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Beyond Fund Administration:

  1. 1. Beyond Fund Administration: The Future of Asset Management in Luxembourg Luxembourg CFA Society September 2009
  2. 2. Contents Contents 1. The current situation of asset management in Luxembourg . . . . . 3 2. Why is asset management important for the future of Luxembourg . . 3 3. What can Luxembourg already offer now . . . . . . . . . . . . 4 4. How can Luxembourg solidify and grow its importance . . . . . . . 5 5. Conclusion. . . . . . . . . . . . . . . . . . . . . . . . 7 6. Case study: Creation of a Luxembourg Emerging Asset Manager Fund. 8 7. Case study: CFA University Partnership Program . . . . . . . . . 9 Appendices . . . . . . . . . . . . . . . . . . . . . . A. The CFA Asset Management Working Group . . . . . . . . . . . 11 B. Luxembourg in the global picture . . . . . . . . . . . . . . . 13 C. Bankers on the move: some press articles . . . . . . . . . . . 13 September 2009 Beyond Fund Administration: 2
  3. 3. 2. Why is asset management important for the future of Luxembourg 1. The current situation of asset management in Luxembourg With more than 2 trillion EUR assets under management for 2868 investment funds, as of 2007, Luxembourg is the second largest fund centre in the world after the USA. However, the main part of the asset management sector in Luxembourg consists of fund administration. A lot of well-known asset managers have these activities in Luxembourg: Fidelity, Templeton, Fortis, Dexia, UBS, Blackrock, Allianz to mention a few. But where are the active investment managers that are responsible for the management of the funds administrated in Luxembourg where are the high valued-added investment research and decision centres of the big players, like Fidelity or DWS located? Globally, New York, Boston, Singapore, Hong Kong, or Tokyo dominate, while for Europe, the key investment professionals’ front offices are located in London, Frankfurt, Paris, Zurich and Milan. The CFA Asset Management Working Group was created in 2007 as a working group to analyze why investment companies that could create added-value activities for Lux- embourg, have chosen not to relocate their asset management business to Luxembourg in the past and how this trend could can be reversed. 2. Why is asset management important for the future of Luxembourg Luxembourg financial sector lacks diversification. Currently, the main activity of the in- vestment management industry in Luxembourg is concentrated around fund adminis- tration. Another substantial segment of the financial sector which has very active in Luxembourg is private banking. Luxembourg has to close the gap in the value chain. As fund administration is mainly a technology based activity relying on economies of scale and comparative cost advan- tages, it can easily be moved to low cost countries in order to reduce costs and generate more profits. The MiFiD regulation is restricting such outsourcing outside the European Union but the competition especially from Eastern Europe is rising. So there might be less risk of delocalization in the future if more investment management companies are located in Luxembourg. New asset management business would of course imply additional tax payments, like corporate, personal taxes or VAT on consumption. Social security payments will rise accordingly. The synergies between existing banking activities (private banking, fund administra- tion) and portfolio management can easily be exploited in Luxembourg. Sales activities for private banking could be easier when the fund managers would be locally present. Also, complex fund structures are faster and easier to build when fund administration and management are closer. Fund administration stays a high volume – low margin business. It is concentrated around the middle and back office activities, like accounting, tax, legal departments and risk management. Due to the high standardization and the big volume of assets under September 2009 Beyond Fund Administration: 3
  4. 4. 3. What can Luxembourg already offer now management, this kind of business is a low margin business and builds on economies of scale. But Luxembourg has to move up in the value chain to attract businesses with customized solutions to keep the existing business and develop new ones. This business might also attract other service providers for the financial sector that are going to settle down in Luxembourg. Overall, this will improve the image of Luxembourg as a financial center in a very competitive environment. 3. What can Luxembourg already offer now Luxembourg has already a lot to offer. The key elements are structural and business specific. 3.1. General structural elements • Luxembourg offers a good and modern infrastructure in telecommunication (digital medias, Wi-fi, IPTV...) and transportation (net of highways, railway station and airport) at reasonable costs. • Education facilities: In Luxembourg itself there is the Luxembourg University, the Luxembourg School of Finance and the Sacred Heart University. Moreover within an one-hour-drive distance, the neighbouring countries offer a broad range of fur- ther universities and institutes (France: Metz, Nancy; Belgium: Liège; Germany: Trier, Saarbrücken, Kaiserslautern). • Luxembourg offers attractive forms and levels of corporate and consumption taxes. In fact, with 15% of VAT Luxembourg has the lowest rate in the Euro-zone and the corporate tax rate is one of the lowest in Europe. • Luxembourg is an open country that is motivated to move up the value chain as it has demonstrated already in the past. • Due to its size, history and regional position Luxembourg can be considered to be a multicultural country. This leads to a multilingual framework where English, French and German speaking employees are available. Due to the closeness to its geographic neighbours education and information is influenced partly by its neighbouring countries. • Luxembourg can claim a top ranking in business surveys that underlines the rela- tive competitiveness of the country. • It has a strong reputation for a high quality of life. This attracts a lot of immigration. This high standard of life is due to a stable and fair social security. In global surveys the low crime rate leads to a high standard in personal security. • The country offers a competitive relative cost level advantage for business rents as well as real estate prices. This makes Luxembourg the first choice for cost-efficient and start-up companies. • Luxembourg is positioned in the heart of Europe. This strategic regional position helps business traveling and offers a multicultural framework. September 2009 Beyond Fund Administration: 4
  5. 5. 4. How can Luxembourg solidify and grow its importance 3.2. Asset Management requires strong building blocs • The local regulation defines quite a number of investment vehicles that can be used by investment management companies to fulfill the needs of their clients. These vehicles promoting asset management are: mutual funds, pension funds, segregated and managed accounts in private banking, SIFs (Specialized Invest- ment Fund), family offices, hedge funds, ETFs, sovereign funds, insurance vehi- cles and corporates. • Asset Management needs outsourcing services. Some investment companies do not want to offer all services. Therefore custody, fund administration, distribution, legal support, risk management and technology solutions can be found in Luxem- bourg without incorporating these activities in a single company. This allows for substantial saving to the end client. • Quality and level of regulation: In the financial sector Luxembourg transposed EU norms regulations, like UCITS III and IV, MIFID. Moreover, Luxembourg has created special investment vehicles, like SIF, SICAR and SOPARFI. Luxembourg offers through the CSSF an efficient and flexible regulator that is reacting fast as seen in the Madoff-case. • Legislation: The administration in Luxembourg is seen as rather light and prag- matic. Luxembourg offers high flexibility in adapting laws and regulations and the authorities have adopted. There is a readiness for dialogue and quick decision- making process by officials. This helped Luxembourg in the past to expand the fund administration activities strongly. • On the Luxembourg Exchange are listed more than 35,000 securities, issued by more than 4,100 companies from 100 jurisdictions. As the size of the local stock or bond market is not important the Bourse has had to focus on a niche in order to offer value and solutions. 4. How can Luxembourg solidify and grow its importance The CFA asset management working group has conducted a survey among the top man- agement of leading investment management companies in London. The working group initiated a questionnaire in order to investigate why investment management companies prefer other financial cities to Luxembourg. Further details about the survey can be found in appendix A. The major shortcomings of Luxembourg are: • In the case of infrastructure costs, such as rent and travel expenses, the managers admitted that in the Euro-zone Luxembourg is a lot cheaper but otherwise there is only an expensive hub solution for intercontinental connections. There is also a rather bad frequency to main EU cities. Luxembourg lacks intercontinental flights and the flight connection for these flights which results in higher prices of trans- portation. Luxembourg definitely has a competitive advantage considering renting and infrastructure costs compared to London or New York but it is offset partially by limited flight connections and the lack of a broad offering for international flights. September 2009 Beyond Fund Administration: 5
  6. 6. 4. How can Luxembourg solidify and grow its importance • There is also a weak link between the university and the industry that makes it difficult to keep intellectual property in Luxembourg. This is the main drawback for setting up upscale business in Luxembourg, as talents are going to places where talents like to be. So recruitment is limited to the Grande-Region. The recruitment of talent was seen as very important and was highlighted as a very weak point for Luxembourg as an attractive business centre. The dominant statement was that it is easier to find talent in London. The management who was surveyed was less concerned with the cost part of the human capital but more with the quality. A deep talent pool does currently not exist in Luxembourg. • Presence of educational institutions (universities, ...): there is a missing link be- tween the universities in Luxembourg and the industry, especially the financial sector. None of the managers interviewed by the CFA Asset Management Work- ing Group thought about the 8 universities that are within 1 hour of traveling time away of Luxembourg. • There is a certain lack of image and profile for the financial industry in Luxem- bourg. Luxembourg is currently seen as an excellent financial centre for fund ad- ministration. For the social life and networking, it was recognized that Luxembourg is lacking the networking capabilities of London and that the way of life in London is different than that of Luxembourg. Concerning its image, it was recognized that Luxembourg puts a lot of effort in improving it. But the city still lacks a positive, dynamic and international image. Similar results can be found in the Global Financial Centre Index. The Global Finan- cial Centre Index is sponsored by the City of London to show the attractiveness of the different financials cities in the world. This survey is important as it focused on the factors significant to the financial sector. It is a global survey that rates: • Business environment (tax, bureaucracy, and regulators) • People (quality, experience) • Infrastructure (transport, air connections) • Market access (openness to foreigners, legal predictability). There were more than 1,200 responses from financial institutions worldwide to this questionnaire. The result is a deception for Luxembourg: Luxembourg was generally ranked 17 after London, New York, Hong Kong, Singapore, Zurich and Frankfurt in 2008 (ranked 26 in 2007). In the segment of the business environment, Luxembourg was ranked 4th while the sub-segment, cost of office space, it ranked 13th, in administrative and economic regu- lation it ranked 12th after the United Kingdom ranked 1st, US ranked 5th and Portugal ranked 11th. Worse is even the ranking for general competitiveness where Luxembourg was not even amongst the top 20 (ranked 22nd). Skilled personal: not ranked top 10 Basis of people factor: not ranked top 10 (reason: no MBA ranking) Brand recognition: not even ranked top 25 (1 London, 2 Paris, 3 Sydney) after Prague, Rio de Janeiro and Beijing September 2009 Beyond Fund Administration: 6
  7. 7. 5. Conclusion But Luxembourg was ranked 2 after Dubai for the financial center where financial institutions consider opening a new business in the next 2 years. Only London and New York were defined as global, international, national, regional and niche players in the financial industry. The other main centers were classified as international or national. 5. Conclusion Luxembourg offers a lot of advantages compared to other financial centres. These are mainly related to relative tax advantages (fiscal framework with low corporate taxes and low VAT), good infrastructure at a reasonable price and innovative and pro-active regu- latory framework (e.g. introduction of SIFs, the Specialised Investment Funds). But Luxembourg has a serious problem of competitiveness compared to other finan- cial centres due to a very restricted labour market and shallow talent pool. Regulators and authorities have done their best but changes have not be sufficient to nurture the environment for the front offices of investment companies. Luxembourg, in the past, has had a strong track record of identifying and capitalizing on niches, services and sectors. This is also possible in asset management as niches are also present here. So, Luxembourg has to profit from the current niches that appear in asset manage- ment. • Focus on niche players • Attract emerging or start-up fund managers • Promote unrecognised talents • Concentrate on start-ups • Alternative investments • Focus on companies without a lot of publicity that need flexibility. Successful investment management companies are also operating outside the big financial centres. It will be impossible to attract some parts or even the entire exist- ing investment management process to Luxembourg due to large relocation costs and the tendency to centralize investment management decisions in international hubs. So Luxembourg has to focus on smaller companies. Especially start-up asset managers are looking at the overall package of a country when registering. They are independent from any politics of a parent company and have different needs than a mature or larger company. Here Luxembourg needs to offer a relocation agency that helps emerging companies to deal with common problems for setting up a company in Luxembourg. In order to attract more asset managers, especially niche players, Luxembourg can use several measures: • More marketing not only to promote the fund management business but also the investment management business in Luxembourg September 2009 Beyond Fund Administration: 7
  8. 8. 6. Case study: Creation of a Luxembourg Emerging Asset Manager Fund • One-contact-point for setting up a new business to show how easy it is to setup an investment management company • Easy access to venture capital to fund the newly founded investment managers or readiness to offer seed capital for new businesses, like in Singapore • Incubator funds for innovative niche players • Seed capital for new funds of emerging asset managers could be offered by the government, banks or pension funds • Promote the University of Luxembourg as a provider of highly skilled future em- ployees and practical research • Special incentives, subsides offered by the government for investing into funds of emerging or start-up fund managers. Already now, the Luxembourg government has relaxed the requirements for setting up an asset management company with the law for Management Companies under chapter 14 of the year 2002. So the government has already opened the barriers for setting up a new asset management company in Luxembourg. But Luxembourg needs to do more marketing for its flexibility in the financial sector. It must move away from the image of a low-end financial service provider that is technology based to the higher end of the value chain to offer specialized high-end products in finance that relies on the intellectual capital. In the long-run Luxembourg has to strengthen the position of the University of Lux- embourg and to establish links between the university and the industry. The University of Luxembourg has to be promoted as a provider of highly skilled future employees and practical research. In the future a large talent pool has to be established in Luxembourg to meet the needs of the industry. 6. Case study: Creation of a Luxembourg Emerging Asset Manager Fund Objective: Attract portfolio management talent to Luxembourg to increase its presence on the higher end of the asset management value chain. In line with the many initiatives to strengthen the Luxembourg financial industry that are ongoing or about to be launched, this proposal would contribute to reposition the Luxembourg financial market as an asset manager center, in addition to its roles of administration and distribution of funds. The idea would be to create an umbrella fund of fund structures under the Luxem- bourg SIF law (Specialized Investment Fund), which will be managed by different asset managers. An investment committee would be established to evaluate the portfolio man- agers who could express interest in the program, as well as the investment strategies they would plan to follow. In order to participate in the program the portfolio manager would need to move to Luxembourg as a permanent resident. The chosen portfolio managers would manage a compartment in the fund of funds structure. The portfolio September 2009 Beyond Fund Administration: 8
  9. 9. 7. Case study: CFA University Partnership Program manager would be engaged for a period of three years, which could be extended un- der certain conditions, to allow her or him to build an appropriate performance track record. He or she will report to an investment committee who will ensure the overall risk management of the structure, and the adherence to the approved investment strategy. The portfolio manager will be employed by the management company that will be set up to manage the fund of funds structure. The management company will also provide administrative support and office space. The management company would be seed financed and owned by private investors and the government. Fund administration and custody will be outsourced to some of the service providers based in Luxembourg (either private sponsors or not). The SIF structure and the management company will be regulated by CSSF. The initial assets under management (for example, we could envisage a minimum of 10 million EUR per manager for a minimum of 5 managers) would be provided by the government (for example from its pension fund) and the private institutions who would like to participate in the program. The performance of the funds will go directly to the sponsors. A reasonable management fee will be raised to cover the operating expenses of the management company. After three years (or the agreed extended period), the portfolio manager will leave the program. At that stage, private sponsors will be provided with a privileged access to the portfolio managers and could enter an exclusive distribution agreement with them should they would like to do so. The main risk for the sponsors would be a negative investment performance. The quality of the investment committee should ensure a selection of high quality managers, and ongoing monitoring of performance. The main opportunity for the private sponsors would be a privileged access to new talent at minimum cost. The main opportunity for the Luxembourg Administration would be attracting portfolio management talent to the country. The main opportunity for the portfolio manager would be to build the necessary track record for him or her to be able to launch an independent operation, by raising assets on his/her own and establishing his/her own business in Luxembourg. 7. Case study: CFA University Partnership Program Objective: Promoting the University of Luxembourg and creation of a talent pool. CFA Institute is interested in partnering with a limited number of globally diverse, select institutions that cover a significant portion of the CFA Program Candidate Body of Knowledge, including our ethical and professional standards, in their degree programs. These universities must be willing to serve as role models to other institutions and must be recognized as leaders. September 2009 Beyond Fund Administration: 9
  10. 10. 7. Case study: CFA University Partnership Program Partnerships are considered on a case-by-case basis. While there are minimum requirements to submit an application to become a partner, meeting these requirements is not sufficient to achieve a partnership. CFA Institute reserves the right, at its sole discretion, not to approve any application for status as a partner. In 2009 the Luxembourg CFA Society has approached the Luxembourg School of Finance to become a CFA Partner. Currently, the local CFA society supports the Luxem- bourg School of Finance to finish the application to the CFA Partner Program. The idea is to promote the Luxembourg School of Finance as leading educational institution in the region and worldwide. The Luxembourg School of Finance could profit from adapting the Candidate Body of Knowledge in order to incorporate ethical and pro- fessional standards in its curriculum. Then the students should have an early access to practical ethical standards. The partnership offers complimentary access to CFA Institute publications and gives notices of educational opportunities for lifelong learning through CFA Institute conferences and publications. Through the student scholarships under- graduate or graduate students can be rewarded to sit the exams of the CFA Program in order to become a CFA charter holder. In the future a talent pool of students that will graduate from a highly regarded uni- versity and will have started with the CFA program will be created. Out of this pool the local financial industry will be able to pick highly-educated and specialized workforce. September 2009 Beyond Fund Administration: 10
  11. 11. A. The CFA Asset Management Working Group Appendices A. The CFA Asset Management Working Group This section describes the origins of this working group and the survey it carried out. It also includes general information about the CFA Institute. A.1. The CFA Institue CFA Institute is the largest and best known global association for investment profession- als. It administers the CFA (since 1963) and CIPM (since 2006) curriculum and exam programs worldwide, publishes research, conducts professional development programs, and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has nearly 100,000 members, who include the world’s more than 84,000 CFA charter holders, as well as 136 affiliated professional societies in 57 countries and territories. The CFA Program is an educational program that tests the CFA candidate’s mastering of a body of knowledge through a series of exams. If you pass these three exams and meet other requirements, you earn a CFA charter. More information may be found at A.2. The CFA Asset Management Working Group The CFA Working Group on Asset Management was created in 2007 as there is a dif- ference between the membership profile of the CFA Institute globally and the local CFA Society. Globally the largest aggregated group of members is employed by investment com- panies. This group comprises portfolio managers, research analysts, and institutional and retail fund salesmen. In Luxembourg, the main employers of the CFA members are private client wealth management companies. The data suggests that Luxembourg is lacking the traditional active investment management activities while being renowned for its large fund administration business. Further, as the private banking activity in Luxembourg is expected to grow by 14% until 2015, there should be a lot of potential for the local asset management industry. The Asset Management Working Group was set up in 2007 with the following tasks: analyse the situation of investment management in Luxembourg, identify organizations that might still take investment management decisions in Luxembourg identify the needs of asset management globally and locally propose ideas from the point of view of in- vestment professionals to make Luxembourg more competitive as a centre for asset management, possibly suggesting changes to the legal, fiscal and regulatory framework in order to attract more the higher value-added decision making part of investment man- agement activities to Luxembourg. September 2009 Beyond Fund Administration: 11
  12. 12. A. The CFA Asset Management Working Group Table 1. CFA Membership Industry Occupations figures expressed as a percentage CFA Luxembourg Institute CFA Society Investment companies/mutual funds 30 17 Hedge funds/funds of hedge funds 6 1 Commercial retail or mortgage banks 7 8 Insurance companies 4 1 Pension and foundations 2 0 Private Client Wealth Management 9 34 Others 42 39 The efforts of this working group are backed by the CFA Institute, capitalizing on the vast experience the CFA Institute has obtained conducting similar studies in other markets, their extensive network to leading investment professionals worldwide and their reputation for unbiased expertise in research and setting of investment standards. A.3. Survey of the CFA Asset Management Working Group The CFA asset management working group has conducted a survey among the top man- agement of leading investment management companies in London. The working group initiated a questionnaire in order to investigate why investment management companies prefer other financial cities to Luxembourg. This survey was conducted as there was no source for pointing out why investment management companies have avoided Luxem- bourg. It could not find any specific survey that could give an answer. For this purpose, we conducted a survey with managers of leading fund houses in Europe’s largest finan- cial centre, London, that hosts most foreign and international asset manager. The Asset Management Working Group interviewed managers (CEO/COO/CIO) of leading invest- ment management companies in London, like HSBC or Aberdeen in order to investigate the reasons for avoiding using Luxembourg as an active asset management centre. The survey was conducted either via a personal telephone interview or via email. We tried to interview leading managers at over 40 leading global investment management institutions. However, only 25% of the respondents responded to the survey. The CFA Institute in Charlottesville backed the effort of the working group and pro- vided the global network and resources to conduct this survey. The questionnaire was split in a part with quantitative questions that could be trans- lated into objective answers and a part with qualitative reasons that are impacted by subjective tendencies for choosing Luxembourg as a center for active asset manage- ment. The answers were analyzed in order to find any important short-comings or added value for the financial centre of Luxembourg. September 2009 Beyond Fund Administration: 12
  13. 13. C. Bankers on the move: some press articles B. Luxembourg in the global picture In several surveys Luxembourg has reached top rankings in different categories, compet- ing globally. The following table shows the ranking of Luxembourg in global, international surveys. These surveys do not only cover business environment and condition but also the situation for private life in a global environment. It is obvious that Luxembourg can com- bine top business conditions with excellent quality for private life, a key point to attract new business. In the field of business environment Luxembourg occupies top rankings in general. Table 2. Luxembourg Position in International Rankins Name of the Index Year Source Rank External positions of global banks 2004 BIS 8 Size of European UCITS/Non-UCITS 2006 FEFSI 2 assets Quality of Life 2007 Mercer 18/50 (50=good) Quality of Life 2005 Economist 4 Personal Safety 2008 Mercer 1 World Competitiveness 2008 IMD May-55 Employer Happiness Index 2008 Forbes 31/58 Overall Business Costs 2005 KPMG 6 Index of Economic Freedom 2008 Heritage Foundation 15/157 Attractiveness of VAT Rate in the 2006 KPMG 1 Euro-zone Global Attractiveness of Corporate Tax 2006 KPMG 1 Rate Governance Indicator 2006 World Bank 100-90th percentile Cost of Living 2007 Mercer 43/50 (1=expensive, 50=cheap) C. Bankers on the move: some press articles The following press articles show that currently some bankers are leaving established financial centres to find new locations with comparative advantages. Mainly bankers are considering leaving London due to the loss in the currency, higher tax brackets and legal bonus restrictions. September 2009 Beyond Fund Administration: 13
  14. 14. C. Bankers on the move: some press articles C.1. London Bankers Look for Exits After “Last Straw” Tax Increase 1 Demetris Efstathiou, a hedge-fund trader and a Londoner for two decades, listened last week to Chancellor of the Exchequer Alistair Darling outline a plan to raise taxes on high earners. Then he decided to leave Britain. “There is no reason for me to stay here anymore,” said Efstathiou, a 38-year-old Cypriot who moved to London in 1990. “This tax increase is the last straw. This government is no longer interested in the City.” Prime Minister Gordon Brown’s proposal to boost the tax rate to 50 percent from 40 percent on income above 150,000 pounds ($220,000) pushed headlines about “class warfare” onto the front pages of the capital’s newspapers. It also prompted predictions from business groups that it would undermine the U.K.’s competitiveness and lead to an exodus of financial talent. Brown was portrayed as Vladimir Lenin in a cartoon on Page One of the Daily Telegraph. The income-tax change, set to take effect next year, would give the U.K. a higher top rate than Spain, Italy, Germany, France and the U.S., according to KPMG, the accounting firm. Among the 30 members of the Organization for Economic Co-operation and Development, the country would jump to seventh from 19th in the rankings of tax rates, accounting firm Ernst & Young said. The initiative is part of the government’s efforts to contain a planned budget deficit of 12.4 percent of gross domestic product, Britain’s biggest in peacetime. The Treasury expects the tax to raise about 2.2 billion pounds next year when government borrowing will be 173 billion pounds. Darling’s budget calls for 703 billion pounds of deficits in the five years through April 2014. How Increase Works Under the new rates, a banker making 350,000 pounds would pay 160,000 pounds in income- tax and national-insurance contributions, according to a government online tax calculator. That’s 22,600 pounds more than the current amount and doesn’t include the elimination of tax relief on the first 6,000 pounds of earnings and the reduction of breaks for pension contributions that Darling is also introducing. About 350,000 people in the U.K. earn more than 150,000 pounds annually, according to the London-based Institute for Fiscal Studies. About 750,000 make more than 100,000 pounds, and their taxes will also increase after the government scrapped a personal tax-free allowance. “There is a populist side to this message: Let’s over-tax the rich,” said French-born Philippe Houchois, 45, an analyst in London for Zurich-based UBS AG. The state is encouraging this anger “against banks, against the financial sector.” Poll Shows Support The proposal, part of the 2010 budget, is likely to go ahead after Conservative Party leader David Cameron said April 24 that reversing the 50 percent rate wasn’t a priority. About 57 percent of Britons have a “positive view” of the plan, a Populus Ltd. poll published the same day showed. Populus surveyed 518 adults after the April 22 budget speech. Brown isn’t without supporters in the finance industry. “We do have a major crisis,” said Bill Blain, a bond broker at KNG Securities LLP in London. “Taxes do need to rise. People in that bracket do need to pay.” Fleeing bankers may find that taxes are also going up elsewhere. President Barack Obama wants to let the top two U.S. tax brackets increase to 36 percent and 39.6 percent from 33 percent and 35 percent. The top U.S. rate kicks in at $372,950. 1 Svenja O’Donnell and Mark Deen, 27th of April 2009, Bloomberg. September 2009 Beyond Fund Administration: 14
  15. 15. C. Bankers on the move: some press articles Lower Taxes Elsewhere Countries such as Singapore, where the top rate is 20 percent, and Switzerland have lower taxes. A single banker living in London and earning 350,000 pounds would pay about 40,000 pounds more under the new system than he would in Zurich, according to British and Swiss government figures. “People are questioning their operations in London,” said Steven Bell, chief economist at the GLC Ltd. hedge fund in London. He was a U.K. Treasury official the last time a Labour govern- ment decided to raise taxes on high earners in 1976. The numbers leaving “will be significant,” Bell said. The move reverses policies dating from former Prime Minister Tony Blair’s election in 1997 that rejected income-tax increases and encouraged wealth creation. When the Labour Party was previously in power in the late 1970s under Prime Minister James Callaghan, the top tax rate was 83 percent on earned income and 98 percent on unearned income. These were cut to 60 percent and 75 percent when Margaret Thatcher took office in 1979. Blair said his party, re-branded as New Labour, wouldn’t return to the past. Brown Defends Increase With Britain facing its worst recession since World War II, Brown, who has trailed in every opinion poll against the opposition Conservative Party since January 2008, is seeking to tap into popular anger over the financial crisis. He defended the tax increase, saying April 23 that the U.K.’s highest earners must pay more to support programs that help the poor. The City of London Corp., an organization that oversees the financial district, KPMG tax advisers and the Center for Economics and Business Research in London say the government’s shift will chase away talent. “If they are losing half of their top-end earnings, entrepreneurs, foreign workers and anyone else who can choose where they work are likely to think twice before making the U.K. their base,” said Carolyn Steppler, associate partner in personal tax at KPMG in London. “Instant post- budget reaction already indicates that many high earners will be wondering whether to leave these shores.” Brown’s government has also lifted capital-gains taxes, affecting entrepreneurs and private- equity moguls, and ended a program under which foreigners residing in Britain didn’t have to pay tax on overseas earnings. Aspiration to Earn “This doesn’t just affect people in the high-income bracket,” said William Hughes, 37, an insur- ance broker in London who said he makes more than 100,000 pounds. “Most people have an aspiration to earn more, so even if you’re well below the 100,000 mark, you want to get that. They’ve alienated the voting public.” Even the Labour-supporting Guardian newspaper said taxing the rich more wouldn’t do much to help plug the gap in the public finances. “It will not be the private-equity barons who pay for this recession, but anyone who uses schools, hospitals and other public services,” it said in an editorial. “People see a recovery in 2010, and there are other attractive countries,” said Efstathiou, the Cypriot hedge-fund trader. “I could go to Switzerland, or Cyprus. I could even go to Asia. Staying in Britain, you end up giving the government more than what you’re going to keep.” September 2009 Beyond Fund Administration: 15
  16. 16. C. Bankers on the move: some press articles C.2. Rich Bankers Have Ways to Escape U.K. Tax Bite 2 London’s status as a global financial hub has taken a beating in the past year. The British have nationalized half the country’s banking system. The non-domicile tax system that allowed foreigners to shelter much of their wealth from the authorities has been hit by hefty charges. And tough new rules on pay are being proposed. And now? The top rate of income tax has just been increased to 50 percent from 40 percent. The phrase “last straw” doesn’t even begin to capture how many of London’s bankers, private- equity partners and hedge-fund managers will be feeling. They may have put up with drizzly weather, creaky transport systems and a national mood that makes financiers about as popular as Bernard Madoff at a retirees’ wealth-management convention. Yet it is hard to see how a city can remain as a finance center when it has the fourth- highest tax rate in the developed world. Only Denmark, Sweden and the Netherlands have a higher top rate, according to accounting firm KPMG LLP. Bear in mind that London draws in talent from around the world. It is inconceivable that lots of clever young people primarily interested in making money are going to move to one of the highest tax regimes in the world. Bankers will be checking their atlases more than ever. As it happens, they won’t be short of choices. Europe has lots of places that could host a financial hub: some old, some new. Geneva, Monaco, Bulgaria or Macedonia, to name just a few. All of them have a better shot than London in the next 20 years of building a friendly environment for Europe’s bankers. They don’t even need to be established. Forty years ago, Hong Kong was little more than an island in the South China Sea. Twenty years ago, Dubai was just a strip of sand with a port attached. If the demand is there, the infrastructure will follow. Here’s a rough guide, based on the following criteria: • Low taxes • Decent infrastructure • Reasonable divorce laws (no point in sheltering your bonus from the taxman only to see it clobbered by your spouse) • Lots of good-looking women, or men • An airport, schools and a good golf club • Low risk of anti-banker backlash next time the financial system implodes. Monaco: Always a safe choice. You can’t beat the principality for taxes –there aren’t any on personal income. The place is crowded and expensive, though. The women are too busy tanning themselves to pay any attention to you, and anyway, if you aren’t a Russian billionaire, you can forget it. Yachts are mandatory. As for the backlash risk, you are dangerously close to France, and the people there keep railing against tax havens. They might one day choose to do something about the small one carved out of their own country. Geneva: There’s a reason that banks have been setting themselves up on the shores of Lake Geneva for hundreds of years: There is nowhere safer for the wealthy. The taxes can be low, but they are also complicated: The Swiss top rate is actually 40 percent, but can be a lot less if you aren’t Swiss. The quality of life is good, but expensive: The “recessionista” look hasn’t made it to Geneva yet and probably never will. And there is zero chance of a backlash against bankers: The Swiss won’t rely on the chocolate industry to keep their economy afloat. 2 Matthew Lynn, 28th of April 2009, Bloomberg. September 2009 Beyond Fund Administration: 16
  17. 17. C. Bankers on the move: some press articles Bulgaria: Things have changed a bit since Todor Zhivkov led the People’s Republic of Bul- garia as one of the most loyal of the Soviet satellite states. Now with a top tax rate of just 10 percent, the country has one of the most pro-business fiscal regimes anywhere in the world. Since 2007, it has been a member of the European Union, so you shouldn’t need to worry too much about political stability. There is plenty of Black Sea coastline to work on your tan, even if it can’t quite match the Hamptons for sophistication. There are 127 airports with paved run- ways, according to the CIA World Factbook, so you should be able to park your jet. Yet it’s only two decades since Bulgaria was a hard-line Marxist state, so don’t count on surviving if there’s another revolution. Macedonia: A small landlocked country that was once part of communist Yugoslavia, Mace- donia is probably not the first place you would think of relocating your hedge fund. It’s not a member of the EU yet, it has a slight tendency toward civil war, and it gets involved in lengthy disputes with the Greeks, so you might be at risk during a financial meltdown. There are only 10 airports with paved runways, according to the CIA Factbook, so maybe trade in the jet for a chopper. Gross domestic product per capita is only $9,000, so your support staff will be cheap, and the top tax rate is just 10 percent. Plus you can always slip away to a Greek island for the weekend. Then there are always old-style havens such as Andorra, Jersey or the Isle of Man for those wishing to relocate. Who knows, maybe in a few years, all London’s finance moguls will be sunning themselves by the Black Sea or Lake Geneva and reading about yet another attack from the U.K. prime minister or the French president on tax refugees. Once all the banks have moved away, perhaps it will become clear to governments that taxes are causing new businesses and talent to go elsewhere. C.3. Elle Macpherson Can’t Counter London Gloom as Americans Flee 3 Andrew Wesbecher moved to London from New York in 2006 to sell software to banks and hedge funds.This month he joined the exodus of American expatriates fleeing high taxes and the city’s shrinking financial industry. “I’m the last guy to leave that I know,” said Wesbecher, 29, who worked for Tibco Software Inc. and lived in Notting Hill, the London neighborhood that’s home to billionaire Richard Branson and model Elle Macpherson. “We are all packing up.” The number of U.S. citizens in Britain fell 3.8 percent to 126,000 in the 12 months through September, according to the Office for National Statistics. The trend probably continued this year, with the Confederation of British Industry estimating the U.K. financial industry will lose about 45,000 jobs in the first nine months of 2009, or 4.3 percent of the total. Americans are heading home as Britain plans a 50 percent tax rate for those who earn more than 150,000 pounds ($248,000) a year and employers cut benefits for workers living abroad, reducing the allure of London. That comes a year after the U.K. said foreigners who have lived in the country for more than seven years must pay 30,000 pounds annually or give up the special status that shields overseas income from British taxes. “Expats feel the tone has changed; it’s less welcoming,” said Mark Tilden, a consultant at CRA International Inc. who wrote a report for the City of London last year on the impact of taxation on corporate relocation decisions. “London’s ability to attract talent has gone down.” 3 Tommy Stubbington and Andrew MacAskill, 25th of August 2009, Bloomberg. September 2009 Beyond Fund Administration: 17
  18. 18. C. Bankers on the move: some press articles We Are Fed Up The worst recession since World War II has left U.K. residents facing tax increases and spending cuts after Britain’s monthly budget deficit soared to a record 8 billion pounds in July. In addition, some employers are reducing benefits such as tax equalization, school tuition for children and cost-of-living allowances that supplement expatriate salaries. Schools catering to international students report a drop in enrollment for the first time in seven years, and relocation companies say they are moving fewer people to Britain. Janet Sherbow lives in London’s Chelsea district with her husband, Nikos Mourkogiannis, the former chief executive officer at the European arm of Cambridge, Massachusetts-based man- agement consulting firm Monitor Co. The family plans to move to Greece after their daughter finishes high school next year. “We are fed up with all the stealth taxes, the non-doms levy, and now the 50 percent tax rate,” Sherbow said. “Six American families have moved from my street in the last six months.” Quality of Life Forty-one percent of employers plan to review expatriate programs, according to a study by KPMG International. KPMG surveyed about 100 companies, 60 percent based in the U.S., and found that 22 percent had recalled overseas workers or turned them into local employees in the past 12 months. Huddling under an umbrella during a July downpour, Wesbecher said he was no longer will- ing to put up with the frustrations of life in London after his commissions dropped and Palo Alto, California-based Tibco eliminated his expatriate benefits, cutting his take-home pay by 75 per- cent. “This is what passes for summer in London,” he said, sipping an iced latte in the city’s main financial district. “The quality of life is a lot harder. Things are more expensive and the houses are smaller. Even public transport is cramped. A New York subway car is like real estate in comparison.” The economic picture is also gloomier in Britain. The U.K. economy shrank 5.6 percent in the year through June, compared with 3.9 percent in the U.S. London?s financial industry lost 29,371 jobs, or 8.3 percent of the total, last year, according to the Centre for Economic and Business Research. Financial companies in New York cut 20,200 jobs, or 4.3 percent, data from the state Labor Department show. Highly Competitive “The U.K. remains a highly competitive center for finance and investment and has excellent in- frastructure for businesses,” the Treasury said in an e-mailed response to questions. The American School in England, based outside London in Thorpe, Surrey, expects enroll- ment to fall 4 percent this year, the first drop since the Sept. 11 terror attacks, said Karen House, interim admissions director. The school charges about 29,000 pounds for boarders, and 70 per- cent of its 750 students are American. ACS International Schools, which has 2,500 students on three campuses in the London area, will see a “small decline” in student numbers, said marketing manager Mark London. Fees for boarding students run about 33,000 pounds a year. “Overall, this year we won’t be at capacity,” London said. “The majority of our families are expat families who are working in London or the U.K. on an assignment. Undoubtedly, major companies will be cutting back on those.” September 2009 Beyond Fund Administration: 18
  19. 19. C. Bankers on the move: some press articles Anything to Make Money Transfers to Britain from the U.S. fell 25 percent in the past year, according to Primacy Relocation LLC, a Memphis, Tennessee-based company that moves more than 50,000 people a year for corporate clients around the world. Repatriations were almost unchanged, suggesting the net American population is declining, said CEO Matt Spinolo. There are signs of recovery, said Sharon Gulden, co-founder of Basingstoke, England-based Phoenix ARC Corporate Relocation. U.S. to U.K. traffic has increased to about 10 percent of its peak after dropping to “almost zero” 18 months ago, she said. “It’s just starting,” Gulden said. “Green shoots of recovery, as they say.” Wesbecher isn’t convinced the boom times will return. “The ethos of the ambitious, high-earning American is I will do anything to make money, even if it means moving my family, he said.” “When the performance bonuses go away, the value of being in this country goes away.” September 2009 Beyond Fund Administration: 19