Luxembourg braces for regulatory pressure in 2012

2011 was a mixed year for Luxembourg with the number of funds registered rising 4.84% to 3,833, but assets under management falling €101bn to €2,059bn. Its fund association says regulation is the key deterrent to new investment.

According to the Luxembourg fund association Alfi, if regulatory pressure intensifies in 2012, retail and institutional investors will remain cautious which could harm the European funds industry.

The group said it was “particularly concerned by the Volcker Rule and the Financial Transaction Tax (FTT).”

The Volcker Rule, a proposal within the Dodd-Frank Act to reform the financial sector, restricts US banks or banks active in the US from making certain kinds of speculative investments.

It prohibits banking entities, with certain exceptions, from acquiring or retaining an ownership interest in, or sponsoring, a hedge fund or private equity fund.

While US mutual funds are not caught by the rule, there is no similar exclusion for non-US retail mutual funds. Alfi said this discriminates against non-US regulated retail funds such as Ucits.

“At the minimum, we believe the definition of the funds affected in the final rules should be amended to exclude European regulated funds in the same way as their US counterparts,” said Marc Saluzzi (pictured), chairman of Alfi.

Alfi also believes the proposed FTT could curtail the distribution of Ucits outside Europe and significantly reduce the assets of European funds.

The association does not accept the argument that the FTT would result in the financial sector making a positive contribution to the economy and to society as a whole, especially if it is not imposed globally.

Financial institutions will try to reduce the impact which might result in a widescale relocation of trading activities and/or the passing on of the costs to end-consumers, including individual savers and those participating in pension plans, Alfi noted.

This would create a significant impact on the fund industry because the proposal gives rise to multiple taxation at the level of the fund, its portfolio and its investors, it added.

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