Embracing change

Since November 2015, when Luxembourg for Finance published its ambition paper LuxFin 2020, a lot has happened. At the time, the Brexit referendum in the UK was still half a year away, the landmark COP 21 was just about to start, and no one suspected that a US-China trade war would be on the horizon only a couple of years later. Importantly, no one could have predicted that a virus would bring most of the global economy to a partial standstill in 2020.

Adapting to a changing global environment, the Luxembourg financial centre has also evolved significantly since 2015:

• With more than 60 financial firms, including banks, insurance firms and asset managers, having chosen to set up new entities or strengthen existing activities in Luxembourg, the outcome of the Brexit referendum has been a real-life test of the attractiveness of Luxembourg’s financial centre.
• Luxembourg has not only embraced the global trend towards green and sustainable finance that was triggered by the Paris Agreement in 2015, but has taken on a leading role: today ranking as the 4th greenest financial centre globally, being home to half the world’s listed green bonds and more than a third of Europe’s responsible investment funds.
• Following the opening of the national Fintech platform LHoFT in 2017, Luxembourg has continued to successfully position itself as an EU centre for Fintech firms as well as a leading European payment services hub, with the world’s main payment and e-commerce firms now established in Luxembourg.
• With Luxembourg having fully embraced transparency in tax matters, the country’s private banking sector has continued to diversify into high-net-worth and ultra-high-net-worth client segments, with assets under management having grown by more than 20% over the past 5 years. In recent years, additional players from Asia, the US and Europe have chosen to centralize their European and private banking operations in Luxembourg.
• With a modernized limited partnership regime and a local ecosystem that continues to climb up the value chain, Luxembourg’s private equity and alternative fund industry goes from strength to strength: assets under management in private equity funds in Luxembourg grew by 50% in 2019.

Building on solid foundations to ensure qualitative growth

Thanks to this continued growth and diversification over the past 5 years,
Luxembourg’s financial centre can rely on solid foundations to continue to develop and evolve in an international environment that has fundamentally changed since 2015.

This international environment is bound to change even more significantly over the next few years because of the Covid-19 pandemic and its fallout. While today it is difficult to predict the shape and length of the downturn and subsequent recovery, the crisis will have a long-lasting impact on many aspects of the daily lives of businesses and citizens; from global value chains to business travel, from consumer habits to remote working.

The financial sector, in Luxembourg and elsewhere, has come to play an important role in helping to overcome the current crisis, notably by providing liquidity through payment holidays and by providing credit, very often through statebacked loans, to businesses.

The sector will play an even more important role in the recovery: in the coming months, firms, both SMEs and larger corporates, will need new sources of sustainable investment beyond purely national borders.

Many of the financial sector’s key priorities and challenges for the future, be it sustainable finance or digitalization, have however not changed. If anything, they have and will come to the fore with increased persistence when dealing with the fallout of the Covid-19 pandemic and better preparing the sector for future crises.

The current crisis will indeed accelerate a shift towards new, digital means of providing services to clients and of operating as a financial institution. It will also spur the demand for sustainable investments, both by private as well as institutional investors.

Luxembourg will spearhead these developments.

As outlined in the coalition agreement of 2018, the development of the financial centre, with a focus on digitalization, sustainable finance and the alternative investment sector, is a key priority of the government.

The ambition for the financial centre over a 5-year horizon, set out in the present document, is not about simply increasing numbers, be it the number of firms, of assets under management or head count. Its focus also lies on qualitative growth. Indeed, thanks to a high level of productivity, the Luxembourg financial centre is already today a model of qualitative growth: with only 12% of the national work force, the financial centre directly generates around 30% of national GDP.

Continuing this path of qualitative growth will require several key ingredients.

• Stability and predictability: Through a responsible fiscal and budget policy, the government is committed to safeguard Luxembourg’s AAA rating and thus provide a stable environment for the financial sector to grow.
• Sound legal and regulatory environment: The government will continue to ensure that financial services firms in Luxembourg can rely on a conducive crossborder business environment that is fully in line with European and international rules and regulations. Moreover, Luxembourg’s supervisory authorities are recognized in Europe and internationally for their competence and high level of expertise in dealing with international financial services and products.
• Digitalization as enabler: Going forward, digitalization will play an even more important role than it has in the past. By bringing new firms and their solutions to Luxembourg and supporting the development of home-grown Fintech innovators, thanks also to the success of its accelerator LHoFT, Luxembourg is creating a favourable environment to allow the financial sector to innovate and develop new products and services, while generating important efficiency and productivity gains.
• Sustainability at the core of everything: Finally, I would like to underline that qualitative growth is in fact synonymous with sustainable growth. In order to avoid another financial crisis as a result of stranded assets and risks to financial stability resulting from climate change, what is needed is not just an energy transition, but also a finance transition. Building on its international financial centre ecosystem and its long-standing expertise in sustainable finance, Luxembourg is not only committed to make its own financial sector more sustainable but, importantly, is also ideally positioned to support this finance transition, which will require mobilizing private capital to increase sustainable investment from the billions into the trillions of euros.