Luxembourg fears a lose-lose Brexit despite financial sector gains

March did not start well for some UK expats living in Luxembourg.

British teachers and other staff seconded to European schools in the grand duchy have been put on notice that they could receive redundancy letters as early as April — although informal deals could provide a transition period for UK staff up to August 2020, or a year later if an exit deal is eventually approved.

Many jobs at EU institutions based in Luxembourg are allocated according to quotas of nationals from member states. UK staff in these roles are therefore at immediate risk, regardless of any settlement for right to remain, should broader Brexit terms be agreed. The threat to such jobs demonstrates that Brexit is a threat as well as an opportunity to local employment.

The prospect of a no-deal Brexit dismays business leaders, even though Luxembourg’s financial industry has benefited from the search for continuing single market access by London-based investment fund service, insurance and payment firms.

To date more than 50 companies have announced they are establishing or expanding operations in the grand duchy. Almost as many have plans in the pipeline, while others have quietly bolstered existing activities without advertising the fact, according to Nicolas Mackel, who heads industry promotional body Luxembourg for Finance.

However, many of the country’s financial and business community agree with fund manager Franklin Templeton’s Denise Voss, who chairs fund industry group ALFI, that Brexit is “a lose-lose” for Luxembourg. This is because of the damage caused by legal and business uncertainty, along with the loss of Britain as an ally in EU debates on regulatory philosophy and financial rulemaking.

“Brexit will not bring overall benefits to anybody,” says Hermann Beythan, an investment management partner at Linklaters Luxembourg.

British expatriates are well integrated in Luxembourg’s economy and society. “The government is doing everything possible to ease any problems that may arise,” he says.

British lawyers practising in the grand duchy are currently in limbo, especially those admitted to the bar by virtue of being qualified in another member state, for which EU nationality is a condition. UK lawyers who have already obtained the status of avocat à la cour after three years’ practice in Luxembourg, though, are assured of retaining it.

Carlo Thelen, director-general and chief economist of the Luxembourg Chamber of Commerce, argues that smaller companies in the grand duchy may be particularly hard hit by the disruption caused by Brexit, since they admit to having made few preparations. “The UK is the fifth most important export destination for Luxembourg and seventh largest for imports, so we should not underestimate the impact.”

The chamber has established a Brexit helpline for its members. Mr Thelen says typical questions are pragmatic: whether businesses can continue to recruit from the UK or send commercial representatives there, or conclude contracts with British companies and individuals.

Mr Mackel describes the roster of Brexit relocations to date, including 24 in asset management and services and 12 in insurance, as “a silver lining — newly arrived firms are opening in Luxembourg almost every day”.

Steven Libby, leader of the asset and wealth management practice at PwC Luxembourg, says the country’s fund industry faces a shake-up because one in six Ucits — EU-regulated funds sold to retail investors — are sold into the UK and 17 per cent of the industry’s assets are run by UK-based portfolio managers.

Mr Mackel says he is standing by a previous estimate that Brexit relocations would create about 3,000 new financial centre jobs in Luxembourg by the end of 2019.

“There is some job creation, but it is not a game-changer,” he says. “Last year we saw around 500 new jobs in asset management alone. Mostly new jobs are not people being relocated from London but recruited in the local market. It is an additional demand on a job market that has grown consistently in recent years. Brexit is not a strain on the job market of itself.”

Mr Mackel says Brexit has helped boost Luxembourg’s appeal to fintech start-ups, especially among the cluster of payment services firms in London.

“Many are keeping their presence in London but setting up operations on the continent in order to have a licence to serve clients elsewhere in Europe,” he says.

Mr Thelen says his biggest regret about Brexit is potential loss of human interaction. “That is the real catastrophe — the threat to cultural exchanges, all the Luxembourgers studying in the UK and British students coming here,” he says. “I hope that will continue, even though it seems bound to become more complex. And if there is political change in the UK, maybe one day Britain will return.”