(Last updated: 24 May 2011)

Trends and opportunities

The market

Luxembourg has a relatively open and stable economy. In 2010, the financial services sector in Luxembourg accounted for about 28 per cent of the country’s GDP, which is especially significant given the GDP of Luxembourg ranks third globally.

While the size of the country may act as a deterrent, being located at the heart of Europe makes Luxembourg a unique gateway to the European market with over 500 million consumers. Luxembourg has long established a reputation as a favoured location for a wide range of international companies with diverse business models from a variety of sectors. Around 40 per cent of the European Union’s wealth is concentrated in a 500km area around Luxembourg.

Although Luxembourg's economy has weathered the global financial crisis (GFC) better than expected, the manufacturing industry (which exports close to its whole production) experienced a downturn and its financial sector (given the international character of the activities) is proving sensitive to developments abroad. Luxembourg's public debt doubled in 2008, largely due to the provision of support for the financial sector. The government has developed a package of economic and social measures to combat the GFC, with infrastructure projects scheduled for 2011-2012 brought forward. The package is valued at over three per cent of GDP and would result in a 25 per cent increase in public spending.

Existing trade

In 2009-10, Luxembourg ranked as Australia's 94th largest merchandise trading partner, with total trade valued at almost A$40.5 million, heavily in Luxembourg’s favour. Australia’s major exports, worth A$1.8 million for the year comprised mainly measuring and analysing instruments, and civil engineering equipment/parts. Key imports, worth A$38.6 million, were heating and cooling equipment/parts and rubber tyres, treads and tubes.

Banking sector

The balance sheets of the Luxembourg banking sector fell to €793 billion in 2009; a loss of €137 billion. The banking sector in Luxembourg is extremely diverse, with banks from all over the world being represented in the market. Luxembourg banks are supervised by the Commission de surveillance du secteur financier (CSSF), the financial supervisory authority.

Key indicators for the Luxembourg bank industry 2007-09

In 2010, the banking sector had an income of €9,558 million, 58 per cent of which was generated from interest rate margins.

As a general rule, foreign banks tend to offer specialised operations for other financial institutions (eg. Dexia and J.P. Morgan) as opposed to local banks which provide a complete portfolio of services. Through their subsidiaries, banking groups from Germany, France and Belgium have a strong representation within Luxembourg; the Luxembourg subsidiary often being the most significant foreign subsidiary within the group.

Banks by country of origin 2009

Overview of banks present in Luxembourg (Top 10, 2009)

Private banking

Private banking represents one of the leading activities of the Luxembourg financial sector. While still dwarfed by Switzerland, the private banking sector in Luxembourg is significant; and accountable for six per cent of the international private banking market (Switzerland 27 per cent and UK/Ireland 24 per cent).

Private banking sectors provide significant services to non-resident clientele, with 72 per cent coming from outside Luxembourg and more than 55 per cent coming from Belgium, France and Germany.

The private banking sector in Luxembourg also provides unique access to ultra-high net worth individuals (UHNWI). In Luxembourg, 54 per cent of the assets are represented by UHNWI with assets of over €5 million. Personal banking clients with assets between €100,000 and €500,000 represent a further 18 per cent of assets.

Deposits

The geographical origin of the deposits held by banks in Luxembourg is highly varied. Within the deposit market, 55 per cent are from Luxembourg resident entities or individuals, 27 per cent are from other European countries and 18 per cent are from the rest of the world. Deposits decreased by nine per cent in 2009 to a value of €254 billion (approximately 32 per cent of the value of the banking sector in 2009).

Loans

In 2009, loans and advances to credit institutions (excluding central banks) amounted to €355 billion, a decrease from €427 billion in 2008. Loans and advances to customers amounted to €173 billion (€192 billion in 2008).

Stock market

The Luxembourg stock exchange was created in 1927. Since its establishment, it has worked to earn a specific know-how in the listing of and trading in securities from a wide range of regions. In January 2009 CCLux, the subsidiary of the Luxembourg Stock Exchange, became Finesti. Following this, in March 2009 the Luxembourg Stock Exchange successfully migrated all securities listed on its two markets, the regulated market and the Euro MTF market, to the Universal Trading Platform or UTP of NYSE Euronext.

In 2008, Euronext was ranked fourth in the world of the leading share markets (according to market capitalisation), with over 3,000 market-listed companies.

NYSE-Liffe is a European based derivatives business of NYSE Euronext. Today Liffe is the world’s second largest derivatives exchange in terms of the value of transacted business, and trades in excess of €2,086 billion each day.

Debt market

Many European domestic rates merged into Euribor on 1 January 1999; the European Monetary Union day. Euribor rates are used as a reference rate for euro-denominated forward rate agreements, short-term interest rate futures contracts and interest rate swaps. Euribor panel banks have the highest volume of business in EU money markets and are banks either located in the EU of large international banks form non-EU countries with important EU operations. In Luxembourg, this bank is Banque et Caisse d’Épargne de l’État.

Asset management

In 1988, Luxembourg became the first EU member state to adapt its domestic legislation to the EU Directive governing undertakings for Collective Investment in Transferable Securities (UCITS). This gave Luxembourg a competitive advantage as it was the first country with the ability to offer investment funds a European Passport for cross-border distribution. With the constant modernisation of the country’s legal and fiscal environment, Luxembourg continues to attract fund promoters from all over the world. In 2009, Luxembourg was responsible for 26.2 per cent of the European investment fund market (France 20.3 per cent and Switzerland 2.2 per cent).

Today, Luxembourg is Europe’s leading investment fund centre and the world’s leading hub for global fund distribution. At the close of December 2010, net assets under management in Luxembourg investment funds totalled €2,198.9 billion. This represents an increase of 19.45 per cent since December 2009.

In 2010, fixed income investments were the most valuable class (in terms of Net Assets) with a value of more than €910.3 billion, accounting for 42 per cent of the net assets. Equity investments accounted for 27 per cent of the number of funds in the sector, with only 31 per cent of the net assets.

Another unique characteristic of the sector in Luxembourg is the diversity of fund sponsors which the market represents. Fund sponsors from the USA and Germany represent 39.9 per cent of the industry, with sponsors from France representing 8.2 per cent and Luxembourg only 1.5 per cent.

Private equity and venture capital

Luxembourg is the second largest global leader for domiciled funds after the US. Institutional investors are the most important source of funding in private equity (PE) in Luxembourg, however, professional investors and high-net worth individuals gained access in 2004 and 2007 with the creation of SICAR and the specialised investment fund (SIF).

A recent survey conducted by the European Private Equity and Venture Capital Association ranks Luxembourg among the most desirable jurisdictions in the EU for the development of the PE sector. The majority of investors that generally use Luxembourg funds to invest in European companies are US or European investors.

The main objective of PE funds is to have the highest return on capital possible at the time of exit (eg. the highest capital gain). The average rate of return in Luxembourg is between 20 per cent and 25 per cent (Australia ≥20 per cent, Germany 20 per cent-25 per cent).

Insurance

With a robust banking sector as a base, the insurance industry in Luxembourg is flourishing. The principal foreign groups present in the market tend to exploit the ability to offer cross border services within the EU. In Luxembourg, the life insurance sector is the most profitable within the industry, accounting for 89.3 per cent of the premiums collected in 2009. The sector had assets totalling over €87 billion in 2009; accounting for 90.5 per cent of the assets held within the industry.

Unlike some markets, providers in Luxembourg are less likely to provide both life and non-life insurance. The number of insurance companies with a presence in Luxembourg has remained stable since the GFC with only minor fluctuations within the market between the two sectors.

Most life insurance companies conduct both international and domestic business, though cross border sales account for over 89 per cent of life insurance premiums.

Opportunities

With a booming financial sector saturated by foreign banks, Luxembourg presents a unique opportunity to become involved in a sophisticated, well-regulated financial market.

Companies seeking to enter the market should be sophisticated and well known. Often, a partnership with a local bank or banking group can present an ideal way to enter an otherwise potentially daunting market. This method ensures that risks are diluted, language and cultural barriers can be mitigated and an established international reputation becomes less crippling.

Ideally, a new entrant to the market will better exploit the ability to freely provide services within the EU’s internal market. Offering comprehensive services and competencies in individual and collective wealth management and financial engineering will be well received in the market where there is a clear presence of desirable potential clientele. Companies seeking to exploit the fluidity of the EU market must ensure their strategy considers the cross border implications of having operations and companies across Europe.

Private equity is set to expand as an industry and Luxembourg (as a world leader in PE and funds in general) is uniquely positioned to capitalise on this development. Within the sector, regulatory bodies have expressly recognised a need to attract asset managers to Luxembourg, and are committed to beefing up staff bases and operational competencies to ensure the industry can capitalise on this growth. A more favourable tax regime for ‘experts’ within specific asset management markets is also currently being considered as a means of attracting more asset managers. A 2011 in-market report on the PE industry specifically indicated that clean tech is increasingly popular with PE investors noting that; “…the growth in clean tech has continued, with the setting up and launch of a significant number of private equity funds investing in alternative and renewable energy”. With Australia’s well regarded position in this industry, this presents a very unique opportunity Australian companies should explore.

Pension funds and similarly oriented products have potential to expand within the country despite not currently being as significant as other financial markets. This development is dependent on greater tax harmonisation and the recognition of foreign pension funds as equivalent to local pension funds in individual countries. The cross-border expertise and wealth of experience available in Luxembourg could easily be applied to develop central pension funds solutions for international groups managing funds across different countries. Partnership in this sector is almost essential.

While the market in Luxembourg already boasts the biggest names in banking and other financial sectors, this characteristic should act as an incentive, not a deterrent. The saturation of the market is testament to its well-regulated and monitored sectors, and the integrity of the market as a whole. Further, the concentration and availability of high-wealth individuals and groups across the markets indicates consumer readiness to accept Luxembourg as a desirable financial destination. Finally, the concentration of banks and financial institutions in the market makes innovation in available products, services and associated regulations a necessity, meaning that companies will be well protected should they choose to invest.

Companies should emphasise the ability of the Australian company to provide better service to the customer at every point in time; advertising, customer enquiry, customer commitment, and post-commitment services. When applied regionally, this approach is sure to earn companies favourable reputations in little time as European companies typically focus on this competency to a lesser degree.

Tariffs, regulations and customs

As a member of the EU, Luxembourg’s legal and regulatory environment is largely determined by the numerous Directives and regulations that have been adopted within the framework of the Financial Services Action Plan. The Luxembourg financial sector is additionally regulated by two fundamental laws which control access to the profession: where banks and professionals of the financial sector are concerned this is the Law of 5 April 1993, as amended, and for the insurance industry this is the law of 6 December 1991, as amended.

However, in order to maintain a competitive advantage, legislators within Luxembourg have ensured the ‘margins’ within each Directive are exploited to ensure the maximum benefit to the market when the regulations are transposed into domestic law. While competitiveness is a key concern as the financial services market is so vast, investor protection remains the priority.

The legislature has two key objectives when regulating the sector:

• To deliver a robust competitive framework for the financial centre
• To guarantee optimal protection for investors and consumers

Banking secrecy

The exponential development of Luxembourg as Europe’s biggest funds centre can be partially attributed to its banking secrecy laws. With a focus on the delivery of competitive financial services, the destination is often known as a tax haven. Many other EU companies with less stringent protection for customer’s details have requested that Luxembourg relax their policies to allow them to better trace potential tax evaders.

Historically, Luxembourg’s law criminalised the disclosure of any information gained in the course of dealings with a customer unless otherwise required to do so by law. In addition, the tax law expressly excluded the ability to request information from institutions within the financial sector, and prevents law enforcement agencies from doing the same. To avoid conflicts with EU Directives, Luxembourg reserved the right not to include Article 26 par. 5 of the OECD Model Convention in its double tax treaties.

In 2009, following significant pressure from other EU states, Luxembourg announced plans to relax its secrecy laws and to increase cooperation with foreign tax authorities. However, it was clearly stated that the country was of the opinion that banking secrecy is not incompatible with OECD rules, and that banking secrecy would be maintained as an instrument for the protection of consumers. As a result, Luxembourg provided that they would exchange information on demand, but only in precise cases with clear proof of suspicion of fraud. Luxembourg continues to make an effort to be in line with OECD standards but refuses to allow ‘fishing expeditions’ or automatic exchanges.

Links and industry contacts

Government, business and trade resources for Luxembourg

Association of the Luxembourg Fund Industry – www.alfi.lu/homepage
Banque Centrale du Luxembourg – www.bcl.lu
Commissariat aux Assurances – www.commassu.lu/
Commission de Surveillance du Secteur Financier – www.cssf.lu/en/
Finest – www.finesti.com
Finesti (events) – www.alfi.lu/conferences-training/conferences
International Bankers Forum Luxembourg – www.ibf.lu/
Luxembourg Bankers Association – www.abbl.lu
Luxembourg Finance Ministry – www.etat.lu/fi
Luxembourg for Finance – www.lff.lu
Luxembourg for Finance (events) – www.lff.lu/en/finance/calendar-of-events/
Luxembourg Stock Exchange – www.bourse.lu

News and media

Le Quotidien (French) – www.lequotidien.lu
Lëtzebuerger Journal (Luxembourgois) – www.journal.lu
Luxemburger Wort (French and Luxembourgois) – www.wort.lu
Tageblatt (Luxembourgois) – www.tageblatt.lu

Contact details

The Australian Trade Commission – Austrade – is the Australian Government’s trade and investment development agency.

Through Austrade’s network of offices in over 50 countries, we assist Australian companies to succeed in international business, attract productive foreign direct investment into Australia and promote Australia's education sector internationally.

For more information on how Austrade can assist you, contact us on:

Australia ph: 13 28 78 | Email: info@austrade.gov.au

A list of Austrade offices (in alphabetical order of country) is also available.

Sources

Business Monitor International
Datamonitor
The Economist
Felbefin
Commission Bancaire, Fianciére et des Assurances