A L F I S P R I N G M A G

"The best way to predict the future

is to create it"

2 0 1 6

PETER F. DRUCKER

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07 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 Meet the Millennials

25 Diversity for growth and innovation

27 Responsible Investing sending Traditional Investment into niche?

28 Female Board Pool Luxembourg

33 Reserved alternative investment funds (RAIF)

37 ELTIFs offer Luxembourg the opportunity to help drive European growth

38 BEPS 41 MiFID II costs and charges

The wave of regulation that has occupied the asset management indus-try 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 tomor-row’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 diver-

sity of thought engendered by the broad range of professional back-grounds 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 VOSSALFI chairman

Editorial

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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 manychallenges of our times.We call them progress makers.And we’ve made it our jobto believe in their ideas.Be they multinationalswanting to invest in Luxembourg or Luxembourg companies looking to expand into markets around the world.Wherever they come togetherto create or to build something,we’re there to help make it real.

© 20

16 Citigroup Inc. C

iti and Citi w

ith Arc D

esign are registered service marks of C

itigroup Inc.

Current Trends in FinTech in the world

of banking and financeFinTech – a buzz word in the world

of banking and finance

< LYRON WAHRMANN Head of Innovation CenterCitigroup, Tel Aviv

More and more entrepreneurs are look-ing for the industry’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 cred-it clearing, will change the way we use money in the coming years, as we con-duct 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 OPPORTUNI-TIES?

LEGACY SYSTEMS – Some of the techno-logical infrastructure of financial insti-tutions 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 cus-tomers present opportunities for entre-preneurs. Those who wish to take ad-vantage of these opportunities for advanced digital services must contend with a complex development environ-ment that requires patience and, most importantly, demands an in-depth knowl-edge of the needs of customers and fi-nancial 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 col-laborative efforts in the Open Innovation framework. The banks are adopting in-novation by opening interfaces to entre-preneurs, 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 sys-tems in general and in financial systems in particular. A system may be sophisti-cated 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 in-terfaces, and to make it easier and faster for users to conduct transactions. More and more transactions – such as opening an account, transferring money, and de-positing 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 com-panies today are wrestling with questions concerning the use of private informa-tion. 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 po-tential 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.

A blockchain is what makes this process possible – accessibility of the money, secure transfer from one place to anoth-er, without intermediaries. The entrepre-neurs’ real challenge is to simplify the process for users who view virtual cur-rencies as something exotic and imprac-tical. The solution must become simpler, more accessible and more secure for the customers.

REGULATION – As we know, there is in-herent tension between regulating finan-cial systems and developing technolog-ical systems designed to make life easier for the users. Regulation does not always manage to keep up with the rap-id pace of technology, which changes and develops from day to day. The reg-ulatory authorities are even more fear-ful 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 solu-tions to meet customer needs. Technol-ogy races forward, and there is good reason for the flourishing of technolog-ical start-ups in the fields of P2P loans and mortgages, payments, capital mar-ket, and more. My recommendation to entrepreneurs is to work in collabora-tion with financial institutions and use their help in contending with regulato-ry impediments.

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.

INNOVATION LAB

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The Big Data BoostFinTech is shaking up the AM industry

with sophisticated data analytics

GRÉGORY WEBER >Director, FinTech

LeaderPwC Luxembourg

Blockchain technology Challenges and opportunities

< PATRICK LAURENTPartner, Technology & Enterprise Application LeaderDeloitte 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 in the last two years alone1. The prolif-eration 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. PwC’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, in-cluding big data, are reshaping the indus-try. 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 spec-trum 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 man-agement approaches, such as behavioural and predictive algorithms, to enable the analysis of all transactions in real time. Asset and wealth managers have a par-ticular 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 in-corporation of automated advisory capa-bilities 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 broad-er 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, transac-tion 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 unpen-etrated segments. As digitally driven solutions emerge among competitors, the ability to differ-entiate will be a challenge and players that do not keep pace with the competi-tion will lag behind. The PwC survey shows that over 20% of FS business could be threatened by FinTech companies by 20202. With the rate of change now oc-curring at increasingly faster intervals, no FS business can afford to sit on its laurels. When faced with disruptive tech-nologies, the most effective players thrive by incorporating them into the way they do business.

Blockchain is one area of financial tech-nology that has received considerable attention from the financial industry giv-en the large number of potential applica-tions and its strong potential to remodel the industry. Blockchain is a distributed ledger where transactions between par-ticipants are processed and validated by several machines via a cryptographic pro-cess and not by one or few central trusted parties. This means that events or trans-actions 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 cen-tral trusted entity to ensure the authen-ticity and integrity of the transactions.

WHAT ARE THE OPPORTUNITIES? The potential of blockchain technology cannot be underestimated – faster inter-bank clearing and settlement, lower trans-actions 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 trans-parency and tracking of transactions and assets, which will certainly be the basis

for further innovation and transforma-tion. In the investment fund industry spe-cifically, blockchain has the potential to make trading and post trading processes much more efficient, improve regulatory control and eliminate unnecessary inter-mediaries. We can imagine changes to the Know Your Customer and Anti-Money Laundering Registries and Surveillance, an increase of transparency across multi-ple applications and the simplification of customer and regulatory reporting, amongst many other opportunities.

WHAT ARE THE CHALLENGES? Notwithstanding the infinite opportuni-ties, 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 frame-work or best practice for the industry to follow, increased by the uncertainty of how regulatory bodies are going to re-spond to the changes. Blockchain tech-nology will also put into question the role of intermediaries, such as – but not lim-ited 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 QUESTIONSDespite 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 tech-nology and how are you adapting to it?

1 IBM.com, Bringing big data to the enterprise.2 PwC, Global FinTech Survey, 2016.

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Multi-manager platformsThe myths and realities

REVEL WOODChief Executive Officer

FundRock Management Company S.à.r.l.,

Luxembourg

The multi-manager platform model is ma-turing, 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-size-fits-all” solution. So what are the myths and what are realities about working with platforms?

SPEEDY MARKET ACCESS – REALITYPlatforms enable asset managers to plug-and-play instantly into road-tested infra-structure. There are no big start-up costs, just a manageable, regular fee.

THEY’RE A CHEAP OPTION – MYTHThere might be some marginal savings to be had, primarily in set up costs, but plat-forms 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 – REALITYSmall fund managers feel the burden of increasingly stringent substance and control requirements. Rather than doing this them-selves they can off-load complex, specialised tasks like governance, risk, compliance and distribution to experienced teams of dedi-cated 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 rela tion ships, and niche branding which may not fit per-

fectly with the generic nature of the plat-form. As mentioned, managers might prefer to establish their own Manco/AIFM once they reach a certain size. Alternative-ly, they could leverage the services of a third party provider to continue to benefit from established infrastructure with lower bar-riers to entry.

THEY HELP BOOST SALES – REALITYPost crisis, investors’ value strong gover-nance and control and well-established infrastructure to support agile asset man-agers. Once a niche client need is identi-fied, a reliable fund can be up and running within weeks. Here are some examples of value propo-sitions 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 net-work, 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 distri-bution model providing access to their client franchise.

• Momentum Global Investment Man-agement gives their investors access to specialist investment management ex-pertise. This is delivered through out-come-based, risk-profiled, multi-man-ager solutions across a variety of jurisdictions and fund structures.

• Lyxor Asset Management’s hedge fund managed account platforms give ac-cess to over 60 managers. In a segre-gated 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 ac-count is valued independently, and with multiple verifications, on a week-ly basis by both the fund administra-tor 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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Luxembourg’s first FinTech awards

www.fintechlionawards.lu

In partnership with

FinTech Lion Awards

© 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.

www.kpmg.lu

Robo-advisorsFinTech’s newest agents of disruption

ALEXANDRE ROCHEGUDE Partner, FinTech Evangelist,

KPMG Luxembourg

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

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

An analogy is often drawn between ro-bo-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 evolu-tion of the asset management industry features long-running technological in-novation, from the first discount bro-kerage introduced in 1975 by C. Schwab, followed by the introduction of index funds by Vanguard, and then ex-change-traded funds (ETFs). It seems that the emergence of robo-advisory, with its algorithm-driven advice based on machine calculations, is the natural continuation of a long-term trend.1

The underlying working principle for most robo-advisory platforms is based on Modern Portfolio Theory (MPT) and Efficient Market Hypothesis, with ad-ditional 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 ro-bo-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 pro-cesses (such as Schwab and Vanguard have done) or by acquiring FinTech com-panies. 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 ro-bo-advisory services in the asset manage-ment 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 all US investments.2 It is therefore not surprising that, despite being a relatively young FinTech area, robo-advisory is gaining more visibility on venture capi-talists’ 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 inex-pensive automated advice and account

management over the Internet, and cus-tomers, naturally, like to receive high-qual-ity, reliable advice at low costs. Since ro-bo-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 typ-ically charge around 0.3% of assets man-aged, 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 espe-cially relevant for this market, and cus-tomers are increasingly seeking value for money, the robo-advisory technology could be a game-changing solution for many. One leader on the market, Wealth-front, imposes no minimum deposit re-quirement for investment on its clients, which opens an opportunity for microin-vestments and allows it to target custom-ers with any wallet size. Robo-advisory is clearly gaining in pop-ularity 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 “chal-lengers”, we are only going to witness the players vying more and more for advantages: refining their strategies, building their brands, creating trust, dif-ferentiating themselves by meaningful services, and, in short, riding the digital and demographic wave.

17www.fundsquare.net

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

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

< PAOLO BRIGNARDELLOHead Product Management and MarketingFundsquare, Luxembourg

Distributed ledger technology threatens to disrupt the business model of many financial sector players, including much of the fund industry. Transfer agents, cus-tody, 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 cur-rencies 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 sever-al key players. For example, America’s leading post-trade financial services com-pany the Depository Trust & Clearing Corporation (DTCC) has indicated that distributed ledgers have the potential for “modernising, streamlining and simpli-fying the ‘silo’ design of the financial industry infrastructure.” They see room for greater standardisation, efficiency, faster processing, transparency, and se-curity. Also, NASDAQ has just made its first share trade using blockchain tech-nology. The potential disruption for fund ad-ministration and distribution is clear. This technology would allow an asset >

OLIVIER PORTENSEIGNE >Managing Director and

Chief Commercial OfficerFundsquare, Luxembourg

18 19

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

< PATRICK LAURENT

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.

LYRON WAHRMANN >

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

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.

GRÉGORY WEBER >

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

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

< OLIVIER PORTENSEIGNE

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 au-tomated and accessed directly in a peer-to-peer fashion (see diagram). The whole distribution supply chain would be vis-ible and available for all registered users to track and manage the lifecycle of their financial transactions. And this at a frac-tion 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 reg-istration 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 in-dustry alone could save nearly 1 billion with improvements to the fund distribu-tion 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• SettlementIn 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 pub-lic blockchains or proprietary systems. This technology is coming and will make changes. The only question is how fast this change will be.

TRADITIONAL FUND DISTRIBUTION MODEL...

. . . VERSUS BLOCKCHAIN DISTRIBUTION MODEL

Data vendor

Transfer agent

PAYING AGENT

Master data

Securities issuance

Trade contract recording

Clearing and Settlement

Asset servicing

SMART CONTRACTS

DISTRIBUTED LEDGERS

DISTRIBUTED

Investor

Asset manager

Bank Bank

CLEARING

Client servicing

Distributor

Custodian

20 21

What matters today – what is important for tomorrow

23© 2016 PricewaterhouseCoopers, Société coopérative. All rights reserved. In this document, “PwC” or “PwC Luxembourg” refers to PricewaterhouseCoopers, Société coopérative which is a member fi rm of PricewaterhouseCoopers International Limited, each member fi rm of which is a separate legal entity. PwC IL cannot be held liable in any way for the acts or omissions of its member fi rms.

www.pwc.lu/am

Millennials in asset managementInnovators in investing

Over the next decade, the average investor base profi le 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.

To stay competitive and relevant, traditional asset managers are seeking alternative business models:

• Client service models • Customer lifetime value• Client profi ling and demographics• Social media & big data• Brand management• Product strategies

Your contactsSteven LibbyAsset Management Leadersteven.libby@lu.pwc.com+352 49 48 48 2116

Nathalie DogniezEMEA Asset Management Regulatory Leadernathalie.dogniez@lu.pwc.com+352 49 48 48 2040

Pierre-André HonnayAsset Management Marketing Leaderpierre-andre.honnay@lu.pwc.com+352 49 48 48 6068 Fo

llow

us

Meet the MillennialsHow is this influential demographic changing financial services?

STEVEN LIBBY >Partner & Asset

Management Leader PwC Luxembourg

1 Bank of America, Merrill Lynch, Thematic Investing, Generation Next, July 2015.

2 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.

Ask a Gen Xer or Baby Boomer for finan-cial 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 pop-ulation and outpace Baby Boomers as the largest consumer group in history; by 2025, it will account for 75% of the workforce.1 So who are these people that will lead the new economy? Unlike previous genera-tions, Millennials have a natural advan-tage 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 five minutes of waking.2 They want tai-lored services that allow them to conduct business through their phones, yet deliv-er 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 their inheritance.3 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 saying.4 In fact, they typically hold more than half of their assets in cash.5 Hence, alternative digital financial services are becoming increasingly popular with Mil-lennials, 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. Tra-ditional asset managers must boost ser-

vices into the digital age and leverage existing FinTech solutions and new tech-nologies. Given the marketing and refer-ral 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 le-veraging big data to understand their needs and respond with customised ser-vice. This will require traditional financial services players to rethink their strategies with new technologies in mind. At a first glance, it might seem like Mil-lennials are asking for the moon, but if you think about it, they are just demand-ing what the rest of us want. In short, the financial services industry must make digital the new normal.

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Exceptional Client ServiceAssured Financial StrengthWith 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

© 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.

Distribution Services | Securities Processing & Administration | Information Management | Transaction Banking | Optimisation

Diversity for growth and innovationEmbracing Diversity and Inclusion

as core company values

< SÉBASTIEN DANLOY Managing DirectorRBC Investor & Treasury Services, Luxembourg

RBC’s diversity and inclusion initiatives are guided by the “RBC Diversity Blue-print” 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 cre-ate value, deliver a superior client expe-rience 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 mem-ber and partner of the Lëtzebuerg Diver-sity Charter, established in 2012. In re-sponse 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 Luxem-bourg 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 mul-ticultural 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 giv-en the opportunity to meet with senior lead-ers at RBC to discuss and gain career advice. RBC also supports the “Dress for Success Luxembourg” initiative, the non-profit or-ganization helping to build women’s con-fidence, 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 celebra-tions which highlights each month one of the 29 nationalities of the RBC I&TS Luxembourg employees to promote cul-tural differences in the workplace.Diversity and growth are not just integrat-ed, 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 strength-en us and we are committed long term to progress in our company and the com-munities we serve. Simply having diver-sity is interesting; doing something with it is powerful.

27

Responsible Investing sending Traditional Investment into niche?

Change in investors’ attitude bears its early fruits in the RI sector

< ANNEMARIE ARENS General ManagerLuxFLAG

While world leaders concluded a historic but non-binding agreement at COP21 to tackle climate change, the conference re-vealed 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 fi-nance beyond traditional approaches to target investments matching their values, could lead to a major step towards sus-tainable 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 Microfi-nance focusing on women can be an ef-fective way to give communities a long-term 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 inves-tors’ needs and to promote the financing of sustainable development through the award of transparent Labels. Current de-velopments now raise the question wheth-er Responsible Investing, formerly seen as a niche asset class, might supersede Tradi-tional Investment in the upcoming years.Indeed, ESG is moving mainstream: Re-sponsible Investing can no longer be stig-matised as a sacrifice of returns but can

track and even outperform the market alongside a non-financial return, as studies show. Corporates are embedding Corpo-rate Social Responsibility in their core strategies; ESG screening and Engagement processes are increasingly used as risk man-agement 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 re-veal that female investors and advisors show an outgrowing interest in Responsi-ble Investing. Changes to the gender bal-ance towards more diversity on Boards might drive the lead to further boost in-vestments 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 com-plies with strict eligibility criteria and fulfils its commitment to invest respon-sibly. LuxFLAG seeks to encourage trans-parency by investment funds on ESG per-formance and aims to drive forward developments towards sustainable finance.

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

©ADA

YEARS1

28 29

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.

STEVEN LIBBY >

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

Simply having diversity is interesting;

doing something with it is powerful.

SÉBASTIEN DANLOY

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.

ANNEMARIE ARENS

Female Board Pool Luxembourg Board Ready for the Fund Industry

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

Still underrepresented in the higher gov-erning bodies of companies and organi-sations, women are slowly but surely moving away from the image of the “weaker sex” that Gandhi already con-sidered defamatory. Meanwhile, and still for a few more generations to come – when this will not even be questioned – initia-tives are multiplying to improve women’s representation in executive positions.

BUILDING A BOARD READY NETWORK SINCE 2010The Female Board Pool concept was launched over 11 years ago in Switzer-land, under the guidance of the Interna-tional Center for Corporate Governance at the University of St. Gall, Switzerland. The Female Board Pool is basically a plat-form that enables the contact and con-nection 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 da-tabase of some 500 female “board ready” candidates. The FBPL offers the transmis-sion 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 commit-ted women at Board of Director levels in Luxembourg across all sectors be it in; 1) the profit sector for private and publi-cally listed companies; 2) the public sector and 3) the Non-profit organisations and NGOs.

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 pro-cess with a further 65 profiles transmitted for potential matchings.In an ideal world, I would like to see all newly constituted companies and invest-ment 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 fi-nancial 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 Invest-ment 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 increas-ing 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 wom-en, who are capable and ready to take up board room responsibilities.”

www.icfcg.orgwww.female-board-pool.org

30 31

Focus on Regulation & Tax – what else?

33

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 in-ternational 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 finan-cial 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 sub-ject to the prior authorization and on-going prudential supervision of the fi-nancial sector supervisory authority (CSSF)]. The AIFM Directive then intro-duced 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 manag-er regulation and modernised the Lux-embourg 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 invest-ment 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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34 35

limit safe harbour rule of aggregate com-mitted 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-in-formed investors, a well-known concept for Luxembourg regulated investment funds. This category includes institution-al investors, professional investors and investors investing a certain minimum amount (EUR 125,000) further accept-ing a self-certification.

GOVERNANCEThe 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 no-tary public. The notary public must ensure that the RAIF is then registered with the Luxembourg Trade and Com-panies’ 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 apply-ing for new product launches in Lux-embourg. With the introduction of the manager regulation via the AIFM Di-rective, the Luxembourg legislator iden-tified an opportunity to revise its long standing strategy: continue the strong and recognised regulatory framework applicable to the Luxembourg fund prod-uct and the Luxembourg services pro-viders 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 resolv-ing the single most important issue of the Luxembourg alternative funds centre.

TAX FEATURESThe RAIF will either be subject to an annual subscription tax (taxe d’abonne-ment) at a rate of 0.01%, with various exemptions, or be subject to the tax re-gime applicable to SICARs, i.e., be fully subject to tax save for qualifying risk capital income and gains. The VAT ex-emption 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.

OUTLOOKRAIFs made in Luxembourg are thus positioning themselves to be a true al-ternative to AIFs set-up in the Cayman Islands, the BVI or Delaware. The com-patibility with EU regulations will be total and the marketing reach truly glob-al. The bill of law is expected to enter fully into force during the second quar-ter of 2016.

SIFs has dwindled in comparison to the launch of CLPs and SLPs, there is no one size fits all solution, be it in Luxem-bourg or elsewhere. The unprecedented rise of the limited partnership did how-ever signal to the Luxembourg legislator that the market participants did no lon-ger 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 tool-box is ready for one of its most signifi-cant evolutions: the creation of a new investment funds framework combining the strengths of the SIF and SICAR re-gimes and permitting a further combi-nation 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 manage-ment 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 intro-duction of the RAIF regime into Lux-embourg law.

THE RAIF: THE MOST SIGNIFICANT ADVANCE FOR THE LUXEMBOURG FUND STRUCTURING TOOLBOXThe new regime will allow alternative investment fund initiators and sponsors to set up a new type of AIF, which com-bines 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 FLEXIBILITYJust like the SIF and SICAR, the RAIF may be formed under any of the well-known Luxembourg corporate, partner-ship and contractual legal forms: • Partnership forms: corporate (SCA),

common (CLP) or special (SLP); • Corporate forms: public limited com-

pany (société anonyme - SA), private limited company (société à respons-abilité limitée - S.à.r.l.), cooperative company organised as a public limit-ed company (société coopérative or-ganisée 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

< CLAUDIA HOFFMANN AssociateArendt Luxembourg

CLAUDE NIEDNER > Partner

Arendt Luxembourg

36 37

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ELTIFs offer Luxembourg the opportunity to help drive European growth

ELTIFs fit perfectly into Luxembourg’s fund industry toolbox

< SILKE BERNARDCounsel Linklaters Luxembourg Investment Management Group

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 econom-ic recovery new impetus. It is also an op-portunity 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 legisla-tion, they must have an authorised alter-native 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 Commis-sion’s Capital Markets Union initiative, aimed at stimulating the “real economy”. Together, the CMU initiatives, as outlined in the Commission’s action plan last Sep-tember, aim to fill the gap left by govern-ment 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 par-ticularly suitable for investors such as

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

panying legislation to increase legal cer-tainty 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 de-ployed great efforts to analyse the ELTIF regulation towards finding solutions to possible pitfalls in its practical handling. The ALFI working group has also initi-ated 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 juris-diction of choice for ELTIFs: ELTIFs fit perfectly into Luxembourg’s fund indus-try toolbox and could prove a substantial source of business in the future, while contributing to economic revival and job creation across Europe.

38 39

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 invest-ments. 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 con-sideration address the situation adequate-ly. Thus, one cannot exclude the possi-bility 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 coun-try levels. As treaty benefit will inevitably come under increased scrutiny by the various foreign tax authorities, asset man-agers should nevertheless already assess whether the current level of substance and legal structure in place is still sustain-able / appropriate in a post-BEPS world.

FOR CROSS-BORDER FUNDS, A HIGHER RISK OF HAVING A LOCAL TAXABLE PRESENCE The OECD recommendations may in-crease the chances of an investment fund with cross-border investments and activ-ities being deemed a permanent establish-ment (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 ex-pand the scope of situations in which a PE can be recognised locally and in par-ticular when the physical presence of agents in a country allows them to play a significant role in the negotiation and con-clusion of contracts on behalf of the funds. This could thus also have an impact on deal-sourcing activities and, more gener-ally, on the way funds conduct their busi-ness activities. In practice, this means that asset managers should verify whether their operational organisation and decision-making process-es must be revisited in light of the above.

DO NOT UNDERESTIMATE THE IMMEDIATE IMPACT OF THE BEPS ACTION PLANAfter two years of work, the 15 actions have now been completed at the OECD

level (although, for some of them, addi-tional 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 var-ious deliverables will, sooner or later, be followed by actual implementation at the local level. Furthermore, the EU Com-mission 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 im-pact of the new rules on their operations.

WHAT SHOULD ASSET MANAGERS BE DOING TO ANTICIPATE THIS CHANGING TAX LAND-SCAPE? 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.

BEPS IN A NUTSHELL The OECD Base Erosion and Profit Shift-ing (BEPS) action plan, containing 15 actions, aims at changing international tax rules in order to ensure that profits are taxed where the profit-making eco-nomic activity is located and where val-ue 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 PLANAlthough 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 man-agement industry are the recommenda-tions covering transfer pricing, perma-nent establishment, treaty abuse, and hybrid mismatch arrangements.

OBTAINING TREATY ACCESS MAY BE INVEST-MENT FUNDS’ MAIN CONCERN IN A POST-BEPS WORLDThe main purpose of double tax treaties is to avoid double taxation so as to re-duce tax obstacles to cross-border ser-vices 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 ju-risdiction 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 contract-ing states, based on the previous work carried out at the OECD level in 2010

BEPSWhat does it really mean for the investment fund industry?

< FLORA CASTELLANI DirectorKPMG Luxembourg

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?

41

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

Keeping a cool head in an ever-changing regulatory landscape

Deloitte Luxembourg’s app isDeloitte Luxembourg’s app is

© 2016. For information, contact Deloitte Touche Tohmatsu Limited.

MiFID II costs and chargesDisclosure requirements for investment funds

MICHAEL JOHN FLYNNDirector, Regulatory Strategy

Deloitte Luxembourg

MiFID II, which is expected to take effect in January 2018, is introducing new dis-closure requirements for costs and charges. Investment funds sold via a Mi-FID investment firm will need to disclose information with regards to one-off charges, on-going charges, all costs re-lated to transactions and incidental costs, such as performance fees. In parallel, the PRIIPs regulation – effec-tive as of January 2017 – requires simi-lar 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 inves-tors without passing a MiFID investment firm are sufficient until 31 December 2019; • AIFs sold directly to professional cli-ents, without passing through a MiFID investment firm must comply with AIFMD product disclosure only. Although the MiFID II level 2 publica-tion date is still unknown (expected for first quarter of 2016), ESMA’s Final Re-port 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) ren-dered 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 cate-gories of clients – subject to certain lim-itations; 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 guide-lines 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 challeng-es will be the new cost disclosure require-ments at the fund and share class level. Transaction costs are the point that at-tracts the most attention, as it will be the first time that both explicit and im-plied 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 calcu-lated 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 embed-ded 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 ac-quiring funds which cannot provide the costs and charges disclosure.

42

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© 2016 ALFI

Any reproduction or adaptation, either partial or total, is strictly prohibited without the express written authorization of ALFI.

T H A N K Y O U

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”).

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

There is a strong common interest

and willingness to make Luxembourg

a jurisdiction of choice for ELTIFs.

SILKE BERNARD

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.

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

STAY TUNED AT THE ALFI SPRING CONFERENCE!

follow the discussions at the conference using #ALFISpring16