ALFI Rentrée

Claude Marx, Director General of the CSSF, and Marco Zwick, Director of the CSSF in charge of the fund industry supervision, participated in the ALFI Rentrée held from 14 to 18 September 2020. Here are the highlights.

Although nobody was prepared for the challenge of the COVID-19 pandemic, Claude Marx and Marco Zwick, both brought to the fore the resilience of Luxembourg’s financial sector. According to Claude Marx “what had to be done was done”. He pointed out the joined action of all stakeholders both at national and international level (the support of the Ministry of Economy, the banks’ response, the guidance of the ECB, the EBA and ESMA).

Nevertheless, the Director General of the supervisory authority remains cautious about the future. “The eventual impact of this crisis on the financial sector and on the real economy is as yet unknown and it will certainly not be until the beginning of next year that it can be fully measured.” One of the main barometers to keep an eye on is the question of whether or not companies will be able to repay their loans at the end of the loan moratoria. “Any way, recovery will be slower than announced.”

Marco Zwick highlighted in particular how well the investment fund industry held up. There had certainly been a slowdown in product launches, as many companies proceeded cautiously or had not the required capacities themselves to launch new products. However, the number of authorisations of new management companies did not decline. It must also be noted that the number of suspensions in Luxembourg was largely inferior compared with other international financial centres, such as the City for instance.

The CSSF was able to pursue its supervisory missions, despite the fact that 98% of its personnel worked from home during lockdown. It was able to rely on the heavy IT investments made in the last years, as well on the commitment of its IT and HR teams. Very early on, the CSSF urged the supervised entities to send their staff into homeoffice.

Marco Zwick on this very special period: “Keeping in touch, facilitating dialogue is all the more important in times of crisis than in normal times.” From the outset, the CSSF received a huge amount of requests for guidance as regards liquidity risk management. In this respect, the Director of the CSSF highlighted the positive role of ALFI as it coordinated the requests of its members.

While the authority’s teams had to face requests for postponement of reporting deadlines from an early stage, they also noted the progress achieved over the last years by the professionals of the sector as regards automation in this area. More generally, Marco Zwick stressed that there are reportings over which the CSSF has full authority as regards deadlines but that there are others on which it had to remain adamant as they are vital to its supervisory missions. In other cases, they are subject to requirements anchored in European or Luxembourg legal texts. “But this crisis demonstrated what we are able to accomplish within a short time, if everyone is goodwilling.” He also stressed that eventually, very few companies wished to benefit from the extensions proposed by the CSSF. This was made possible with the help of very cooperative audit firms. The only attention point that remains today is internal control reports of which 20% are still outstanding.

Given the specific context, the CSSF had to introduce new reportings of course. It has proceeded gradually and they have been well accepted by the market. It has also strengthened its dialogue with the largest investment firms in terms of assets under management in Luxembourg. According to Marco Zwick, “the daily dialogue that we set up allowed us to identify, as from the first week of lockdown, the subjects for which guidance was necessary, such as fair evaluation, active limits or swing pricing.”

Claude Marx does not foresee putting in place any specific post-COVID regulations. “Tools were put in place following the 2008-2009 financial crisis and have been successfully applied”. However, “the need to reform regulations governing teleworking became more apparent in the context of lockdown, but it won’t be a ‘COVID reform’”. The CSSF’s objective is to provide a new framework to teleworking to the entities supervised by the CSSF by taking into account the following dimensions: ensuring that remote working takes places in proper conditions notably at operational, key functions and IT security level, but also keeping an eye on the issue of substance. “This is a point of attention especially for small countries and a matter of perception. A small country with a heavy reliance on cross-border workers could more easily be accused of non-compliance with regulations on substance if these same cross-border workers regularly make use of telework.”

Ten years after its publication, a recast of the AIFMD is expected. Marco Zwick took the opportunity at ALFI Rentrée to share his sentiment concerning three dimensions of this subject: delegation, harmonisation with the UCITS Directive and transnational passports for depositary banks.

According to Marco Zwick, “Some years ago, delegation was perceived as risky. Today, there should be an agreement on the issue before trying to solve it.” In this context, he refers to the strong opinion of the Supervisory Coordination Network which operates under the aegis of ESMA and in which the CSSF participates. For the network, there is no problem in this area. Recasting delegation is thus not a priority for the CSSF which keeps its line defined in Circular CSSF 18/698.

Furthermore, the CSSF does not believe it is appropriate to introduce cross-border passports for depositary banks. “One can’t cry wolf regarding delegation and then wish for more delegation.”

Finally, as regards greater harmonisation between the AIFMD and the UCITS Directive, Marco Zwick considers that a certain harmonisation would be welcomed by the market, but that one should be very selective as regards the topics that could be dealt with. In this vein, he notably refers to the tools for liquidity management that could be streamlined for products as well. “However, it must be made quite clear that chances are great that the changes to be made to the AIFMD will be transposed into UCITS.”

Claude Marx answered three questions to which the regulator is committed: sustainable finance, pension funding and financial education and emphasised the link between these topics. “While economic reconstruction will be slow after the COVID crisis, it must nevertheless be sustainable. We can’t go back to a ‘brown economy’”. According to the Director General of the CSSF, Luxembourg has a strong card to play and could have an undeniable impact in the area of sustainable finance.

He also broached the issue of pension funding by stressing that there is consensus that the first pillar would not suffice in the long run. “The CSSF supports the idea of the Pan-European Personal Pension Product – PEPP”. Again, the Luxembourg financial centre is well positioned given its experience in international distribution of financial products and investment fund administration. “But a link must be created with sustainable finance, as a large part of its pension funds should be invested sustainably, and with financial education.” On the one hand, Luxembourg must indeed catch up in this matter and, on the other hand, information provided from pension fund promoters must be transparent and comprehensible.

Questioned on financial education, Claude Marx reiterated the national mission with which the CSSF is invested in this area, as well as its recent initiatives, including the launch of an information platform www.letzfin.lu which, as a matter of fact, boasts a section dedicated to pension funds. “Financial education starts from a very young age, around 10-11 years. And the loop will only be closed if we are able to raise awareness about sustainable finance among these youngsters. ”

“I regret that diversity is not progressing faster in Luxembourg and that our country lags behind the European average in this matter both at the level of management and boards of directors”, said Claude Marx. However, according to him, studies demonstrate that a company that has tackled the diversity issue is more efficient. Thus, it would be important that entities take this issue as an opportunity, as would be the case with ESG, and not a burden, as their continuity is at stake. “Omitting sustainability or diversity in their strategies involves major commercial or HR risks. Indeed, a company which would not take into account these dimensions will have greater difficulties winning over the young generation.” He continued by recommending supervised entities to continue efforts in this matter endorsed by top management.

Marco Zwick clarified the FATF’s audit calendar: “We know that the audit was postponed for 4 to 6 months and that the final report should be presented in October 2021.” The review includes two major stages: a first one, where the FATF requests a lot of information in order to form an opinion of the technical compliance of regulations in place and a second one, the visit itself, during which the FATF studies the effectiveness on the ground of the measures taken. For the FATF as for any other institution or company, staff health is of paramount importance and therefore, it is expected that a certain number of talks will take place remotely.