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For Robert Scharfe, chief executive of the Luxembourg Stock Exchange, the lesson of his county’s development as a financial centre is never to be complacent. “We do not take anything for granted,” he says. “We are asking ourselves constantly ‘what next?’”
It is an approach that has enabled Luxembourg to transform itself over 50 years from an economy reliant on steel to an international financial services hub — one built on private banking, investing, insurance and corporate lending. The approach has also driven diversification into markets such as offshore renminbi trading, green finance and fintech.
The latest change to which Luxembourg and its rivals are reacting is one that few anticipated: Brexit and the prospect of the City of London, Europe’s largest financial centre, leaving the EU’s single market.
The UK’s decision has put the spotlight on Luxembourg as an alternative home for financial companies looking to maintain their precious rights to market access — drawing the grand duchy into competition with Paris, Frankfurt, Dublin and Amsterdam.
Some relocations are already under way. M&G, the asset management arm of UK insurer Prudential, as well as the insurers AIG, FM Global and Hiscox are among those that have decided to set up subsidiaries or divisions in Luxembourg in response to the UK vote. Investment bank JPMorgan has also identified the country — alongside Dublin and Frankfurt — as a European centre where it will increase its presence after Brexit.
While the French authorities have made no secret of their desire to lure big financial services companies across the Channel — even launching a poster campaign in support of the idea — their counterparts in Luxembourg stress that they are not engaging in a public beauty contest to attract business. “We have not been waving our hands or raising the flags to tell players ‘close your office in London and come to Luxembourg’,” says Pierre Gramegna, the country’s finance minister. “We have not said this and we are not going to say this.”
Executives and politicians in Luxembourg say, instead, that one of the defining features of its financial centre is that the services it offers are “complementary” to those in the City. This reflects the symbiotic relationship between two business hubs.
London offers Luxembourg-based financial companies an exhaustive supermarket where they can buy instruments to hedge their risks and access deep pools of capital.
“We have had a co-operative approach with London for decades and that’s what we want to continue tomorrow,” Mr Gramegna says. “It’s our largest partner for the financial centre of Luxembourg.”
Mr Scharfe agrees. “Our assumption is and remains that, irrespective of whatever red-carpet treatment might come from other big EU capitals, it’s difficult to imagine that London will not remain the capital markets centre in Europe,” he says. “The relationship is very tight.”
One of the questions for Luxembourg, then, is what this relationship will look like in the future, and specifically what the conditions for cross-border business between the UK and the EU will be, given the prevailing uncertainty over Brexit negotiations.
As it stands, UK government policy would lead to City-based companies losing their “passporting rights” and having to rely on alternative legal arrangements for operating in the EU market from London.
Chief among these are the EU’s so-called “equivalence rules” that allow market access from overseas if Brussels deems the other country’s regulations to be tough enough. But few believe that the system could form the basis of a comprehensive, long-term solution, not least because the European Commission can withdraw a country’s equivalence status at any time.
For Mr Gramegna, there has been a “kind of dramatisation” of the threat posed by Brexit to cross-border financial business. “We have relations with [countries in] the rest of the world that are not part of the single market,” he says. “Look at different free-trade agreements that the EU has concluded. Look at the one with Canada — which is the most recent. What a sophisticated free-trade agreement that is.”
Mr Gramegna says the ingenuity of business leaders will help keep trade flowing.
Even if Luxembourg is not engaging in a race to attract wholesale office relocations from London, industry professionals in the country have clear ideas about what kinds of moves are on the cards, and which are not.
The expectation is that — like most of the relocations announced so far — they will centre on businesses in which Luxembourg already has strength, such as private equity, insurance and fintech. The country’s size means relocations requiring large-scale personnel moves could pose logistical problems.
“If your idea is to transfer 400 people to the continent, I don’t think we would be the first choice,” Mr Scharfe says.
What Luxembourg does bring to the table, he says, is “international understanding”. The regulatory rule book for financial services has been translated into English, and company accounts can be filed in English, French or German. Luxembourg has — inevitably given its size — specialised in cross-border business, with the expertise that comes with it. “All the others around us are big markets, but above all big domestic markets,” Mr Scharfe says. “You will not find a more international financial centre on the continent than Luxembourg.”
The country’s other advantages, according to its advocates, are its political and economic stability and lack of social unrest.
Ultimately, Mr Scharfe says, the real question for the future beyond Brexit is how to keep Europe as a whole “attractive for international issuers” in the face of mounting competition, notably from Asia. “There’s a lot at stake for all of us in Europe,” he says.