In Luxembourg, FinTechs and investment fund experts are coming together to create fund distribution of the future based on client centricity, cost reduction, efficiency and transparency.
Luxembourg is the world leader for cross-border fund distribution and, in terms of investment fund assets, it is second only to the United States globally. With a long tradition of being a first mover or early adopter, it is home to over €5 trillion of assets in investment funds.
The country is the leading fund domicile in Europe with a 27 per cent market share. Additionally, worldwide, around 60 per cent of all authorisations for cross-border distribution are for Luxembourg funds.
However, despite this strong position, Luxembourg’s fund sector is subject to the same wider trends that are affecting investment funds globally.
Prime amongst these are the initiatives for investor protection, financial inclusion, and greater transparency from policy makers as well as changing expectations from investors for the same, but also for a better and easier investment process and real value for money. At the same time, the industry is operating in an environment of low interest rates, rising compliance costs and a long-term downward pressure on margins. Clearly, the asset management industry is undergoing change and incumbents want long-term solutions that enable them to better serve investors.
As a thriving international financial centre, Luxembourg is home to a vibrant ecosystem that has risen to these challenges. This ecosystem, composed of investment fund professionals and FinTechs, is bringing in fundamental changes that will significantly change how fund distribution is carried out in the future, not just in Luxembourg but in European markets.
Before looking at these changes in detail, it may be worthwhile to take a step back and look at the larger picture. The financial industry worldwide is set to experience “Amazonisation”: the key to surviving and flourishing is now dependent on technology and a complete and far-reaching digital transformation. This means focusing on digital operations and processes, cost-reducing technology and client-centricity.
To implement this requires, first and foremost, policy and regulatory enablers, meaning measures and initiatives that support development in this direction. Secondly, what is required are the appropriate enabling technologies: the base technologies that will grow business, such as distributed ledger technology (DLT), cloud computing or artificial intelligence. Thirdly, if the first two are in place, then we come to the actual business activities for innovation and digital services in financial services.
Therefore, let’s examine the regulatory and policy initiatives in Luxembourg, the use of particular technologies and how they will transform fund distribution in particular.
DLT Fund Distribution And Platforms As A Base
The Luxembourg government sees DLT and blockchain as a promising field for development and has taken the necessary legislative actions. In 2019, Luxembourg passed a law aimed at facilitating the use of blockchain in financial services and giving additional legal recognition to securities held and transferred via this technology.
This was followed by the law of January 2021 which amended existing laws and enabled the issuance of securities in dematerialised form via DLT. It also enabled the circulation of securities via DLT. This law is of particular importance for the investment industry in Luxembourg.
On a practical level, DLT and blockchain hold great promise for the investment fund industry and especially for distribution.
The fund distribution chain is heavily intermediated with many redundancies and the various actors in the chain – asset managers, distributors, registrars and transfer agents and so on – are siloed and do not work together effectively or in a cost-effective manner. The same information and data may be held in unconnected and disparate ledgers and spreadsheets. In short, the legacy technology is simply not up to the job if the industry wishes to grow and offer better services. On the other hand, the chain, built up over many long years, contains much value that is untapped or underdeveloped.
It is the unlocking of this value, together with efficiency gains and cost reductions, that distributed ledger technology can achieve. A shared infrastructure based on DLT gives fund distribution incumbents the means to better work together and share value across the entire chain.
To give a general example of how this works in the real world, take the process for a retail investor. Today, the buying and selling of investment fund shares is onerous and time-consuming: it takes days to settle and there are often duplicated Know Your Customer (KYC) and Anti Money Laundering (AML) checks throughout. A DLT infrastructure shared across all actors involves digital account opening, real-time transactions, clearing and settlement, and automation of business processes in general. Most importantly, it opens up opportunities for real transparency and knowledge on final investors, in that information is easily and securely shared between actors.
For the investor, this results in a much simpler and user-friendly buying experience. For the asset manager, this means that they finally can have specific and detailed information about who is investing in their funds – something that is currently almost impossible at scale. They can identify and understand investors’ needs and be in a better position to tailor products to them, even if these retail investors are intermediated. Because of the speed that all of this can be done, it also means that greater numbers of investors can be onboarded simultaneously.
The distribution chain is thus streamlined, more agile and more intelligent.
Cloud Services To Stay Agile
DLT is just one of the enabling technologies that are revolutionising financial services. Another, which in many respects is complementary to DLT and has a multiplying effect, is cloud computing.
The Luxembourg government has long had a policy that emphasises smart information and communications technology that has as an objective the strengthening of the national cloud infrastructure. Today, the country is home to a number of Tier IV data centres – the highest certification available – and has the highest concentration of such centres in Europe.
As regards the regulatory aspects, in Luxembourg the use of cloud computing by regulated entities is considered by the Luxembourg regulator, the CSSF, as IT outsourcing, is governed by various circulars, and subject to preliminary authorisation.
As has been seen in many other sectors, the cloud, with its flexible access to a set of shared and configurable computing resources, has many advantages over traditional on-premise infrastructures.
For the fund industry, one of the most convincing is the significantly lowered costs and resources for deployment and maintenance of services: cloud providers operate on-demand models that enable scaling up or down as and when needed. This is particularly important for many fund distribution actors who hesitate when it comes to replacing their legacy systems, itself a long and expensive process.
Secondly, partial or full migration to the cloud allows companies involved in fund distribution to keep up with the pace of change and innovate more easily.
The Data Revolution Completes The Picture
Distribution actors must be able to access, use, analyse and act upon the data that is in the fund distribution chain. However, getting access to good quality data in a timely manner has long been problematic.
Moreover, the state of affairs described above – disparate systems, data silos and multiple sources – makes aggregating data and extracting value difficult, messy and expensive. A lot of data already exists in today’s distribution chain but making it available is not economical.
With the ongoing digital transformation of the fund industry, data volumes, variety and velocity will only increase. In order to best exploit this data for maximum effect fund firms are increasingly relying on new ways of using this data, such as data analytics and artificial intelligence.
This entails more reliance on a scalable pipeline for Big Data, one that enables fund companies to extract data in real time. A shared and decentralised infrastructure creates the right foundation for this by allowing the retrieval of data across the entire distribution chain – in a secure, permissioned and shared way – and thus eliminates the complex steps needed today for data analytics.
With a digital point of sales created by a shared infrastructure and network, data can finally be used for investor insight analysis and segmentation and thus better acquisition and retention. It will also open up the way to a long anticipated personalisation or even hyper personalisation for end investors and their individual investment needs.
There will also be a much greater efficiency in middle and back offices. Intelligent use of quality data will take process automation, surveillance and regulatory and investor reporting to another level and further decrease costs.
The greater use of data across the investment fund life cycle, requires specialised companies who are expert at quality control and dissemination but who also understand how fund distribution works. Here, we return to the advantages of Luxembourg and its ecosystem.
The Perfect Mix For Fund Distribution
To sum up, companies involved in fund distribution are, or soon will be, working in an environment that requires them to do more in a more intelligent and efficient way. They cannot do this cost-effectively with their current business models and existing technology.
Meeting this challenge means partnerships and working with FinTechs that can provide very specific services and tools and thus help optimise business and operational processes. It also means adopting an “as-a-service” mindset that best uses the FinTech ecosystem to the best advantage of a company.
It is fair to say that Luxembourg is unique in Europe with its mix of deep expertise in cross-border fund distribution and innovative FinTech companies. The Luxembourg government is proactive and runs numerous development and innovation initiatives specifically in the field of financial services.
It is this combination of public programmes, business knowledge and new technology that makes it the ideal location to complete the digital transformation of fund distribution.
Olivier Portenseigne was appointed CEO of FundsDLT in May 2020, when the company was incorporated. Prior to this Olivier led the development of FundsDLT project from its start in 2016, as a ground-breaking blockchain project initiated by the Luxembourg Stock Exchange and its subsidiary Fundsquare. From 2013 to 2020, he was also the Chief Commercial Officer and Managing Director of Fundsquare, the fund market infrastructure leader in data management and exchange. During his leadership, the company experienced high levels of growth and the launch of numerous new products and services. Olivier has more than 25 years of experience in the fund industry and he previously held various senior management positions related to shareholder services and distribution support activities at RBC Investor & Treasury Services.