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What Luxembourg and UCITS now offer Australian investors

Luxembourg, a small European country nestled between France, Belgium and Germany, has become the second-largest investment fund centre in the world after the United States. This article explains how the country has reached this position and explains what it can offer to Australian asset managers and investors.

UCITS: a spectacular European success story

The European fund industry is characterised by the success story of a truly European idea: UCITS, the acronym of Undertakings for Collective Investments in Transferable Securities. What started in 1985 as a European Directive with the modest ambition of defining a single framework for investment funds within the European Union ended up as a strong global brand for investment funds that is now recognised around the world.

This directive gave a tremendous boost to the European investment fund industry. UCITS started to flourish in the late 1980s, in particular in Luxembourg, which was the first country to implement the directive into its national legislation in 1988. It was the start of a long and steady development. Today, assets under management by Luxembourg-domiciled funds have reached €3.7 trillion (AUD$5.3 trillion) in some 14,594 investment funds.

UCITS were initially intended only to be marketed across the European Union and saw the creation of a new concept called the ‘European Distribution Passport’, which implies that a fund domiciled in one European country can be sold easily to investors located in all the other countries of the European Union. Since then, a growing number of countries in Asia, Latin America and the Middle East have accepted UCITS because the framework provides a stable, high-quality, well-regulated investment product with significant levels of investor protection. For example, in Latin America, Chilean, Peruvian and Columbian pension funds invest heavily in Luxembourg UCITS. For them, this is the most efficient way to get international diversification while offering a high level of investor protection.

Investor protection within the UCITS framework is a key concern of European policy-makers, with rules on diversification, risk management and capital requirements.

To date, UCITS is the only such fund model to achieve this international recognition. About 65% of all cross-border UCITS registrations belong to Luxembourg funds, which are distributed in more than 70 countries around the globe. Luxembourg gained a first mover advantage and attracted international fund promoters, and a professional and diversified asset servicing industry developed which in turn attracted more promoters. From a South Korean promoter selling Luxembourg UCITS to Hong Kong to a Brazilian promoter gathering retail investors from several European countries, UCITS have become truly international.

A major new development for Australia

Australia’s investors can now get easier access to Luxembourg UCITS. The Association of the Luxembourg Fund Industry (ALFI), the official representative body for the Luxembourg investment fund industry, has successfully negotiated with ASIC an exemption from the obligation to hold an Australian Financial Services Licence (AFSL) to provide financial services in Australia. The exemption, which came into force in November 2016, applies to certain financial services providers regulated by the Luxembourg financial supervisory authority, the CSSF. It should increase the range of funds, including alternatives and global infrastructure, offered by overseas fund managers to Australians, circumventing the need to apply for an AFSL in Australia.

 

Pierre Oberlé is Senior Business Development Manager at ALFI. This article is general information that does not consider the circumstances of any individual.

About the AFS licence relief: The Australian financial services regulator, the Australian Securities and Investments Commission (ASIC) has issued ASIC Corporations (CSSF Regulated Financial Services Providers) Instrument 2016/1109 which sets out the conditions of this AFS licensing relief. It came into force on 16 November 2016. A copy of the Relief Instrument is available here.


 

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