Private Banking in Luxembourg: A slow-motion analysis

ABBL Published 07.07.2017

At the occasion of the 10th Anniversary of ABBL’s Private Banking Group, Luxembourg (PBGL)

Watching slow-motion footage of an event can very often improve our judgment on what has happened.

As remarkable as the human eye is, when we watch a video, we only see the big picture. However, slow-motion video analysis can provide more exact information that is not visible in real time.

The ‘video’ under review here examines the evolution of the private banking business in Luxembourg, analysed and assessed by the Private Banking Group, Luxembourg (PBGL), an ABBL cluster, over its 10 years of existence.

Statistics, collected in collaboration with the CSSF, interviews, conferences, working groups and LFF missions abroad and in Luxembourg with PBGL members, friends and other stakeholders are used in order to substantiate the review.

Although there are millions of ways to use slow-motion technology as a study tool, here I offer a multi-frame approach to examine and understand the transformation of the country’s private banking business over the years. This technique allows us to look at a complex and difficult situation with clarity through a variety of methods – in other words, “the ability to use multiple frames is a consistent correlation of effectiveness” (Bolman & Deal, 2008, p. 325).

Assets under Management Frame:

The sector continued to thrive over the past decade, as demonstrated by the increase in AUM from €300bln in 2007 to €361bln at the end of 2016. This confirms that the country has been able to reinvent itself by adapting to the regulatory shift toward tax transparency and successfully targeting the global market. The industry is expanding its geographical scope within Europe and beyond, having previously been confined mostly to continental Europe.

Client Frame:

Evolution of client profiles and needs accordingly is a reality. In contrast to the traditional affluent clients we were used to serving just a few years ago, today Luxembourg increasingly attracts an internationally exposed, mobile HNWI clientele, more sophisticated and demanding enhanced and immediate access to reliable and transparent financial information. This new segment of client recognises the benefits of Luxembourg as an onshore EU banking hub that combines a high degree of stability with international diversification.

Client Relationship Management Frame:

The client adviser profile is also evolving, from the longstanding stereotypical ‘wine and dine’ relationship to a one encompassing a segmented holistic client approach and advisory processes, underpinned by the knowledge and expertise to identify the need for asset structuring and estate planning. Both changing client profiles and needs, and the evolution in required skills and expertise on the part of our bankers, are key aspects of the development of private banking in Luxembourg.

Education Frame:

To adapt the capabilities of private banking advisers to the expectations of tomorrow’s clients, the sector is seeking to introduce mandatory certification of client-facing private bankers (Certification for Private Bankers), similar to what already exists in competing jurisdictions such as the UK, Singapore and Hong Kong. Further developments might include other financial sector professionals that are involved with private banking activities, or extending appropriate certified training to middle-office or back-office staff.

Profitability/Markets/Business Model Frames:

The noticeable deterioration of private banks’ profitability and investment capabilities over the past few years has been compounded by the current economic environment and ultra-low interest rates, pressure on commission income (MiFID II) as well as the cost of supervision, risk management and regulatory compliance. These trends are seriously impacting banks’ business models, depending on their revenue and product mix, balance sheet structure and business network. Market consolidation including restructuring, asset sales and mergers is expected to result in a reduced number of players (for example, by subsidiaries becoming branches) and a growing polarisation between leaders and laggards, as well as increased recourse to in- and/or outsourcing;

Luxembourg Ecosystem and Toolbox Frames:

Despite considerable recent challenges, the private banking business in Luxembourg has demonstrated its ability to adapt to the changes of these turbulent years, not least thanks to a multi-faceted national ecosystem including the support and advice of expert auditors, consultants and lawyers, and a locally available pool of experienced and multilingual staff. All of this goes hand in hand with what Finance Minister Pierre Gramegna defines as “the unique longstanding expertise that Luxembourg has been able to build over the years in providing compliant tailor-made solutions to international clients with complex multi-jurisdictional issues who wish to develop and transmit their wealth”, as well as its ability continually to adapt and improve the regulatory framework and, where necessary, expand the toolbox available to international investors.

Hub Frame:

Over the years, Luxembourg has become the European Hub for major financial institutions active in Private Banking. In particular:

  • Banks are licenced in Luxembourg to operate across the EU, allowing them to leverage on the Luxembourg platform by working through their branch network, so getting access to the EU clients through the European Passport;
  • And, some private bankers have developed transaction hubs in Luxembourg for servicing other group entities located in Europe, Middle East and elsewhere.

Transparency and Regulatory Frames:

Investor Protection Frame:

Advisory models are evolving to improve investor protection, putting the focus on providing the best service at a fair price and, at the same time, wealth managers have to demonstrate how their services add value for their clients. MiFID II, which affects jurisdictions throughout the EU, not just in Luxembourg, means the country’s private banks, along with their international peers, face the challenge of implementing the new standards stipulated by the legislation to make financial markets more efficient, resilient and transparent.

Transparency Frames, include:  

  • ICMA Charter: the PBGL, in 2012, was the first Organisation to have signed a Private Wealth Management Charter of Quality devised by the International Capital Market Association (ICMA); this initiative brought together the main players of the private wealth management industry in Luxembourg who committed to voluntary common standards of quality, compliance and good market practice;
  • Automatic Exchange of Information: in 2013, the Grand Duchy demonstrated, once again, to be a center of excellence committed to international standards, with the decision to introduce the automatic exchange of information under the Savings Directive, as of 1 January 2015. In addition, the Grand duchy ever insisted on a global level playing field as this was of vital importance for the Luxembourg financial center and which was agreed on OECD level with the introduction of the Common Reporting Standard;
  • The rules on banking secrecy are to be modified by the impending amendment of article 41 of the 1993 Banking Law that provides legal security for Luxembourg-based financial institutions performing in- or outsourcing of certain activities.

Anti Money Laundering Frame:

Rules are also affected by increased transparency, notably the creation of national central registers of beneficial owners and extension of the list of predicate offences to money laundering with the inclusion of ‘serious tax crimes’.

Digital Frame:

Digitalisation is not a one-off effort or investment but a long journey to create a better way to interact and transact with clients. According to Mr Pierre Etienne, Head of the PBGL: “Digitalization should bring more added value to clients, either in their relationship with their bank / banker, or in the quality of service they will get from their bank / banker”.

Oppositely to Retail Banking where the technology has drastically changed the business (use of new communication channels, but also allowing clients to pay without any contact), in the wealth management industry the integration of technological advances has made this evolution in service provision inevitable, BUT aspects of traditional wealth management services will remain relevant, in particular for higher client segment and for those clients appreciating the human engagement.

Image Frame:

While the move toward automatic exchange of information continues, misconceptions about the jurisdiction’s reputation will take time to fade away. PBGL ambassadors are proactive in their ongoing promotion of the structures and services the Luxembourg ecosystem’s offer. The most important goal is to underline the positive achievements of Luxembourg’s financial industry and to repeat where necessary Luxembourg’s move toward transparency, ensuring that stakeholders and public opinion understand the real secret of Luxembourg’s success: the diversified, innovative, international and stable character of its financial centre.

Federation Effort Frame:

The PBGL, during these years, has brought together banking (currently 56 banks) and non-banking members (law firms, consultancy firms, etc.) thereby gathering the broadest possible expertise and skills for private banking activities in Luxembourg. The PBGL also actively interacts with all the main stakeholders of the financial ecosystem being: Luxembourg for Finance, CSSF, ALFI, ACA, LHOFT, Chamber of Commerce, Luxembourg Stock Exchange, ICMA, University of Luxembourg and Luxembourg School of Finance, House of Training (HoT), Fondation de Luxembourg, LAFO (Luxembourg Family Office Association), etc.

And finally, on 1 February 2017, the PBGL has officially launched a Forum entirely dedicated to External Asset Managers Servicing Banks (EAM) in order to strengthen the flow of information with the ABBL members providing custody & asset servicing to independent, professional, third party, discretionary asset managers and their clients with possible extension to Family Offices.

Anticipation and incorporation of these trends and challenges into the business models will enable private banks in Luxembourg to position themselves for continuing success in the future.


By Fabio Mandorino, ABBL Adviser – Commercial and Private Banking