Luxembourg proves resilient in 2020 despite pandemic headwinds
Luxembourg’s economic stability and the expertise available in its specialised eco-system continues to attract global financial firms, amidst the Covid-19 pandemic, with 82 new entities being licensed to operate by the country’s two financial regulators during 2020.
The Grand Duchy saw licences granted to five new banks, 11 new Management Companies, four new investment firms, four reinsurers and others such as support PFS and specialised PFS institutions, payment institutions and e-money institutions. Luxembourg continues to be particularly attractive for alternative investment fund managers (AIFMs) with 18 new AIFMs and 31 new “light” AIFMs licenced in the year.
Nicolas Mackel, CEO of Luxembourg for Finance, says: “The past year has been unlike any other in recent history. The financial industry managed to switch within a matter of days to remote working. More importantly, it proved resilient. This is certainly in large part due to the extraordinary support measures governments and central banks made available to our economies. It is also due to the regulatory measures adopted after the last crisis.
"Contrary to 2008 where the problems originated in finances, this time financial services are part of the solution and will play an important part in our recovery once we reach the end of the tunnel. To this end, it is important to make sure that capital can flow freely from investors anywhere in the world to firms and projects in need of financing. The continued growth of sustainable finance in Luxembourg points to the future of finance. Luxembourg takes great pride in bringing the expertise of its eco-system to the task of Building Back Better.
“2020 was also about Brexit, although most financial firms were already well prepared from an operational perspective. While financial services is not covered by the trade agreement announced on Christmas Eve, the mere fact there was a deal is essential for other issues directly affecting the sector, such as the granting of equivalences.”
Despite a general consolidation trend that is sweeping across the European banking industry, five new banks set up activities in Luxembourg in 2020. Goldman Sachs Bank Europe looks to continue supporting EU clients post-Brexit with a new branch in Luxembourg to support their investment and wealth management business. Spanish private bank Caixa Bank set up their EU Wealth Management operations in the Grand Duchy, joining a EUR 466 billion private banking sector in Luxembourg. Furthermore, as Elavon Financial Services, a division of US Bank, opened a branch focused on fund custody services while the Canadian CIBC Group established a corporate and capital markets focused bank. Leading Greek Bank, Alpha Bank, set up a new branch in the country as well.
In the investment funds industry, AuM continued to grow following the dip seen in the beginning of the year. Both performance and net flows were largely positive for the year, showing the attractiveness and quality of funds domiciled in Luxembourg (see Figure below). Given the trend towards the end of the year, total assets are expected to reach EUR5 trillion for the first time at the end of 2020, confirming Luxembourg’s position as the leading European fund domicile and second largest in the world. More than 3,600 funds have been set up by over 500 promoters in Luxembourg. These funds are being sold to investors in 77 jurisdictions, making Luxembourg-domiciled funds the most widely distributed and accepted investment vehicle globally.
Sustainable finance has truly come of age in 2020, both in response to the Covid-19 pandemic and growing sustainability concerns that are echoed throughout the globe. The pandemic saw increased emphasis placed on the S in ESG, with a notable uptick in social and sustainability bond issuance. Luxembourg was chosen as the listing location for the EU’s first social bond, issued under the EU SURE programme. The EUR 17 billion bond was 13 times oversubscribed with demand exceeding EUR 233 billion, reflecting the support from the investor community for a bond that will help safeguard jobs and fight rising unemployment stemming from the Covid crisis.
Throughout the course of 2020, the Luxembourg Stock Exchange welcomed 407 new sustainable securities, totalling EUR 186 billion on the Luxembourg Green Exchange (LGX), a 134 per cent increase in terms of total value compared to 2019. In the same period, the number of securities added on LGX grew by more than 50 per cent compared to the year before. The LGX now displays over 900 securities worth EUR 388 billion. Furthermore, the social and sustainable bond categories combined have, for the first time, surpassed green bonds on the platform in terms of total value.
LuxFLAG (Luxembourg Financial Labelling Agency) labelled investment products saw a 76 per cent growth in 2020, going as high as 144 per cent for ESG labelled funds, to reach 322 labelled investment products across 10 jurisdictions and representing EUR135.4 billion in assets under management. Promoters from 17 different countries manage these products, highlighting the importance of ESG credentials to managers internationally.
In line with the trends observed in late 2019, 2020 saw a continued influx of e-payments companies hosting their operations in Luxembourg. The year saw new licences granted to Monex and JoomPay who are now authorised to operate in the Grand Duchy and who join other companies such as Amazon Pay, PayPal, Alipay, Banking Circle, Six Payment Services and others, who have selected Luxembourg as their EU market hub. PPRO and PingPong, already established in the Grand Duchy, received additional licences allowing them to expand their cross-border services across the single market.
The Luxembourg House of Financial Technology (LHoFT) saw the number of FinTechs it hosts rise to 76, up from 67 the year before. The fintech platform has grown as well, with total membership reaching 156, up from 142 the year before.
Following the strong growth observed in recent years, largely due to Brexit relocations, the insurance industry remained stable in terms of firm numbers. The year saw 3 net new authorisations in the reinsurance sector, with two non-life insurance undertakings surrender their licenses.
Covid-19, however, continues to impact the sector, as investors take a wait-and-see approach. The first three quarters of the year saw overall premiums fall by 20.78 per cent compared to the same period in 2019. Much of this stems from the life insurance sector which saw an overall fall of 33.99 per cent, however this is very much product dependent. Guaranteed products, which were already falling into disuse, saw a significant fall of 62.51 per cent, whereas unit-linked products remained far more resilient and saw premiums fall at a lower 10.91 per cent.
Non-life insurance, on the other hand, was significantly less affected by the crisis, seeing premiums rise by 7.49 per cent. Much of this growth is attributable to premiums stemming from Brexit transfers, which grew by 10.02 per cent.