Amcham: Please give us an S.W.O.T. overview of the current situation of the Luxembourg financial sector?
Nicolas Mackel: Luxembourg’s key strength remains the expertise that we have built over the last 30 to 40 years. This expertise, in areas such as investment funds, banking, capital markets, insurance, FinTech, and sustainable finance, among others, has created an ecosystem or toolbox that cannot be found in a single location in the rest of Europe. Further, Luxembourg provides financial institutions with a stable political environment, that has maintained its AAA rating from key ratings agencies, and continues to build on the regulatory certainty that it has established. Certainly, this has also been a draw to the diverse and multilingual workforce that is key to the expertise we have built. Further, Luxembourg has established a sense of cooperation among players in the market, meaning that the industry is not working against each other but rather together in order to establish best practices.
When we look at the weaknesses, one of the key points that tends to arise is the fact that Luxembourg remains fairly expensive. Further, the availability of talent remains a key issue that financial centres globally, including Luxembourg, face. In the Grand Duchy, this lack of talent is a consequence of our quantitative and qualitative growth. As we move further up the value chain, we must both train and attract individuals with new skill sets. In the same vein, the Grand Duchy remains largely back and middle office oriented. Given that these roles are the most likely to be automated in the medium term, there has been an increased drive from both the government and private sector to upskill staff and drive a more qualitative enhancement towards front- office roles.
Key opportunities for Luxembourg lie in a number of spaces, including the rapid rise of sustainable finance and alternatives, where the Grand Duchy is a leading player.
Further, the overall regulatory developments at an EU level, via work done on the Capital Markets Union and the Pan-European Personal Pension Plan, are key opportunities for Luxembourg to serve the broader European market given our cross- border expertise.
Threats to our financial centre include further fragmentation or rising protectionism across Europe that could play against our aforementioned expertise. Moreover, as companies look to reduce costs, the rise of outsourcing to other jurisdictions, while not a key issue yet, could become one in the coming years. Given this, the previously mentioned upskilling becomes all the more important.
Amcham: Has Brexit caused UK based companies to migrate jobs and assets to Luxembourg and what is the likelihood that additional UK based financial sector companies will follow over the coming 2 years?
Nicolas Mackel: We have seen a number of companies choose to continue serving the European market out of Luxembourg. Since the Brexit referendum, more than 60 companies have chosen to establish themselves in the Grand Duchy explicitly mentioning Brexit as the cause.
In the coming years, we don’t expect many direct relocations as those who needed immediate EU market access have already made the move. We do, however, expect staff to grow considerably in the firms that only established contingency plan offices, but that will now need to be fully staffed in the coming years. In the future, US and Asian firms that expand to Europe will look at the map differently, not choosing London but one of the EU financial centres.
Amcham: What employee professional credentials, experience and skill sets are in critical demand within the Luxembourg financial sector?
Nicolas Mackel: We still see strong demand in our key focus areas, including legal and compliance, accounting, risk management, private banking and wealth management. We are also seeing growing demand for IT skills as more companies shift focus into automation of certain functions, as well as a growing demand for quantitative skills for front-office roles that are becoming more in demand in Luxembourg.
Amcham: Are Financial sector assets under custody, stable shrinking or growing?
Nicolas Mackel: Our financial sector growth remains strong, both in terms of fund assets and private banking assets. Despite the pandemic, Luxembourg funds remained attractive and we will probably reach the €5 trillion threshold in early 2021. In the private banking space, assets have more than doubled in the last 11 years, reaching €466 billion at the end of 2019.
Amcham: Recently Luxembourg has been again accused in French and German Newspapers as facilitating improper tax avoidance by criminal elements. Please explain what this is all about and is this a set-back for the LFS?
Nicolas Mackel: Much of this stems from an inability of our neighbours to comprehend why Luxembourg would be a location of choice for financial services, hence the need to immediately jump to tax and the “black box” of finance to explain this to themselves. The allegations made stem from a blatant misunderstanding of European law, not Luxembourg law, as well as misunderstanding of why international investments are structured through the creation of holdings companies.
Luxembourg has correctly applied the European regulatory frameworks for taxation and transparency, and in some cases is more transparent that many other countries within the EU. The Luxembourg government attempted to explain our position to the journalists when questioned, however it seems that many of these explanations were conveniently ignored in order to damage the reputation of the Luxembourg financial centre. It is unfortunate that Luxembourg is once again being labelled a tax haven when we are steadfast in our application of all relevant EU directives and willingly share all required information with the tax authorities in other countries.
Amcham: Compared to our competitor locations, can you give us an idea of the relative positioning of Luxembourg on the road of digital transformation? Are we ahead, behind or even with our competitors and what do we urgently need to do to stay competitive in this process?
Nicolas Mackel: This is largely a matter of perspective. In my opinion, we are ahead in some areas and most likely behind in others. In terms of our core competences, we are advanced in the digitalisation of the fund industry, in payments and in RegTech development.
Further, the establishment of the Luxembourg House of Financial Technology has gone a long way to fostering the growth of Luxembourg’s FinTech ecosystem.
Amcham: To save costs and because of the high relative salaries in Luxembourg, many companies are outsourcing lower and mid-level financial sector jobs to other locations. Does this outsourcing constitute a long-range threat to the prosperity of the Luxembourg financial sector and, if so, what can we do to face and overcome this challenge?
Nicolas Mackel: As mentioned in your first question, this is a definite threat we are facing. Often, tasks perceived as repetitive or of low value are often moved out of Luxembourg to cheaper business locations. However, we are also seeing more high-level positions being created in Luxembourg. In most group structures, the control, supervision and management of tasks remains centralised in Luxembourg.
As noted earlier, it is important for us to counter this by moving up the value chain and attracting more front-office roles to Luxembourg. This is a long process, but it is happening slowly but surely, thanks in part to Brexit, European regulations and the realisation among players that Luxembourg has more to offer than just expertise in back and middle office roles.
Amcham: How can the LFS use the ongoing digital transformation to reduce the cost of risk/audit and compliance related activity?
Nicolas Mackel: This is already happening, one only need look at the explosive growth of RegTech, FundTech and other tech solutions being developed in Luxembourg. Some of the players that grew out of the Grand Duchy are globally leading players in their areas. It is critical that we continue to foster the development of the FinTech ecosystem to ensure that new and innovation solution providers can thrive.
Amcham: What advice would you give regarding skills and competencies attainment by newcomers trying to enter the financial sector job market… what knowledge and skills are needed and how best to acquire them?
Nicolas Mackel: This is fairly difficult to answer as the continuous evolution of financial services globally means that the skills and competencies that are required are always shifting. Clearly, as technology becomes more embedded in the financial system, we’ve seen a growing need for individuals who can rapidly understand and incorporate technology into their daily work. Further, the ability to adapt and understand new topics is also crucial. As finance evolves, the way we work within it evolves and one cannot remain static.
Amcham: Financial services has a key role to play in sustainable development. Where does Luxembourg’s finance centre stand in this?
Nicolas Mackel: Luxembourg has always been a leading proponent of sustainable finance, from the listing of the EIB’s first green bond on the LuxSE in 2007, the establishment of the Luxembourg Green Exchange in 2016 – which has become the world’s leading platform for sustainable securities listings, to the creation of the Luxembourg Sustainable Finance Roadmap in 2019 and the Luxembourg Sustainable Finance Initiative in 2020.
The government and the private sector in Luxembourg have worked together to ensure that Luxembourg is a leading financial centre in this space, and we will continue to do so through the various initiatives that we have in place.