Luxembourg has in the past benefited from the Fruits of National Autonomy but now it must change and harvest the higher hanging fruits relating to sophistication and competitors from abroad. There have been many conferences on this subject but this one was different because it was to concentrate on Luxembourg and to help prepare for its future in the industry:

• Will the Finance sector be so important to Luxembourg in 10-20 years
• The crisis and destruction of much good will for Bankers
• Over Regulation and its consequences
• Reduced Tax Avoidance and tolerance
• The high cost of Capital and Liquidity
• The shift from Private Banking to the Fund Industry

Nicholas Mackel stated: “The future is happening while we are discussing it and future leaders must open up to opportunities that technical development brings”.

25 years ago the ATM was the only invention worthwhile talking about but now we have on-line banking and ever increasing mobile banking so the future is now with Fintech at the centre of the digital world. There will be more and more software, less branches and more mobile payments. So what are the new financial services:

• Alibaba has created the biggest investment fund in China showing the power of a large customer base linked with Big Data.
• Telecom companies want banking licences to facilitate payments and
• New virtual currencies where technology is used to register every operation. Bitcoin, for example, may be in the press for all the wrong reasons but a potential currency revolution is out there. Of course we must concentrate on safety and security but be open for business. Virtual currencies are probably here to stay and we must make sure there is proper regulation which the serious ones welcome as the way forward.

To conclude he referred to the phrase often (incorrectly) attributed to Darwin: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change”.

Pierre Masset: “A strong and innovative financial sector will remain an important building block in the creation and distribution of wealth. Leaders must remain capable of adapting to a constantly changing landscape”.

He started by saying: “The future is hard to Forecast and the future of Finance is even harder”! The golden days are perhaps behind us but he personally had left Luxembourg 15 years ago and when he came back, he found that it was still growing! We don’t know what we don’t know and the Dot.com phenomenon is perhaps the best example. The financial crisis has been like escaping from Armageddon and we experienced the previously untested quantitative easing of which we are still discovering the consequences and results.

Today we have the lowest interest rates ever and providing or finding yield is difficult across the industry. Prices across all asset classes have tightened but volatility is low in the medium term future. Investments are currently split Passives 11% Actives 79% & Alternatives 10%. We can’t beat liquid markets and there is not the yield in the public market so we need to go to the private market for a reasonable return. He believes there will be more movement towards alternatives and passives and predicts 22% passives, 65% active and 13% alternatives in the near future.

20 years ago there was no cross border distribution of funds, today Luxembourg is an asset servicing centre attracting AIF’s through its value proposition, investment vehicle promotion toolkit and maintenance of a strong regularity framework. There is still room for improvement and growth of course, passive investing, minimising cost and full scope depository is where Luxembourg is still trying to catch up with Ireland for example.

Paul Mercier: addressed the conference on Monetary Policy and Central Banking. BCL is, of course, principally involved in:

• Interest rates for Monetary Policy
• Borrowing from the Lender of the Last Resort
• Interbank Lending and Base Rate management

The financial crisis saw an important slow down in the interbank market, especially internationally. Central banks are now in need of other ways to conduct their monetary policy such as:

• Scraping ‘overnight’ in favour of the 3 month rate in the unsecured sector.
• Using the Repo market in the secured segment but security is complicated and administratively heavy.
• A shift from short term to very long term i.e. 5-10 years (similar to the Fed buying and selling bonds) but central banks have to be careful not to ‘crowd out’ other bond holders.

What is needed is ‘good money’ that keeps its purchasing power with Financial and not only price stability. They must be careful of bubbles (asset price bubbles) and the cost of pricking such bubbles with the consequent damage to macro-economic issues. Then there are Shadow Banking issues and the need to pay more attention to financial stability.

There are discussions around the definition of price stability (the general level of prices in the economy) e.g. an Inflation Rate below 2% and whether this is in fact the right rate of inflation. Many countries seem happy to hover around this level. Then again the measurement of inflation is usually based on the consumer price index but this does not include house prices as only rents are reflected. The US for example does use rental equivalents but not house prices.

M. Mercier’s personal opinion is that there could perhaps be a departure from price stability in the future. Monetary policy is not cast in stone so we could see new nominal income targets to manage the national economic activity with the consequent movement away from price stability.

Geoffroy de Schrevel: “The finance industry will be “uberized” with new entrants focusing on purposes rather than on products. Leaders must create a corporate culture where disruptive innovation carries a social vision”.

M de Schrevel gave a lively speech in an amusing and thought provoking style. Companies like “Uber” or AirBnB have been successful because they found and filled gaps in their market and not because of a new product. Success is is not about technology but more about feeling, technology is only the enabler.

There are myths on the supply side and on the demand or investors side:

1. People care about their bank - No they care about the role money plays in their life.
2. People care about their bank account - No they care about the way in which their money is being managed for the future
3. People have lost trust in their bank - Rubbish they still have their money there where it is relatively safe. What they do not agree about is the quality of service.
4. The marketing budget is too high - This does not increase loyalty, it only lines the communication agencies pockets.
5. Digital is nice, let’s have more Fintech! - No Fintech is nasty to banks, the young look for the gaps like Uber and AirBnB and will play by their own rules whatever.

On the demand or Investor side

1. Investors like cash (wise and not so wise). In continental Europe 70% of our money is in cash - deposit accounts or perhaps funds but most, non financial people, do not really understand funds.
2. ROI (Return) is the only thing that matters - No - people invest with a purpose in mind.
3. Investors always have the same definition of risk. Knowing customer risk profiles is covered by the MIFID regulations. People look for the stability of an annuity; they want capital protection i.e. to be sure they will get their money back hopefully with a good return.
4. There is only one recommendation - People want choice. They are intelligent and do not want constant questions from their bank - They want easy self driven & free COMPARISON.
5. Finance is very complex - No it is just jargon and expertise perhaps used to confuse!

The Banks are not the only ones people trust. We now know that they prefer Paypal (Luxembourg based) to banks then come Visa, Master Card, Tesco .... but now organisations like Lending Club (Person to Person lending), Alibaba and Alternative finance like Crowd Funding. People are ready to support new ventures, why not the baker down the road because it is a nice thing to do, they have a good feeling about it.

He then spoke about what he called the Golden Circle: The Why, How & What. Most of the time people have no real clue as to why they want to invest in a particular product but it is not only for profit, profit is just the result. If we take the what, this can be split between:

• Expected Return - How is this managed if not in the industry?
• Availability - free access when I want / need it
• Accessibility - Do you need to be rich, have a minimum sum to enter?
• Simplicity - for easy personal management - We have discretionary Investment but this is usually for a fixed period or term and one should not dream about the return!

So in summary, the Why is to make everyone’s money support them better, the How is through Technology which is the unstoppable enabler and the What is new investment products which satisfy human needs.

There was then a short open session for questions and one in particular was about how Luxembourg is driving competition and choice in the industry to deliver tangible benefits to personal and business banking customers but this must be reserved for another occasion. There then followed by a splendid cocktail and beneficial networking session offered by the EIB.

Clive Munn, MD, MFTSE Affairs S.A. (under formation)

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