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Banque Degroof Luxembourg makes strides in Asia on back of judicious record

Category: Asia, Global

Experience in servicing UCITS-compliant managers places firm at fore of cross-border distribution segment

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The financial crisis separated market institutions into two groups; the risk-hungry opportunists that got burnt and the judicious conservatives, which comprise the lucky few. Banque Degroof Luxembourg, as one of the few, has enjoyed a reaffirmation of its principles in recent years as financial market leaders worldwide increasingly tout the benefits of steadiness, transparency and long-term relationships. Riding on its pure-blood heritage, its long-standing success, and its balanced growth in Europe throughout the crisis, the Luxembourg-based outfit is now expanding its investment servicing presence in Asia from its Hong Kong office.

“Many asset managers came to us in 2008 because they were shying away from big institutions which at the time had big issues in terms of stability, arising from business restructurings and change of strategy,” says Marc-André Bechet, head of the bank’s investment funds department. “The group’s Luxembourg investment funds business has enjoyed very steady growth over the last decade, often surpassing the average industry growth. Our lending is practically zero, and we don’t trade for our own account. As such, the bank is extremely well-capitalized and its solvency ratio remains far above regulatory requirements.”

Strength and service

For a firm of this size and experience, the service range hits hard.

“We have certain advantages,” says Cecilia Chin, the firm’s general manager and chief representative in Hong Kong. “We are in the supply chain covering a wide range of services, so aside from being a depository and custodian bank, we also provide fund administration, registrar and transfer agency services, domiciliary services, and management company services. We are probably one of the few banks that can cater so broadly to investment fund needs“.

“Our ideal Asian client is a manager who’s looking at Europe to target distribution. There’s a mix of boutiques, newly created firms, firms that have a specific set of investors in Europe, or managers that have benefited from years of growth in Asia and really want to expand elsewhere.”

While the bank’s clients are technically long only, the trend toward simplicity in the alternatives space combined with the introduction of more complex products (involving certain derivatives) in the long-only sphere means that the range of clients it serves within the UCITS landscape has expanded significantly.

Eyes on the road

Fortunately, against this backdrop of increased complexity in the mainstream, Banque Degroof Luxembourg has an eye for detail when it comes to developments in the all-important regulatory sphere.

“The waves of new regulation that have hit the asset management industry since the financial crisis are unprecedented, and we should not lose sight of the key objectives that underlie these developments,” says Mr. Bechet. “There are three main items, first, investor protection. It may mean different things to different people, but at the heart of the crisis is the default of Lehman and the Madoff scandal. Here the key concern is to make sure that the assets of the funds are protected. As such, the rules and responsibilities of the custodian banks are clarified and reinforced in the upcoming UCITS 5.

“Transparency is another key issue in terms of restoring investor confidence. Lack of transparency regarding costs and risks has increased as fund documentation has become more complex and comprehensive, and this has prompted an initiative from the regulators to produce documents that are concise and investor-friendly. In Europe and Hong Kong, the Key Investor Information Document (KIID) and the Key Facts Statement (KFS), respectively, were created to ensure that retail investors receive relevant, clear information when they invest in funds, which is a major and positive development for the entire market.

“The third item relates to the suitability of products for investors. Again we have legislation covering it. ‘MiFID 2’ stipulates that whenever you sell a product in Europe you must properly assess the client’s risk profile to make sure it really is what the investor expects to receive. We have not yet seen the full results of these developments, but over the coming years we are increasingly going to see that managers take into account risk profiles, risk appetites, and long-term horizons versus short ones, for instance.

Mr. Bechet is quick to warn against seeing regulation as an end in itself: “There’s a tendency to waste time by looking at regulation for the sake of looking at regulation, instead of looking at the objectives of what is being put in place. There must be clear objectives to regulation. The industry must also be involved in some way in preparing and checking new regulation to make sure that it is sensible and pragmatic.”

Nevertheless, the firm considers adherence to regulation and conservatism paramount.

“It’s in our DNA. As sponsors of funds that are managed out of Hong Kong or Singapore, we carry significant responsibility,” says Mr. Bechet. “We have developed very powerful tools to monitor investment compliance and trades made by investment managers. We have two different levels of control. One is at the level of the Luxembourg management company, which gets the trades from the investment manager, where we carry out pre-trade or post-trade controls. The second level of control is done by the custodian bank itself. Of course, both of these are combined with the work the investment manager is already doing. On top of that, we have invested in a full array of risk management tools, which allows us to offer a package of reporting for investment managers to comply with the legal obligations.”

Shape of things to come

In a note to potential clients in the Asia region, Mr. Bechet says that all asset managers heading into Europe will be faced with a variety of regulatory issues that need to be acknowledged.

“Anyone involved in the management or distribution of an offshore or onshore vehicle in Europe which does not qualify as a UCITS fund will be affected by the forthcoming Alternative Investment Funds Management Directive (AIFMD),” he says. “The expansiveness of the regulatory environment stems from a major trend in the asset management field. Ten years ago you started to see asset managers broadening their investment scope or merging two firms together to increase capabilities. This new regulation reflects this merging of worlds into a unified set of global products.”

The combination of increased regulation and rising client demands for lower fees is set to transform the competitive landscape of the securities servicing industry. With this, end users looking to build long-term partnerships must select their service providers carefully.

“It’s a question of size now, and the mid-sized players in the securities servicing industry are set to face a squeeze,” says Mr. Bechet. “The cost of doing business has risen dramatically, and the firms that will succeed are the large-sized firms and the smaller specialist outfits. It’s an industry in which you either have very low margins and mass business or are focused on core strategies, much like Banque Degroof Luxembourg. I think we’ll see many mid-sized firms disappear due to this size issue.”

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