments matching their values, could lead to a major step towards sustainable development.

Simply having diversity is interesting; doing something with it is powerful. SĂ&#x2030;BASTIEN DANLOY

ANNEMARIE ARENS 29

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Focus on Regulation & Tax â&#x20AC;&#x201C; what else?

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Reserved alternative investment funds (RAIF) The modernisation of the Luxembourg fund structuring toolbox

GILLES DUSEMON Partner Arendt Luxembourg

In an ever changing international, legal, regulatory and fiscal framework, it is a difficult balancing act to provide the international investment funds industry with the most solid structuring framework while keeping innovation at a steady pace. In order to achieve this, Luxembourg has readily embraced the fundamental shift towards regulation in the alternative investment funds industry as set by the G20 in the aftermath of the 2008 financial crisis. The Luxembourg investment funds model has traditionally been based on sound regulation at product level [i.e., prior to the 2013 implementation, all

Luxembourg investment funds were subject to the prior authorization and ongoing prudential supervision of the financial sector supervisory authority (CSSF)]. The AIFM Directive then introduced a manager regulation with certain product regulation features. In a first step towards the new European approach for regulation of the alternative investment funds sector, the Luxembourg legislator implemented the new manager regulation and modernised the Luxembourg common limited partnership – société en commandite simple (SCS or CLP)– and took a quantum leap by in-

troducing the special limited partnership – société en commandite spéciale (SCSp or SLP). Two years and almost 1,000 new limited partnership launches later, the Luxembourg unregulated limited partnership (whether common or special) has become a new norm for the launch of alternative investment funds. It would however be incorrect to state that the modernised limited partnership regimes have replaced the tested and tried investment company in risk capital (SICAR) introduced in 2004 or the specialized investment fund (SIF) introduced in 2007. While the launch of new SICARs and >

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SIFs has dwindled in comparison to the launch of CLPs and SLPs, there is no one size fits all solution, be it in Luxembourg or elsewhere. The unprecedented rise of the limited partnership did however signal to the Luxembourg legislator that the market participants did no longer perceive product supervision as a must have. Instead, markets participants put speed to market and structuring flexibility (in the context of regional, international or global offerings) at the forefront. Two years into the new investment funds order created by the AIFM Directive, the Luxembourg fund structuring toolbox is ready for one of its most significant evolutions: the creation of a new investment funds framework combining the strengths of the SIF and SICAR regimes and permitting a further combination with the modernised limited partnership forms under a new acronym, the use of which will be reserved for authorized alternative investment fund managers (AIFM) based in Luxembourg,

any other EU Member State or, if and when the third country AIFM management passport is introduced, to third country AIFM: the RAIF (the “reserved alternative investment fund” regime) or FIAR (fonds d’investissement alternatif réservé). The Luxembourg government council indeed adopted shortly before year-end 2015 a bill of law proving for the introduction of the RAIF regime into Luxembourg law. THE RAIF: THE MOST SIGNIFICANT ADVANCE FOR THE LUXEMBOURG FUND STRUCTURING TOOLBOX The new regime will allow alternative investment fund initiators and sponsors to set up a new type of AIF, which combines the legal and tax features of the well-known, tested and tried SIF or SICAR regimes without the regulatory supervision of the CSSF however. Instead FIARs will be managed and monitored by AIFMs subject to the supervision of their competent national authority.

LEGAL STRUCTURING FLEXIBILITY Just like the SIF and SICAR, the RAIF may be formed under any of the wellknown Luxembourg corporate, partnership and contractual legal forms: • Partnership forms: corporate (SCA), common (CLP) or special (SLP); • Corporate forms: public limited company (société anonyme - SA), private limited company (société à responsabilité limitée - S.à.r.l.), cooperative company organised as a public limited company (société coopérative organisée comme une SA - SCOSA); • Contractual form: common fund (fonds commun de placement - FCP). A RAIF may thus adopt a variable (e.g., SICAV) or fixed capital (e.g., SICAF) structure. Quite importantly also, the RAIF may adopt an umbrella (multi-cell or multi-compartment) structure. INVESTMENT STRATEGY The RAIF (just like the SIF) is subject to a minimum risk-spreading requirement (i.e., with a 30% counterparty exposure

CLAUDE NIEDNER > Partner Arendt Luxembourg

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< CLAUDIA HOFFMANN Associate Arendt Luxembourg

limit safe harbour rule of aggregate committed capital/NAV). If the RAIF elects to only invest in qualifying risk capital investments (just like a SICAR does), the risk-spreading requirement will not apply. ELIGIBLE INVESTORS The RAIF will be available to well-informed investors, a well-known concept for Luxembourg regulated investment funds. This category includes institutional investors, professional investors and investors investing a certain minimum amount (EUR 125,000) further accepting a self-certification. GOVERNANCE The naming convention of the RAIF stems from the legal requirement that a RAIF must be managed by and is thus reserved for fully authorized alternative investment fund managers. Each Luxembourg AIF which elects to be treated as a RAIF must thus appoint a duly authorized AIFM, whether established in Luxembourg, in another EU Member State or, upon and subject to the implementation of the third country management passport, a third country authorized AIFM. The creation of a RAIF will have to be

witnessed in front of a Luxembourg notary public. The notary public must ensure that the RAIF is then registered with the Luxembourg Trade and Companiesâ&#x20AC;&#x2122; Register within 10 days of its formation. The fact that the CSSF will not have to authorize the launch of a new FIAR (or any changes thereto) will probably be recognised as the most welcome feature of the new regime. Investment fund managers and initiators have long been requesting timing certainty when applying for new product launches in Luxembourg. With the introduction of the manager regulation via the AIFM Directive, the Luxembourg legislator identified an opportunity to revise its long standing strategy: continue the strong and recognised regulatory framework applicable to the Luxembourg fund product and the Luxembourg services providers surrounding it but replacing the authorization and prudential supervision of the CSSF by the authorisation and supervision of the product through the authorised AIFM. The outcome will be absolute planning certainty thus resolving the single most important issue of the Luxembourg alternative funds centre.

TAX FEATURES The RAIF will either be subject to an annual subscription tax (taxe dâ&#x20AC;&#x2122;abonnement) at a rate of 0.01%, with various exemptions, or be subject to the tax regime applicable to SICARs, i.e., be fully subject to tax save for qualifying risk capital income and gains. The VAT exemption applicable to AIF management services will also apply. The RAIF regime thus merely continues two tested and tried tax regimes and does not introduce any new tax features. CONVERSIONS Existing SIFs, SICARs and unregulated AIFs may elect for the RAIF regime subject to securing the relevant approvals from investors and where applicable the CSSF. OUTLOOK RAIFs made in Luxembourg are thus positioning themselves to be a true alternative to AIFs set-up in the Cayman Islands, the BVI or Delaware. The compatibility with EU regulations will be total and the marketing reach truly global. The bill of law is expected to enter fully into force during the second quarter of 2016.

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LINKLATERS_Esch Belval_ALFI SPRING MAG.pdf

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ELTIFs offer Luxembourg the opportunity to help drive European growth ELTIFs fit perfectly into Luxembourg’s fund industry toolbox The entry into force on 9 December 2015 of the EU regulation on European Long Term Investment Funds (ELTIFs) is an important tool to give the Union economic recovery new impetus. It is also an opportunity for Luxembourg to consolidate and extend its role as Europe’s leading centre for cross-border structuring and distribution of investment funds, both retail-oriented UCITS and, increasingly, alternative investment products. Under the regulation, which is directly applicable in EU Member States without requiring national legislation, ELTIFs fall between these two categories. Like the funds subject to the 2013 AIFM legislation, they must have an authorised alternative investment fund manager, but like UCITS, their pan-European marketing passport allows them to be sold to certain individual investors. ELTIFs are the first fruit of the Commission’s Capital Markets Union initiative, aimed at stimulating the “real economy”. Together, the CMU initiatives, as outlined in the Commission’s action plan last September, aim to fill the gap left by government budget constraints and the impact of higher capital and liquidity requirements on bank lending. As the name indicates, the focus of ELTIFs is on long-term assets. The spectrum of eligible long-term assets is broad. Besides infrastructure and real assets the regulation allows investments in SMEs and permits the origination of loans by ELTIFs. Such broad range of eligible investments presents interesting investment opportunities. Their long-term focus makes ELTIFs particularly suitable for investors such as

< SILKE BERNARD Counsel Linklaters Luxembourg Investment Management Group

pension schemes with long investment horizons, but also for individuals wishing to diversify their savings portfolios. Like other regulated EU investment structures, ELTIFs are subject to diversification requirements and restrictions on borrowing. ELTIFs are closed-ended funds without early redemption rights; however, the product initiator may allow redemptions, under certain circumstances. Investors may also trade shares or units on secondary markets which may grant them another exit possibility if sudden liquidity needs arise. Certain elements of the ELTIFs rulebook have yet to be published, including regulatory technical standards. Certain amendments to other EU legislation are also expected, including changes to the Solvency II rules that give insurers more favourable capital treatment of ELTIF investments. Although no national implementation is required, Luxembourg is planning accom-

panying legislation to increase legal certainty for potential managers and investors. The Luxembourg law will further create a specific new tax regime that offers ELTIFs eligibility under the country’s extensive network of double taxation treaties. The Luxembourg fund industry has deployed great efforts to analyse the ELTIF regulation towards finding solutions to possible pitfalls in its practical handling. The ALFI working group has also initiated a dialogue with the CSSF and other stakeholders to exchange views on certain elements of the regulation. There is a strong common interest and willingness to make Luxembourg a jurisdiction of choice for ELTIFs: ELTIFs fit perfectly into Luxembourg’s fund industry toolbox and could prove a substantial source of business in the future, while contributing to economic revival and job creation across Europe.

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BEPS What does it really mean for the investment fund industry?

< FLORA CASTELLANI Director KPMG Luxembourg

BEPS IN A NUTSHELL The OECD Base Erosion and Profit Shifting (BEPS) action plan, containing 15 actions, aims at changing international tax rules in order to ensure that profits are taxed where the profit-making economic activity is located and where value is created. In October 2015, the OECD issued its final recommendations on each of these 15 actions, which must now be implemented by the member states in their own domestic law or in bilateral tax treaties. HOW AND WHY INVESTMENT FUNDS ARE AFFECTED BY THE BEPS ACTION PLAN Although the initial purpose of the BEPS action plan was to target multinationals’ aggressive tax planning strategies, many

of the BEPS recommendations will also apply to investment funds and may thus – directly or indirectly – negatively affect the investment fund industry. The OECD deliverables that are likely to be the most relevant to the asset management industry are the recommendations covering transfer pricing, permanent establishment, treaty abuse, and hybrid mismatch arrangements. OBTAINING TREATY ACCESS MAY BE INVESTMENT FUNDS’ MAIN CONCERN IN A POSTBEPS WORLD The main purpose of double tax treaties is to avoid double taxation so as to reduce tax obstacles to cross-border services and investments. Ensuring treaty access for investment funds is therefore

key in order to create a level playing field for direct investments and investments through a fund, as well as to reduce the risk of double taxation between the jurisdiction of the fund and that of the investor. However, the OECD recommendations could end up denying treaty access for most investment funds and in particular for those operating on a cross-border basis. This could be detrimental for both mainstream and alternative funds. Indeed, the OECD has concluded that collective investment vehicles (CIVs), which are widely held, should be dealt with on a case-by-case basis by way of bilateral negotiations between contracting states, based on the previous work carried out at the OECD level in 2010

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KEY QUESTIONS FOR ASSET MANAGERS IN A POST-BEPS WORLD • Is your level of substance still appropriate? • Is your transfer pricing policy robust enough? • Are you prepared to comply with new reporting and documentation requirements? • Are there hybrid financing arrangements in your structure? • Are you ready to react to an increased number of disputes by foreign tax authorities?

with respect to treaty entitlement of CIVs. This means that no single uniform solution has been agreed upon, even for UCITS, and that treaty access may be granted to a given fund by two countries, whilst being denied by other countries where the fund is holding other investments. Ultimately this leads to increased costs and complexity. As far as alternative investment funds (AIFs) are concerned, the OECD stated that further work is still needed to ensure that the new treaty provisions under consideration address the situation adequately. Thus, one cannot exclude the possibility that the final recommendations will make it more difficult for AIFs to gain access to tax treaties in the future. Asset managers should thus review the points at which they currently rely on treaty benefit and closely follow the next developments at both OECD and country levels. As treaty benefit will inevitably come under increased scrutiny by the various foreign tax authorities, asset managers should nevertheless already assess whether the current level of substance and legal structure in place is still sustainable / appropriate in a post-BEPS world.

FOR CROSS-BORDER FUNDS, A HIGHER RISK OF HAVING A LOCAL TAXABLE PRESENCE The OECD recommendations may increase the chances of an investment fund with cross-border investments and activities being deemed a permanent establishment (PE) – and thus of a local taxable presence – in the countries where the funds are distributed or are investing. Indeed, the aim of the BEPS action plan is to expand the scope of situations in which a PE can be recognised locally and in particular when the physical presence of agents in a country allows them to play a significant role in the negotiation and conclusion of contracts on behalf of the funds. This could thus also have an impact on deal-sourcing activities and, more generally, on the way funds conduct their business activities. In practice, this means that asset managers should verify whether their operational organisation and decision-making processes must be revisited in light of the above. DO NOT UNDERESTIMATE THE IMMEDIATE IMPACT OF THE BEPS ACTION PLAN After two years of work, the 15 actions have now been completed at the OECD

level (although, for some of them, additional follow-up work is still in progress). Implementation is thus becoming key. Given the political commitment taken by all member states and the peer-review mechanism that will be set-up at the OECD level, one can expect that the various deliverables will, sooner or later, be followed by actual implementation at the local level. Furthermore, the EU Commission has very recently released a draft of an “anti-BEPS” directive, with the aim of transposing some of the OECD BEPS recommendations into hard law. Asset managers therefore must closely follow the timeline of the upcoming changes, but must also anticipate the impact of the new rules on their operations. WHAT SHOULD ASSET MANAGERS BE DOING TO ANTICIPATE THIS CHANGING TAX LANDSCAPE? In this evolving tax environment, asset managers should start assessing whether their current tax strategy is fit for the future. They should perform a BEPS “health check” of their structures and operational processes to spot where any improvements or restructuring could be appropriate.

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Keeping a cool head in an ever-changing regulatory landscape Although the worlds of UCITS and AIFMD are converging, major challenges still lie ahead to ensure cross-border compliance when it comes to distribution and marketing of funds. Deloitte can help you through the maze of regulatory and practical requirements to ensure a seamless and effective cross-border distribution strategy. More information on: www.deloitte.com/lu

Deloitte Luxembourg’s app is Deloitte Luxembourg’s app is

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MiFID II costs and charges Disclosure requirements for investment funds

MICHAEL JOHN FLYNN Director, Regulatory Strategy Deloitte Luxembourg

MiFID II, which is expected to take effect in January 2018, is introducing new disclosure requirements for costs and charges. Investment funds sold via a MiFID investment firm will need to disclose information with regards to one-off charges, on-going charges, all costs related to transactions and incidental costs, such as performance fees. In parallel, the PRIIPs regulation – effective as of January 2017 – requires similar disclosure for all financial products promising a return to investors and sold to retail clients in the EU. We have identified five possible scenarios: • If an investment fund (UCITS or AIF) is sold or packaged via a PRIIP, then the PRIIP manufacturer will request the fund to provide disclosure for the PRIIPs cost and charges from January 2017; • AIFs sold to EU retail clients will need a PRIIP KID starting January 2017; • Investment funds (EU domiciled or not)

sold via a MiFID investment firm will need to provide such entity with cost and charges information as of January 2018; • KIIDs of UCITS sold directly to investors without passing a MiFID investment firm are sufficient until 31 December 2019; • AIFs sold directly to professional clients, without passing through a MiFID investment firm must comply with AIFMD product disclosure only. Although the MiFID II level 2 publication date is still unknown (expected for first quarter of 2016), ESMA’s Final Report of 19 December 2014 provides a high-level picture of expectations in terms of costs and charges disclosure in relation to the investment service(s) rendered by the investment firm and the financial instrument(s), which can be summarised as follows: • Disclosure of costs and charges related to the financial instrument(s) and the investment service(s) on an “ex-ante” and “ex-post” basis; • Aggregation of costs and charges; • Disclosure of aggregated costs and charges as a personalised cash amount and as a percentage; • Provide clients with an illustration showing the cumulative effect of costs on return. These measures shall apply to all categories of clients – subject to certain limitations; at this stage, professional and eligible counterparty clients would be

provided full disclosure on investment products with embedded derivatives. In the absence of clear MiFID II guidelines for the moment, we recommend referring to the draft Level II regulation on PRIIPs which provides more insight into the expectations of the regulators and can be applied to MiFID II. As far as the investment fund industry is concerned, one of the biggest challenges will be the new cost disclosure requirements at the fund and share class level. Transaction costs are the point that attracts the most attention, as it will be the first time that both explicit and implied costs have to be part of investor disclosure. Implicit costs embedded in market spreads and OTC derivatives will need to be 1) estimated based on past observations, 2) calculated from a fair value model or 3) for new funds calculated in reference to a fee grid provided by true regulator. The transaction costs disclosure will certainly be a significant issue, since these costs are often embedded in the transaction price or difficult to accurately calculate. While Europe’s locally domiciled funds may struggle to calculate and disclose this information in time for PRIIPs or MiFID II implementation, investment funds domiciled outside of the EU may not yet be aware of the consequences and may find that MiFID firms stop acquiring funds which cannot provide the costs and charges disclosure.

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Two years into the new investment funds order created by the AIFM Directive, the Luxembourg fund structuring toolbox is ready for one of its most significant evolutions. < GILLES DUSEMON

Although the initial purpose of the BEPS action plan was to target multinationals’ aggressive tax planning strategies, many of the BEPS recommendations will also apply to investment funds and may thus – directly or indirectly – negatively affect the investment fund industry. There is a strong common interest and willingness to make Luxembourg a jurisdiction of choice for ELTIFs. SILKE BERNARD

FLORA CASTELLANI

In the absence of clear MiFID II guidelines for the moment, we recommend referring to the draft Level II regulation on PRIIPs which provides more insight into the expectations of the regulators and can be applied to MiFID II. < MICHAEL JOHN FLYNN

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THANK YOU The ALFI Spring Mag 2016 that you are currently holding in your hands is sponsored by the authors and their respective organisations. ALFI would like to thank all contributors of the magazine, whose aim was to provide each conference participants with a memento of key industry references discussed during the ALFI Spring Conference and depicted in this unique publication, as we move forward with the fund industry. As the old adage says: “Les écrits restent, les paroles s’envolent” (“Written words stay, spoken words fly away”).

Published by:

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Produced by:

www.maisonmoderne.com — TM

© Maison Moderne Maison Moderne is used under licence by MM Publishing and Media S.A. (Luxembourg) © 2016 ALFI Any reproduction or adaptation, either partial or total, is strictly prohibited without the express written authorization of ALFI.

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STAY TUNED AT THE ALFI SPRING CONFERENCE!

follow the discussions at the conference using #ALFISpring16 ALFI_book.indb 44

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