PSFs in the Luxembourg financial ecosystem
Key actors of a vibrant financial centre
In a time where the regulation of banks is becoming more complex every year, the Professionals of the Financial Sector (PSF) offer a lighter and more flexible way to provide specialized financial services.
While the banking license granted in Luxembourg is indeed universal and therefore covers the whole range of banking activities, the PSF licenses each target a specific set of activities and allow a provision under a tailored, quality and effective regulatory regime.
This structure enables entities to focus their resources on a core of key activities, benefiting from a license that only covers what they really need.
A vibrant financial centre at the heart of Europe
Luxembourg’s financial centre was once again confirmed as the number one in the Eurozone by the Global Financial Center Index and appears today stronger than ever. But Luxembourg’s advantage does not only lie in its financial expertise: its small size makes it naturally oriented toward cross-border service in which it has developed a strong expertise. This focus on crossborder services is further facilitated by the nature of its workforce, which is multilingual and international, with foreigners making up close to 70% of the population living in Luxembourg’s capital.
Luxembourg’s AAA status as well as its political and fiscal stability attracts banks, investors and their clients. Its business-friendly government is committed to maintaining a legal and regulatory framework that is stable and flexible enough to quickly adapt to an everchanging environment and to allow businesses to pursue emerging opportunities.
Not so long ago, Luxembourg was the first member state to start offering the EU passport for investment funds, leading to the success story in the development of this industry: the country is now the second largest investment centre in the world and the leading one in Europe. This dynamism has started to expand well beyond the country’s traditional core banking and funds activities, and Luxembourg is a pioneer in many emerging areas of growth. These new untapped areas represent many development opportunities for the PSF sector through innovative use of the existing licenses.
To name just a few, Le Freeport Luxembourg - firstof- its-kind in the European Union - is seen by many as a catalyst for new service offerings in the financial, logistics, ICT, and cultural sectors. The opportunities are indeed numerous, with storage facilities and associated activities allowing wealth managers, private bankers, and family officers to broaden the scope of their services. As for the ICT sector, the combination of the Freeport facilities together with state-of-the-art technological infrastructure unlocks new potential for online businesses such as online art marketplaces or online auctions.
Within the fund industry, Luxembourg is the largest European hub for Islamic Finance: Luxembourg ranks in the top three Islamic fund domiciles worldwide after Malaysia and Saudi Arabia with a total of US$5 billion of assets under management (AUM). To foster the development of Islamic finance in Luxembourg, the country was the first in the Eurozone to issue a sovereign sukuk in 2014. Previously, the Luxembourg stock exchange was the first in Europe to list such a product in 2002. This creates exciting opportunities for the PSFs that target traditional banking and funds activities to enter into a new market and diversify their service offerings.
Looking toward Asia, Luxembourg is now confirming itself as the new bridge between the Eurozone and China: the six largest Chinese banks already chose to base their European headquarters in Luxembourg, the country hosts its own RMB clearing bank and has been granted an overall RQFII quota of RMB 50 billion in April 2015. The proactive nature of the Luxembourg regulator (CSSF) also made it possible for the country to be a first-mover in terms of RMB investment funds by granting access to the UCITS passport to funds investing in Chinese assets. These developments will call for additional support services and yield new activities.
With its first-class infrastructure and telecommunications networks, together with a deep-rooted culture of trust and security, it is not a surprise that Luxembourg is already home to key actors in the e-business sector such as Amazon, PayPal, Rakuten and Skype. Luxembourg has seen the evolution of a dynamic FinTech sector over the past years: almost two-thirds of the FinTech companies established in Luxembourg have been created during the past three years. The number of e-money and e-payment institutions has also tripled over those last three years and the country welcomed international e-business actors leveraging on the EU passport to distribute services and products through the 31 other EEA countries. The PSFs share some key features with this new wave of financial activities: they are focused on a core set of activities and have the flexibility necessary to keep on with evolving market needs. For those reasons, they have the potential to be both a support and an actor of this change by embracing the internet revolution.
PSFs – key actors in the Luxembourg financial ecosystem
The PSF sector is composed of 28 types of actors, which makes this sector transversal to the whole Luxembourg economy, being particularly impacted by its development. As a consequence, this enables the PSFs to directly reap the benefits of its steadily growing economy. Although composed of multiple types of licenses, two categories of PSFs can nevertheless be distinguished – each of them offering specific advantages.
The first of them covers PSFs that supply or provide investment services to third parties on a professional and ongoing basis, and which therefore benefit from the so-called EU Passport. This passport grants investment firms established in an EU country the right to provide financial services within the EU, either via the establishment of branches or directly through a “free provision of services.” In Luxembourg, this right has been implemented through the creation of ten different subcategories of PSFs.
With more than 500 million consumers living across 28 countries, the European Union is a key market for international businesses: setting up this type of PSF allows investment entities to leverage on the flexibility offered by Luxembourg’s PSF regime to tap into the whole EU market. At the heart of both the European Union and the Eurozone, Luxembourg is turning today into a vibrant international hub and is the ideal gateway to the European market.
For all the reasons described above, the financial sector in Luxembourg is thriving and has a vital need for specialists to support its growth and development. This is precisely what the twelve specialized and the six support PSFs, which together form the second category of PSFs, offer: their flexibility and broad coverage allows them to address specific clients’ needs (i.e. family offices) and to offer the services required for the functioning of the Luxembourg financial ecosystem (i.e. Primary IT Systems Operators). As a key player in this ecosystem, they will directly benefit from the future developments of Luxembourg’s financial centre.
The Luxembourg financial sector is evolving and diversifying toward new business opportunities. Le Freeport Luxembourg, the country’s growing RMB activities, its Islamic-compliant products and service offerings, or its FinTech industry are just some illustrations of Luxembourg’s first-mover strategy. The country leaves no stone unturned and is committed to ensuring that its financial centre remains a constantly evolving hub in the Eurozone and an ideal gateway to the EU single market. The services of financial services experts will be much needed in the future to support this development process, and investment firms will be able to leverage on this attractive situation to expand their activities within Europe through the EU passport.
In that context, the PSFs appear to offer the ideal structures to take advantage of such a fast-changing financial landscape: the quality of their regulatory regimes, tailored to their needs - together with the flexibility they offer - allow them to quickly respond to the emergence of new activities and needs.