Ten years after the financial crisis, the CSSF continued, in 2019, its mission of prudential supervision by organising its action around five priorities: consumer and investor protection, financial innovation and digitalisation, fight against money laundering and terrorist financing, review of business models and risks associated with climate change. In order to rise to these challenges, it also continued to focus on its transformation efforts through its CSSF 4.0 strategy.
The world of finance and its challenges
Ten years after the financial crisis, Luxembourg banks are well capitalised and their solvency and liquidity ratios exceed the minimum requirements. The investment fund industry is growing steadily. Claude Marx, Director General of the CSSF explains: “Meanwhile, we are not immune to a new economic or financial crisis; the Capital Market Union is far from being completed and the rapid technological changes and digitalisation which spread to the real economy also affect the financial sector.” The sector is facing great challenges: low profitability, outdated information systems, training staff on the new environment and on expectations of customers and investors, new market entrants and new risks.
The five priority action areas of the CSSF
– Consumer and investor protection
This core mission of the CSSF cuts across all activities under its supervision. In this context, the authority ensures, in particular, compliance with the obligations on transparency and under MiFID II. Claude Marx underlines: “Consumers should get special attention in light of their exposure to speculative or risky products.” Therefore, in 2019, the regulator prohibited the sale of binary options to uninformed customers and issued restrictions regarding contracts for differences. The CSSF pursued its efforts in financial education, notably by launching a dedicated website letzfin.lu, educational games and applications, as well as tools for better management of consumers’ family budget and pocket money. He specifies: “The best way to protect consumers is to teach them, and this process must start as early as possible, in schools where the CSSF participated in awareness-raising campaigns.”
– Financial innovation and digitalisation
The digitalisation and FinTech are topics of importance to the CSSF. Hence, the regulator established a permanent dialogue with the market, took part in many conferences as speaker or participant, was attentive to new projects at an early stage, published guidance, like the white paper on artificial intelligence (Artificial Intelligence: Opportunities, risks and recommendations for the financial sector) and worked continuously on the adaptation of the supervisory framework (e.g.: modernisation of the framework with respect to the use of cloud in sectors under its prudential supervision) and all this in a context of increased digitalisation and interconnectivity. In 2019, a particular focus was given to ICOs (Initial Coin Offerings), the new payment services under PSD2 (Payment Service Directive 2), and the KYC utilities. The CSSF had active bilateral exchanges with other authorities either in the context of cooperation agreements or international working groups, like EFIF (European Forum for Innovation Facilitators) and GFIN (Global Financial Innovation Network). It also contributed to the work of European authorities as, for example, the report of the EBA (European Banking Authority) on Big Data and Advanced Analytics. Finally, it remains vigilant on risks associated with digitalisation and with the increasing dependence on information systems, as well as on the major risk of cybercrime.
– Fight against money laundering and terrorist financing
One of the CSSF’s tasks is to contribute to the financial stability which is sometimes undermined by financial crime. Claude Marx underlines: “Money laundering and financing of terrorism are not new subjects; nevertheless, they resonate more than ever, since new players, for instance in the area of virtual currencies, could misuse the financial system for money laundering purposes.” The supervision in this area is carried out on a risk-based approach and will be extended to professionals dealing with virtual assets pursuant to the Vth AML Directive. The CSSF refined its risk-based approach by publishing sectoral analyses, in particular in the field of private banking, a sector which was identified as high risk. It also implemented working groups with AML/CFT (anti-money laundering and combating the financing of terrorism) experts from the CSSF, the supervised sector and the Financial Intelligence Unit (FIU) and intensified its awareness-raising campaigns, notably by organising sectoral conferences.
– The review of business models
The profitability risk remains critical for many banks and other supervised entities in Luxembourg as well as in Europe. This risk is due to a range of factors: constant pressure on net interest income, operational expenditure that is greater than the operational income, in particular, as a result of the cost of the regulations, the increase of salaries in the financial sector, as well as of the extensive investments to modernise the information systems and in digitalisation. Claude Marx indicates: “Too many banks and private portfolio managers in the Grand Duchy still have a volume of activity that is lower than the critical mass which would allow them to cope with these charges. Therefore, it is expected that small-sized entities and those which do not adapt their business models to the customers’ expectations and to the digital world will disappear.” The CSSF supervises the risk associated with business models in the framework of the protection of depositors and investors.
– Risks associated with climate change
Climate change and its impact on the environment became important risk factors in the longer term, as indicated in the last edition of the Global Risks Report of the World Economic Forum. The Single Supervisory Mechanism of the euro area conducted two large-scale surveys in 2019, in order to gain insight on the banks’ situation with respect to the incorporation of climate-related and environmental risks in their business strategy, their risk management and their governance frameworks. This work will continue in 2020 with the communication of supervisory expectations. The Green Deal of the European Commission requires the mobilisation of both private and public investments. The European regulations on Disclosure, Benchmark and Taxonomy will improve the classification of sustainable investments, avoiding, thus, greenwashing which has a detrimental effect on investor confidence. Claude Marx underlines: “The Green Deal cannot be accomplished without responsible investment and the CSSF is ready to assist, at national and international level, in the transition towards sustainable finance”. The authority acts, in particular, via the Network for the Greening of the Financial System, of which it is a member. He continues: “an economy based on ESG (Environmental, Social and Governance) criteria will be more resilient and a sustainable economy goes hand in hand with sustainable finance. With almost EUR 5,OOO billion in assets under management in Luxembourg, our country can have an influential impact when most of the players incorporate sustainable investements in their business strategy and consider these investments as an opportunity rather than a last resort.” A substantial effort to educate consumers, investors and financial sector players is needed and it is part of the CSSF’s financial education mission. Moreover, the remuneration models should include a sustainability component in the objectives of managers (dirigeants) of financial sector players.
The CSSF invests in the future
In order to face all these challenges and meet the stakeholders’ expectations, the CSSF has embarked on a modernisation programme since 2018, called CSSF 4.0. This programme has four goals: effectiveness, transparency, improved interaction with the market and risk management. It includes a technological dimension with, for example, the use of big data and artificial intelligence, an organisational dimension based on lean and agile organisation and a human dimension with a strong focus on training (the agents benefitted from 41,000 hours of training in 2019).
The French version of the report is available free of charge at the CSSF, email: firstname.lastname@example.org
, upon request.
The Commission de Surveillance du Secteur Financier
The Commission de Surveillance du Secteur Financier (CSSF) is a public institution which supervises the professionals and products of the Luxembourg financial sector. It supervises, regulates, authorises, informs, and, where appropriate, carries out on-site inspections and issues sanctions. Moreover, it is in charge of promoting transparency, simplicity and fairness in the markets of financial products and services and is responsible for the enforcement of laws relating to financial consumer protection and the fight against money laundering and terrorist financing.
The CSSF carries out its prudential supervision and supervision of the markets in order to contribute to the solidity and stability of the financial sector exclusively in the public interest.
The CSSF is under the authority of the Minister of Finance but has financial autonomy and autonomy of action as required by the highest international organisations. It has a total workforce of 900 highly qualified agents.
– Danièle Berna-Ost, email@example.com, t. 26251-2230
– Paul Wilwertz, firstname.lastname@example.org, t. 26251-3157