Interview with Charles Muller, Association of the Luxembourg Fund Industry

Charles Muller studied law in Paris and London and is a former Luxembourg barrister. He held various legal positions in the retail, corporate and private banking departments of Banque Générale du Luxembourg, before being appointed Deputy Secretary General of the Bank. In 2003, he joined ALFI, the Association of the Luxembourg Fund Industry where he is Deputy Director General in charge of Legal Affairs, Promotion, Communication and Press Relations. Furthermore he’s a Board member of IIFA (International Investment Fund Association) and a member of the Management Committee of the European Fund and Asset Management Association (EFAMA). Being the perfect person for us to find out more about the future development of UCITS as well as the Luxembourgian point of view we seized the opportunity and interviewed him.

Dennis Drenjovski: Luxembourg offers promoters a unique concentration of product development experts, lawyers, accountants and specialist service providers who can assist them in the design, launch and distribution of investment funds without having a significant domestic market for these products. What led to this unique development?

Charles Muller: To understand this development you have to look at the roots of the Luxembourg fund industry. Luxembourg was the first country to implement the UCITS directive of 1985. In the first ten years there was not much going on as the assets were developing rather slowly. In the middle of the 1990ties, due also to the expansion of the European Union (EU) it was suddenly easier to reach more countries and fund promoters began to see the opportunity in UCITS. As Luxembourg hasn’t got a big domestic market it was quick to concentrate on the passporting of funds – not only for the EU but world wide – and therefore this universe of service providers started to grow. Furthermore fund promoters from countries outside the EU like Switzerland or the USA had to chose a jurisdiction to set up their UCITS products and with the first mover advantage on the one hand and the multiple languages spoken here (English, German, French) on the other Luxembourg was able to establish itself in the UCITS space.

DD: Which advantages offers Luxembourg over other jurisdictions?

CM: The know-how to passport funds. This is not limited to Europe: the funds set up in Luxembourg are sold to over 140 countries worldwide. In Hong Kong for example 40% of the funds sold are from Luxembourg. Our funds can be sold in Asia, Middle East and South America.

DD: Which trends did you recognize over the last 12-18 month in the UCITS III space in general and from a “hedge fund” perspective?

CM: The so called “Newcits” funds try to push the limits of UCITS III. But these funds are not only being set up by off-shore managers that seem to push for regulated versions of their funds, but also from long-only managers who have an appetite for more risky products. While I’m not sure whether these products are as successful as you can read everywhere at the moment, one thing is for sure: The EU regulators keep an eye on them. No one knew how far you could go under UCITS III and as some of these products also target retail clients the question remains whether they are really sophisticated enough to buy into these funds. As this was not the spirit of the UCITS directive I can’t exclude that there might be changes to come under UCITS V or at the level of CESR regarding risk management and the risk/reward-ratio relating to the KID (Key Information Document).

DD: The other big nation in the UCITS space is Ireland. Do you think that comparably small countries have a competitive advantage towards bigger countries regarding adaption time to new regulations?

CM: You also have to mention Malta which tries to be a member of this little club. I think there are two key factors: For one small countries look for cross border markets and decisions are being made much quicker than in bigger countries. If I need to talk to the regulator or the government I pick up the phone and call them. For example, the national legislation is implementing the UCITS IV directive at the moment.

DD: Looking at the competition between Luxembourg and the “Celtic Tiger”: what do you think will be the further development?

CM: As on the classical UCITS front all promoters have chosen either Ireland or Luxembourg already to set up their funds, the future competition will be to attract fund promoters from new countries, e.g. from Asia. Furthermore new markets will open up for everything non-UCITS through the Alternative Investment Fund Managers (AIFM) directive. Whatever Ireland does we will have an eye on it and they also look over our shoulder, basically keeping each other on our toes. In the end this a healthy competition and a good thing for fund promoters. I believe we both will grow in the future.

DD: Are you satisfied with UCITS III or do you see issues which should be tackled? What do you expect from UCITS IV and what impact will it have on the industry?

CM: To answer the first part of the question: Yes. Still, although we think it doesn’t need to be tackled, the Newcits funds might have to undergo some changes as the regulators could have an issue with some recent developments. As for UCITS IV and the passporting ahead there will be some administrative changes: instead of the funds the Luxembourg Regulator CSSF will have to notify the regulators of the countries a fund sells its products into. As for UCITS V I expect the status of the depositary bank to be on the agenda after the bankruptcy of Lehmann Brothers.

DD: Thank you for the interview.