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Emmanuel-Frédéric Henrion (Clifford Chance): Interesting times for the Luxembourg Fund Industry in 2019

At the occasion of the Clifford Chance Luxembourg Annual Investment Funds Conference, we had the chance to talk with Emmanuel-Frédéric Henrion (partner) who joined Clifford Chance at the beginning of 2019. According to Emmanuel-Frédéric, the upcoming Brexit, the Asian market as well as the development of sustainability concepts promise interesting times and significant impact on the development of the Luxembourg fund industry in 2019.

Brexit: where to now?

Certainty seems to be the opposite of the outcome of the Brexit as things are changing from day to day. At this stage it is also questionable, if only one party has made mistakes during the process since March 2017. Both sides have spent more time focussing on the divorce, says Emmanuel-Frédéric, although it should now be the time to focus on the common future. While it seems easy to identify what the United Kingdom respectively the EU27 do not want, it is hard to define what each side wants to preserve as common ground. One can understand, and one must acknowledge, the draft exit deal agreement is not acceptable to the House of Parliament in its current state. To solve this dead-lock, the UK government nevertheless continues to hold the feet to the fire with the threat of a hard no-deal Brexit. If this improves the basis for an acceptance of the Irish backstop solution or enables further concessions by the EU27, remains doubtful. For the Luxembourg market, chances and risks exist, from a negative impact on the European Union including Luxembourg to benefits of a partial transfer of the fund industry from the United Kingdom to Luxembourg. What is therefore to do: "Hope for the best, prepare for the worst, a hard Brexit.", says Emmanuel-Frédéric. In this regard, Clifford Chance advises its clients to prepare the funds, their documentation but also their people (e.g. visa and work permits) for this scenario.

« Reliable validation of sustainability performance will be key for the development of sustainable finance into an asset class of its own. »

Sustainable Finance Ecosystem: what comes next?

The profile of corporate sustainability has been growing steadily over the last few years. Boosted by international initiatives such as the Paris Climate Change Agreement, the topic is becoming a mainstream focus of business attention. While the perspective is changing from imposing an overlay onto existing operations to sustainability becoming an enlightened business itself, the fund industry struggled in bridging the gap between ecology and economy. In other words, increasing the visibility of the sustainability performance while preserving the equity performance, becomes the focus. Initiatives such as Bertrand Piccard's Solar Impulse Foundation ( offer tools for fund promoters and governments to demonstrate performance of both, capital and sustainability, allowing investors to comply with their economic as well as ecologic targets. Reliable validation of sustainability performance will also be key for the development of sustainable finance into an asset class of its own. In this respect, the EU's recent proposal for a regulation to establish a sustainable investment "taxonomy" has the potential to become a cornerstone piece of legislation by establishing a unified EU classification system of sustainable economic activities. "Saving the planet while generating performance", summarises Emmanuel-Frédéric, is what will make sustainable finance truly sustainable. There is still a long way, but it looks like an ecosystem is emerging for sustainable finance.

China: open the doors further?
The co-operation agreement recently announced between the CSSF in Luxembourg and the SFC in Hong Kong will facilitate the mutual recognition of funds and make it easier to sell Luxembourg funds in Hong Kong and vice versa. This is an interesting development, especially if one considers the long-term relationship that Luxembourg and Hong Kong have built over the last decades. More specifically, this development must be put into perspective in the sense it is a further step towards more connections between the Luxembourg and the other EU markets, on the one hand, and the Hong Kong and Chinese markets, on the other hand. Going back to the immediate benefits of the co-operation agreement, expectations need however to be managed in the sense that the co-operation agreement imposes eligibility requirements for the recognition of Luxembourg UCITS funds by the SFC, including a limitation of the leverage (arising from derivatives) to 100% of the fund's net asset value as calculated under the commitment approach and the exclusion of share classes with hedging arrangements other than currency hedging.

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