Financial Innovation

Financial innovation affects all financial sector activities and increasingly reshapes the way these activities are carried out and how the related financial services are used by clients.

Integration of evolving technology-based innovation in financial services and markets is a continuing challenge for regulators such as the CSSF, calling:

• on the one hand, for a proactive flexible regulatory approach in order not to hinder new opportunities and benefits by creating excessive regulatory barriers for innovation; and
• on the other hand, for a prudent risk-based regulatory approach in order to safeguard the role of prudential supervision and supervision of the financial markets in ensuring the safety and soundness of the financial sector with a special focus on consumer protection, market confidence and AML issues. No entity can be established in Luxembourg to carry out an activity of the financial sector without an authorisation by the Minister of Finance and without being subject to the prudential supervision of the CSSF.

To reach this goal, on a case-by-case basis, the CSSF combines a technology neutral approach, where the legal qualification of each project presented to the CSSF is assessed on the basis of the services effectively provided, regardless of the technology used, with a risk-based approach, to assess the way the chosen technology is implemented.

In line with this risk-based approach, the CSSF has published a certain number of documents to inform the public on its positions on subjects related to the financial innovation, as listed below.

The CSSF created an Innovation Hub, consisting of a dedicated point of contact for any person wishing to present an innovative project or to exchange views on the major challenges faced in relation to financial innovation in Luxembourg.

Within this framework, in order to gain the best possible understanding of FinTech developments and expectations of the industry and to address the forthcoming challenges, the CSSF is in permanent contact with market players. The CSSF is thus promoting a constructive and open dialogue with the FinTech industry.

With a view to being proactive and promoting a constructive dialogue, the CSSF remains open to consultation regarding the development and application of regulation and encourages market players to contact it in order to either present an innovative project, request information on the regulatory framework applicable to a project or to initiate a dialogue on new technologies or regulation that may impact the financial sector.

If you would like to enter into contact with the Innovation Hub of the CSSF please complete the contact form and send it to innovation@cssf.lu.

Virtual assets are defined in point (20b) of Article 1 of the Law of 12 November 2004 on the fight against money laundering and terrorist financing, as amended, (“AML/CFT Law”) as a digital representation of value, including a virtual currency, that can be digitally traded or transferred and can be used for payment or investment purposes, with the exception of the virtual assets which qualify as electronic money as per point (29) of Article 1 of the Law of 10 November 2009 on payment services, as amended, and the virtual assets which qualify as financial instruments as per point (19) of Article 1 of the Law of 5 April 1993 of the financial sector, as amended. The development of new technologies like distributed ledgers and cryptography have resulted in the creation of various types of virtual assets that may be referred to as “virtual currencies”, “cryptocurrencies” or “tokens” (e.g. so-called “payment tokens”, “investment tokens” or “utility tokens”).

In 2018, the CSSF published two warnings related to financial activities involving virtual currencies, cryptocurrencies or tokens.

In 2021, the CSSF published its guidance on virtual assets along with two FAQs for UCIs (undertakings for collective investment) and credit institutions.

No persons established in Luxembourg or providing services in Luxembourg may provide virtual asset services without being registered with the CSSF as provided for in Article 7-1(1) of the Law of 12 November 2004 on the fight against money laundering and terrorist financing (“AML/CFT Law”).

Technological risks and recommendations in the financial sector

Distributed Ledger Technology (DLT) is a technology that has been used for many years. Its potential has been emphasised in 2008, through the development of the blockchain (which is a particular type of DLT) on which the crypto-currency commonly referred to as Bitcoin still relies.

Nowadays, the DLT is seen, by some, as the next step towards the digital transformation and may have a significant impact on the financial sector in the decade to come. Over the past few years, the CSSF has been increasingly solicited by financial and non-financial institutions, incumbents and start-ups, wishing to present a large diversity of applications and use-cases of DLT, in various sectors.

The CSSF applies a principle of technology neutrality and acknowledges that innovative processes and technologies can contribute to the improvement of the provision of financial services. When properly used, a DLT, like other technologies, can provide benefits for the financial sector. At the same time, the DLT entails specific risks that must be understood, mitigated and monitored.

In this context, the CSSF has decided to publish a non-binding document in the form of a “white paper” aimed at guiding interested professionals in the conduct of their due diligence process related to the DLT and its use in the provision of services in the Luxembourg financial sector.

It shall be noted that the present white paper does not purport to provide all the technical explanations on the functioning of a DLT (extensive literature is already available) but to ensure that both risks and advantages are adequately and appropriately taken into consideration by the financial sector. To that extent, the document first recalls the key common characteristics and different types of DLTs and then presents the main actors and roles identified in a DLT project along with use-case examples. Finally, the main part emphasises some of the main risks related to the DLT, both in terms of governance and technical risks, by proposing key questions and recommendations for professionals to consider when performing their risk analysis and due diligence processes.

You can find more information about the DLT Pilot Regime on the following dedicated page: DLT Pilot Regime.

Today, Artificial Intelligence (“AI”) is one of the most promising technologies, and different kinds of practical applications, especially in the financial sector, are emerging. This topic attracts a lot of attention, but at the same time, there is still a sense of ambiguity about what kind of technology is hidden behind this term. The potential benefits that AI can bring are enormous, but these can only be achieved if the fundamentals of this technology and its underlying risks are well understood and an adequate control framework is put in place.

In this context, the CSSF has performed a research study in order to better understand what Artificial Intelligence is and the related risks. The result is a document which intends to provide some basic knowledge about Artificial Intelligence, describe the different types of AI and some practical use cases for the financial sector.

Furthermore, the study covers the analysis of the main risks associated with AI technology and provides some key recommendations to take into account when implementing AI inside a business process. Given the increasing adoption of AI in the financial sector and the relative lack of practical guidance from a risk perspective, the CSSF has decided to share the results of this study with the public, for the benefit of the financial sector.

The document is published in the form of a “white paper” and has no binding value vis-à-vis the supervised institutions. Nevertheless, it provides the foundations for a constructive dialogue with all the stakeholders of the financial sector for a deeper understanding of the practical implementations of AI technology and its implications.

In recent years, the CSSF has seen a growing number of financial institutions providing investment advice or portfolio management services to investors, in whole or in part, through automated or semi-automated tools, often referred to as “robo-advice”. Robo-advice can range from the provision of investment recommendations to services providing investment advice and automated monitoring and rebalancing of investment portfolios.

At present, robo-advice appears to be generally based on automated structured questionnaires to gather and analyse customer preferences in relation to the investment horizons, risks, investment sectors and objectives to determine the investor’s risk profile and propose an investment strategy. Robo-advisors also use algorithms to automatically invest into a broad universe of funds, usually ETFs, including rebalancing investments to remain in line with investor risk profiles as determined by the questionnaires. In the future, advancements in machine learning and artificial intelligence may further improve the automated decision-making of robo-advisors.

The CSSF has issued a position paper which describes robo-advice services, the business model of robo-advisors and the regulatory framework.

You can find more information about Crowdfunding on the following dedicated page Crowdfunding service providers.

List of MoUs signed in the field of innovation in financial services.