2 July 2012 | Updated: 2 July 2012 9:43 am | By Joanne Harris
14 July 2014
27 January 2014
2 May 2014
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The CSSF publishes the article 42 AIFMD information form: non-EU AIFMs can notify CSSF of intention to market in Luxembourg
22 July 2014
The past year in Luxembourg has seen splits and new arrivals in an environment of changing regulation
It is not often that a small jurisdiction has two successive years of major moves in its legal market. But after a busy period at the end of 2010 and the start of 2011, which saw the arrival of a number of foreign law firms in Luxembourg, there has been yet more change at the start of 2012.
The story is a little different this year, but no less interesting. The first news to break was the announcement by domestic firm Bonn Schmitt Steichen that it was beginning the new year by splitting in two, with name partners Alex Schmitt and Alain Steichen both leading breakaways – and both taking the name of late founder Alex Bonn to do so.
A month or so later, offshore firm Ogier confirmed the hire of OPF Partners’ name partner François Pfister for its launch in Luxembourg. Ogier is the first offshore firm to move into the jurisdiction.
Ogier is joining a crowded, multi-tier market. At the top end are Luxembourg’s two biggest outfits, Arendt & Medernach and Elvinger Hoss & Prussen. Arendt & Medernach now has almost 300 lawyers, while smaller rival Elvinger employs more than 120, and both are approaching 40 partners, dwarfing the rest of the domestic market.
Other Anglo-Saxon firms in Luxembourg now include Baker & McKenzie and Dechert, with other international firms predominantly coming from the surrounding Benelux region. Loyens & Loeff, NautaDutilh and Stibbe are all present and busy in Luxembourg.
The rest of the market is made up of small- to mid-sized firms with fewer than 10 partners, all competing for a share of the referral business.
Although the number of lawyers in Luxembourg has spiralled in the past few years to around 2,000 now, incumbents feel there is still room for new entrants. Far from being concerned that the entrance of a major offshore player signals competition from other jurisdictions, they believe Ogier’s arrival – and that of firms such as Baker & McKenzie in 2010 – is a stamp of approval for the country.
“I think that Luxembourg is a very attractive place and that’s good news. Nobody’s coming to Luxembourg without hoping to attract business to Luxembourg, which will be good for all of us and makes the cake bigger in the end,” says Arendt & Medernach managing partner Guy Harles.
Ogier spent time visiting the incumbent magic circle firms in Luxembourg before formally announcing its launch, conscious of the fact that as an offshore firm it relies heavily on referrals from UK firms for business. As a result, Harles’s sentiments about the firm’s launch being good for the jurisdiction are echoed by Clifford Chance and Linklaters’ respective local managing partners, Christian Kremer and Freddy Brausch.
“As long as the market is rich and large enough for this to happen it’s not a bad thing,” says Brausch.
“If a firm comes to Luxembourg that means clients want to go to these firms in Luxembourg. It puts Luxembourg more and more on the map,” adds Kremer, saying he is surprised that the offshore sector had not moved into Luxembourg earlier.
The smaller domestic firms also welcome Ogier’s arrival – even OPF Partners, despite the fact that it lost name partner Pfister to the start-up.
“For us it was a natural evolution, although for the market, François Pfister being one of the name partners was a surprising progression,” asserts managing partner Frédéric Feyten.
Feyten points to the departure earlier in 2011 of founding partner Stef Oostvogels as another development at the firm. A few months after Oostvogels left, the firm – previously known as Oostvogels Pfister Feyten – changed its name to OPF Partners. Feyten agrees the firm has “gone through quite some changes” but says the losses of Oostvogels and Pfister have led to a “renewal”, with the firm now driven by a leaner, younger management team.
He is confident that OPF Partners will continue to advise clients on investment funds, which have always been a key practice area for Luxembourg firms, despite the fact that Pfister is best-known for this and took his team of associates with him to Ogier.
“There’s still a strong interest in Luxembourg’s investment vehicle products. I think that the presence of Ogier is a good illustration of that,” Feyten says, adding that he expects other offshore firms to follow Ogier into Luxembourg.
Pfister confirms the emphasis on investment funds and says the increasing demand for regulated products will drive work to Ogier’s new office. “I can really see the benefit for clients of being able to network with a range of jurisdictions to get the best possible structuring. Because of the synergies and differences between offshore and onshore, I’m sure that an increasing number of clients will want to benefit from the stability and reputation of Luxembourg,” he says, adding that he was “excited” to join a firm with an extensive network.
“We’re increasingly seeing clients use complementary structures from more than one jurisdiction,” Pfister explains. “The firm’s presence will be good for the jurisdiction because it’s the first time that an offshore firm has had an office in Luxembourg and we’ll attract new business into the jurisdiction. The positive echoes received so far from our existing client portfolio exceed our expectations.”
At Elvinger Hoss & Prussen, partner Pit Reckinger thinks it will take some time for Ogier and other recent entrants to make a real impact in the market.
“If you look at the number of players you see that there are more players than before but in terms of our activity we see no direct effect following the entrances of these players at this stage,” Reckinger says.
Being confident that Elvinger and other firms will be able to hold their market position, especially in the funds business, Reckinger also thinks the new arrivals are positive.
“I think that in general if foreign firms set up in Luxembourg it means that the Luxembourg market is a market which is good. They must have a business case and they must be able to get clients,” he adds, with a caveat. “I think especially in investment funds it’s a fairly competitive market and it’s in the hands of a few big players so it’s not easy to enter that market.”
One reason why Luxembourg lawyers welcome the arrival of foreign firms is the impetus this gives to improving standards across the jurisdiction. Although many believe that the profession has moved on considerably in the past few years, there remains a concern that client service standards in Luxembourg lag behind those of other countries.
“It’s correct to say that the firms in Luxembourg have had to get more professional,” says Harles. “I would hope that we have a good reputation for being responsive.”
“The market is becoming fairly discriminating,” adds Bonn & Schmitt managing partner Lionel Noguera. “We’re becoming more and more comparable to the big neighbouring countries. That means that the level of expertise has to step up. It’s going to become more and more difficult here to just make a living merely by translating foreign documents and incorporating companies.”
While Luxembourg has been used as a venue for foreign companies to establish headquarters for many years, a recent development being monitored closely by the professional services community there is the arrival of investors from new countries. Perhaps most significant was the move by the Industrial and Commercial Bank of China (ICBC) in 2011 to establish its European headquarters in Luxembourg. ICBC is using its base to expand across Europe.
Michel Molitor, founding partner of Molitor, points to Luxembourg’s 2009 tax treaty with Hong Kong as a key tool to encourage Chinese investment into the country.
“What we can see now is that outbound investment companies are using this tax treaty with Hong Kong,” Molitor says. “They’re heavily investing in and buying brands, and because of this tax treaty we see increasing work coming from China using Luxembourg corporate structures. This is a huge opportunity in the legal market because this is where the transactional work is coming from currently.” He notes that previously Luxembourg’s business tended to be driven by financial institutions in the UK and Europe.
Qatar is the other source of increasing work identified by several law firms. Last year the Qatari royal family, via its investment group Precision Capital, spent almost €2bn in acquiring stakes in the Luxembourg private banking arms of Belgian bank KBC and Dexia. The Dexia deal, which followed the bailout of the Franco-Belgian bank, saw Precision Capital team up with the Luxembourg state to acquire the bank.
Luxembourg’s lawyers see no reason why investors from markets such as Asia and the Middle East should not continue to use the country as a domicile for European headquarters or investment structures.
“As long as investment has to flow from country A to country B then we’re a good choice,” says Noguera.
Another growing opportunity, which has been on the horizon for some time but is now looming ever-closer, is the implementation of the EU’s alternative investment fund managers directive (AIFMD). The trend in recent years for managers of alternative funds to look for a regulated structure for their products could accelerate as a result of the directive’s implementation next year.
As is often the case with new legislation, Luxembourg is ahead of the curve when it comes to implementing the directive and looks set to be the first in the EU to adopt implementing legislation.
“We’re very optimistic that this will generate quite a lot of work for us,” says Elvinger investment funds head Jacques Elvinger.
Pfister agrees. “We anticipate that this will generate a level of interest globally in AIFMD-compliant funds, potentially in a similar way to the development of Luxembourg Ucits [Undertakings in Collective Investments in Transferable Securities] as a global brand. We’re convinced that Luxembourg has already created, and will continue to improve, the required toolkit to enable efficient and modern structures being set up in our country,” he says.
Feyten, meanwhile, points out that Luxembourg is also modernising its company law to allow the creation of structures akin to a UK LLP, popular for investment funds, and changing tax rules to ensure that funds registered in Luxembourg under the AIFMD will be tax-neutral.
Financial institutions in Luxembourg are also coming under the banner of other EU legislation, including Basel III, Solvency II and the second iteration of the Markets in Financial Instruments Directive (MiFID II).
“We’ve noticed that regulatory work has picked up quite a lot,” says Harles. “New demands are being made on banks and insurance companies. I don’t know how good or bad that will be for the ultimate business but it gives a lot of work to lawyers.”
As a result, Harles says, Arendt & Medernach has been hiring new lawyers, especially in regulatory and litigation. Reckinger and Elvinger say the same is true at their firm.
Spliting the difference
While most firms in Luxembourg have been growing, the split at Bonn Schmitt Steichen caught everyone by surprise. Both Schmitt and Steichen are well-known names in the market and the falling-out between them followed more than a decade of a successful merger. The two halves terminated their partnership agreement in June, but took another six months to formally break up.
Noguera says from the Bonn & Schmitt perspective, progress has been good following the formal split in January.
“It’s going fairly well, honestly. We’ve had quite a few new hires and business has been flowing in,” he says. He confirms that the firm has added seven lawyers in its first six months of operation. “I strongly suspect that Mr Steichen has kept his clients as we’ve kept ours.”
However, most believe that the future of domestic firms in Luxembourg will be consolidation, or possibly takeovers by more international firms.
“I’m sure we’ll see other firms still thinking that they don’t receive good service and they’d be better off starting a branch here,” comments Denis Van den Bulke of Vandenbulke.
“What we can see now is that we have an incredible number of new international firms establishing in Luxembourg. It’s not entirely clear whether they think that Luxembourg is a place where you must be because it’ll become an important gate for this Asia work, or because there’s not enough work in their own jurisdiction,” adds Molitor.
Harles believes that size is critical and thinks that smaller firms could struggle. “The world has become so complicated that size is of importance nowadays. You must be able to put 10 or 20 people on a closing if needed,” he explains.
“I think consolidation is on everybody’s minds,” agrees Elvinger. “The market is more competitive but if you are reactive and creative you should be well prepared for the future.”
Clifford Chance’s Kremer is less sure that consolidation will happen. “I certainly believe in an environment where we’ve got strong international firms and very strong local firms,” he says.
Several of the domestic firms are determined to remain independent rather than join an international network, believing that the potential loss of referral work is too much of a risk.
“We’re closely looking at the market and if there was a good opportunity then we’d always look at it,” says Feyten, acknowledging that a merger “may be something which we can’t avoid”. He goes on to say: “We’re so dependent on referrals and we work with so many firms that it would need to be a firm that would suddenly replace all that work.”
For now, most firms are content to keep on the successful track they have been, confident that Luxembourg’s authorities will keep the country up to speed with the changing legislation in the financial markets which are so key to its success.
“I believe that there have to be opportunities for Luxembourg there and that Luxembourg is preparing well. I’m optimistic without necessarily being naively optimistic,” concludes Linklaters’ Brausch.
The arrival of offshore firm Ogier in Luxembourg caused ripples in the market – but incumbent firms are happy to welcome the newcomer, believing in the old adage of ‘the more, the merrier’.
With investment funds and banking work flourishing, what other changes can be expected in the legal market?
10 Grand facts about Luxembourg
1) Luxembourg is the only Grand Duchy in the world, having been
so since 1815. The current Grand Duke, Henri, has reigned since 2000.
2) The country’s Prime Minister, Jean-Claude Juncker, has been in his role longer. Juncker is the longest-serving democratically elected head of state in the world, having won four elections in a row.
3) Luxembourgish became an official language of Luxembourg
in 1984, along with French and German. Most Luxembourgers speak all three languages fluently, as well as English.
4) More than 40 per cent of the population of Luxembourg is foreign …
5) … and the largest foreign population is from Portugal.
6) The most athletes ever sent to
a summer Olympic Games by Luxembourg was 56, to the 1948 London Games. Eighteen of those were in the football team. Since then numbers have slumped, and just 13 Luxembourgers competed in Beijing in 2008.
7) In 2011, there were fewer
than 1,000 road accidents in Luxembourg and just 33 fatalities.
8) In 2010, the average salary for a Luxembourger was €51,285, rising to €63,668 for men and falling to just €46,525 for women.
9) Luxembourg is completely land-locked and shares its borders with Belgium, France and Germany.
10) In 1927, Luxembourg was the world’s seventh biggest producer of steel.
Sources: Luxembourg National Tourist Office; CIA World Factbook; Grand Duchy of Luxembourg Statistics Portal
Where to eat in Luxembourg
I’d recommend La Mirabelle in Luxembourg-city, because of its well-executed modern French cuisine, the interesting and reasonably priced wine list and the quality of the service. Kamakura is the best Japanese restaurant in the country, and I’d also recommend Windsor in Bertrange for its traditional revisited French cuisine and its easy parking.
François Pfister, Ogier