The Perfect Combination?

The Luxembourg fund industry has always been characterised by an environment of investor protection-led regulatory constraints imposed by either European and national legislators, or by increasingly complex and intrusive prudential rules from our domestic financial sector regulator, the CSSF.

The approach taken so far has been to dictate rules around the fund products (so-called "products laws") on one hand, and to impose more or less burdensome licensing requirements on most financial service firms active in the production and distribution of fund products (managers, depositary banks, fund administrators, IT support, distributors and advisors, etc) on the other.

This regulated environment has been beneficial to the development of Luxembourg's role as a global fund domicile by creating a brand for its products (UCITS and SIFs) and a label of quality. The downside, however, has undoubtedly been costs, entry barriers and slowness in the regulatory approval process.

With the implementation in Luxembourg law of the alternative investment funds managers' directive (AIFMD) in July 2013, a further layer of regulation was introduced and international fund promoters, although attracted by the EU distribution passport created by AIFMD feared - rightly so - increased compliance costs and even further delayed approval processes by the CSSF.

The prospect of dual regulations under both the products laws and the new regulation of the managers through AIFMD has accelerated the emergence of new, unregulated investment fund vehicles taking the form of common or special limited partnerships (introduced under Luxembourg law simultaneously with the transposition of AIFMD). These transparent, and thus neutral, fund vehicles would appoint an authorised AIFM (fully subject to the AIFMD), opt-out of the products laws and have access to the European marketing passport to professional investors.

More regulation on the manager has therefore enabled less regulation on the products. Good news!

In reality, the emergence of an unregulated fund products segment was, and remains, an absolute necessity. A double layer of regulation (manager and products) was not sustainable and risked creating a competitive disadvantage for Luxembourg as a domicile compared with its traditional competitors (both onshore and offshore).

Constantly improving the jurisdiction's legal and regulatory infrastructure is key, and the recent initiative from the Luxembourg government to introduce a...