Luxembourg is winning Brexit business with an unlikely pitch: don't bring all your London-based staff.
European capitals are vying to attract UK-based financial firms that need to increase their presence – or establish a presence – within the European Union (EU) to continue selling their services across the Continent after Britain leaves the bloc in 2019.
However, unlike cities such as Paris, which has been lobbying for major relocations aggressively, Luxembourg City – with a population roughly one-quarter the number of workers employed in the City of London – would struggle to cope with a massive influx of financial-services workers.
"Luxembourg cannot be a candidate to attract Barclays bank moving, say, 2,500 people to Luxembourg because we just cannot house them," said Paul Mousel, founding partner at law firm Arendt & Medernach. "We just do not have the infrastructure."
We decided relatively early on not to go running around like butterflies on crack
The Luxembourg government has therefore adopted a much more complementary approach, where London remains Europe's major financial hub.
"We decided relatively early on not to go running around like butterflies on crack as maybe some others have done," said Nicolas Mackel, CEO of Luxembourg for Finance.
Luxembourg Finance Minister Pierre Gramegna also highlighted in Parliament earlier this summer that the country hoped to attract hundreds rather than thousands of workers from Britain, and that the Grand-Duchy was looking for "qualitative growth".
The government's strategy has been echoed by senior figures in the Luxembourg finance industry who have been candid about the limitations of an already-strained transport infrastructure, housing and school places. Many have intimated that Luxembourg is instead hoping to attract "activities", alongside highly qualified top-tier staff and managers.
"Luxembourg has pitched an intelligently complementary offer to London," said Jeremy Browne, The City of London Corporation's Europe envoy, adding that this approach was appreciated by businesses "inclined to move the minimum amount of people consistent with doing what they need to do to adjust to the realities of Brexit."
Insurers and fund managers
This pitch has won over both insurers and fund managers wary of major disruption to their business and staff in London but that need to establish or increase their European presence to prepare for a so-called 'hard Brexit', where they would lose access to the single market.
In particular, Luxembourg has been named as the location for the European base of a series of specialty insurance companies, such as AIG, Hiscox, RSA, Liberty Specialty Markets, CNA Hardy and FM Global, as well as asset managers such as M&G Investments.
The announced insurers are the "tip of the iceberg", and at least eight others are in discussions with the regulator. More are expected to follow, according to Mousel, an insurance and banking specialist. Insurers have also been quicker to take decisions because transferring policies is a lengthy process that can take more than a year, he added.
Luxembourg is already a hub for cross-border life insurers, but the level of interest from specialty insurers (marine, real estate and renewable energy, for example) – partly attracted by the stand-alone regulator for insurers, the Commissariat aux Assurances (CAA) – was unexpected.
"It's true to say the number of insurers that settled in Luxembourg came as a surprise because, to be very honest, the main target for Luxembourg for Finance and the Ministry of Finance was more asset management and banking," said Jean-Michel Pacaud, insurance practice lead at EY.
Fund managers are also quietly applying to scale up their operations via new UCITS retail funds, alternative investment funds (AIF) and super management companies that are licensed for both, or through MiFID licenses to distribute funds – all registered with the Commission de Surveillance du Secteur Financier (CSSF).
Luxembourg is attractive to fund managers because it is already the largest cross-border domicile of funds in Europe and boasts a wide range of service providers, said Camille Thommes of the Association of the Luxembourg Fund Industry (ALFI).
While many funds have been quietly consolidating their presence in the Grand-Duchy, so far, only M&G has announced it would establish a new EU base in Luxembourg. But, half a dozen other UK or US managers have made the same decision but have not announced it publicly, said Claude Niedner, founding partner and specialist in investment funds, from Arendt & Medernach.
"My expectation is that many of the players who already have a small substance in Luxembourg, maybe a small office with four or five people, will at the end of the day end up having more like 15-20 people on the ground," he said.
The companies moving to Luxembourg are also abiding by the requirements imposed by their new regulators on the "substance" of a relocation.
Newly arrived insurers will have to meet Solvency II regulations and base their risk management, actuarial, compliance and internal audit functions in Luxembourg. Solvency capital requirements will be the same, "penny for penny", as in London, Mousel said.
In addition, the CAA is demanding that two executives be resident in Luxembourg, and be highly qualified decision-makers, potentially including the CFO.
For asset managers, the European Securities and Markets Authority (ESMA) released guidance in June that includes recommendations to avoid 'letter-box entities', including limitations on outsourcing.
The CSSF is also requiring that the "decision makers", or at least two senior executives, be based in the country or near the border. The CSSF declined to comment but said in a statement in July that principles laid down by ESMA were "in line with the CSSF's practice".
There is an established model for asset managers to set up EU bases in Luxembourg and handle the administrative side of the business in the Grand-Duchy but delegate asset management back to their home jurisdiction.
"We are very used to having Swiss asset managers here that delegate things back to Switzerland, or US asset managers that delegate things back to the US," said Charles Muller, partner at KPMG. "There is a policy in place, and we haven't changed it for Brexit."
However, the level of "substance" remains contentious politically across Europe, although business leaders and politicians alike passionately defend the integrity of Luxembourg's regulators.
"Our regulator is not supporting the presence of empty shells, quite to the contrary," Thommes said. "I think there is a movement of activity that has to go hand in hand with substantive presence and operational activities on the ground."
There is some evidence of growth, as around 10 companies relocating because of Brexit are out looking for new office space in the prime districts of the city centre, according to real estate agents, but there has not been a massive surge in demand.
"They are not in a hurry – some are visiting offices, some are waiting until early 2018," said Régis Luttmann, managing director of Savills Luxembourg. "There are several corporates looking at properties now looking for 5-to-20 people. No-one is looking for 5,000 square metres or 200 people."
For Mackel, though, no country in Europe is yet experiencing a flood of London bankers because companies are still planning for "contingency operations".
"I haven't seen the movie Dunkirk yet, but I don't see any inverted Dunkirk operations yet of bankers being shipped by French fisher-boats onto the Continent," he said. "That simply doesn't happen for a good reason because nobody knows yet what the outcome of the negotiations will be."
Relocating companies are also expected to hire locally to fill positions rather than move disgruntled Londoners. Luxembourg for Finance's Mackel said any jobs created as a result would have real benefit for the country's economy.
"It's the development of the Luxembourg financial services ecosystem, which has basically been the fuel of Luxembourg's economy," he said.
"It gives jobs not only to bankers in pinstriped suits but also jobs to secretaries, to IT personnel. It's not a question of 10 jobs. I think each job is worth trying to create."
And while Luxembourg lobbyists did not descend onto London like vultures, senior financial services executives were keen to point out that the Grand-Duchy is still actively trying to attract London-based companies, with Gramegna flying to London every six weeks to meet with potential movers, although a spokesperson for the Finance Ministry could not confirm those trips.
With €10 billion in yearly flows between the two cities, the general expectation is that, as negotiations progress, so will the number of companies announcing moves to Luxembourg.
The CAA was not available for comment.
(By Hannah Brenton and Barbara Tasch)