Due to Brexit, financial institutions have been forced to reorganize and relocate their operations, leading to an overall increase in costs. These are caused by increased liquidity costs, more complex legal entity structures and regulatory reporting portfolios, especially in the banking sector. However, a handful of European cities have benefited from those implications.
Luxembourg is demonstrating to be among the latter, coming out on top of the situation by virtue of a number of advantages:
Many institutions have relocated their activities from the UK to Luxembourg (Figure 1). Recently, Brexit preparations have had multiple consequences on the banking sector in Luxembourg. One of them is the transfer of the business functions related to wealth management and private banking, and more generally an overall growth of local business operations. Significant increases in the size and activities of the banks’ portfolios (Figure 2) have repercussions on the operational and compliance adaptation to the local regulatory landscape. For this reason, banks now have to cope with new needs such as increased local resources and stronger governance.
From Avantage Reply’s experience, banks should extend their knowledge in areas such as:
In the context of relocation, some banks resorted to using short-term solutions such as the replication of their AS-IS business models. However, in some cases these shortcuts have proven to be inefficient and potentially problematic in the long run.
When transferring activities in response to Brexit, banks should put in place flexible solutions that take into consideration the worst-case scenario. When implementing the same structure and/or the same systems, it is crucial to make sure that these structures/ systems meet local regulations and that the bank applies the three lines of defense model. The local teams need to demonstrate sufficient knowledge of the products, activities and a strong governance.
Avantage Reply has helped Banks in Luxembourg aligning their strategy to local regulatory needs. This is particularly relevant for the Supervisory Review and Evaluation Process (SREP), where Avantage Reply can facilitate the identification of gaps at the governance or outsourcing levels in respect to the regulations. This is also one of the top priorities expressed by the ECB for 2020 (ECB SSM supervisory priorities, 2020).