14 June 2013
By Jacques Peters
Tidy, quiet Luxembourg—smaller than the smallest U.S. state and richer, per capita, than nearly every other nation on earth—has lately found itself in the very last place it wants to be: under the global spotlight.
Ever since Prime Minister Jean-Claude Juncker announced in April that the country is ready to engage in the automatic exchange of information with EU and American tax authorities, analysts world-wide have speculated about what the change means for our nation of 500,000, where the financial-services sector accounts for roughly 28% of GDP.
In banking circles here, concern has been mixed with relief that the regulatory outlook is at last certain. The mood is also mixed among the wider population, who are worried about the impact on employment and state revenues but are gratified that the country will soon shed its longstanding reputation as a “tax haven.”
That characterization—which implies that Luxembourg is a place where individuals evade their responsibilities—is simply not representative of who we are as a country, or as a people.
For the better part of the 20th century, including the periods leading up to and following two World Wars, Luxembourg was an industrial nation, dominated by the production of iron and steel. The rise of industry came swiftly and was sustained until the 1970s, when the services sector, led by banking, became ascendant.
Given that the median age here is nearly 40, most of us have at least some memory of that earlier era. Our ancestral values of labor, respect and thrift are borne of the steel works in which our parents and grandparents toiled.
Our people are typically conservative in the true sense of the word. Despite our openness to new ideas and to the world at large—which is reflected by the fact that some 40% of the country’s residents are foreign—we’re a quiet people who don’t relish being in the spotlight.
The premium we place on discretion suited perfectly the rise of private banking in this strategically located crossroads. Roughly 40% of the wealth of the EU lies within 500 kilometers of Luxembourg
Supported by one of the world’s most responsive regulatory environments, our private banking industry now manages roughly €300 billion and generates over €3 billion in annual revenues. Private banks, both foreign and domestic, operate here alongside vibrant asset-management and insurance sectors, in an environment characterized by an extraordinarily high level of political stability and drawing upon an oversized pool of skilled, highly productive professionals.
Critically, with more than €2.4 trillion in net assets under management, Luxembourg is the largest investment-fund center in Europe and the second-largest in the world after the United States.
Following nearly four decades of more or less sustained expansion, however, the end of banking secrecy represents a watershed moment that will surely lead to some reorganization at private banks here—and even to consolidation.
Consider that, in the first four months of this year alone, 1,715 Belgian citizens officially disclosed previously undeclared revenues, according to a recent report in the Brussels-based newspaper Le Soir. That figure represents a nearly 10% increase compared to all of 2011. If this trend continues, it would be equivalent to a rise of about 120% over last year.
There is little doubt that some—but by no means all—of that previously unreported capital has been held at Luxembourg-based banks.
One clear consequence of the so-called “onshorization” process is that some “offshore” clients in Luxembourg are now electing to repatriate their wealth, based mostly on their preference for geographic proximity. That fact is undeniable.
It’s also undeniable that most of those clients are in the lower tier of the private-banking pyramid. According to a 2011 PwC survey, 80% of private banking clients in Luxembourg have accounts containing less than €1 million, and often well below that amount. Only a fraction of the total client base here can be put in the High Net Worth Individual (HNWI) or Ultra High Net Worth Individual (UHNWI) categories.
The challenge for private banks in Luxembourg is therefore clear: While assisting existing clients with “onshorization” and retaining as many of them as possible, private banks need to attract more clients that fit the HNWI and UHNWI profiles.
My firm belief is that we can and will do so, primarily because this small country already offers a concentration of services and skills found nowhere else. In future, the key selling point for Luxembourg will not be “secrecy” but rather our talent base, and the political and macroeconomic stability we offer.
At the same time, it has never been more important for Luxembourg-based private banks to establish broader geographic networks, and to ensure that such operations are at scale. Today’s HNWIs and UHNWIs seek private banks that can manage their international portfolios, meet their lending expectations and provide highly advanced professional services. Private banks in Luxembourg are perfectly placed in that regard.
The end of the era of banking secrecy coincides with the conclusion of a long period of uncertainty. We now know, and our clients know, that full transparency is the future. We have no option but to act accordingly.
But secrecy and privacy are not synonymous. Even in this age of always-on surveillance, when every Facebook post can be analyzed instantly and stored forever, individuals retain the right to privacy. That is important to all of us, especially those in the private banking industry.
Here in Luxembourg, privacy will remain a basic principle that will continue to guide our client relationships as we enter this new era.