€548 million has been budgeted by the banking sector to comply with all existing regulations by 2020. This figure includes investments and recurrent costs related to the implementation and monitoring of regulatory compliance. A figure that has increased by 17% compared to the previous edition of the study, in 2017. Olivier Maréchal, partner at EY Luxembourg, points out that since 2016, the annual increase is around 16%.
In terms of human resources, 13.9% of the banks' workforce works for regulation. A 73% increase in three years.
On average, 38% of the banks' investments are made in the regulatory field. This percentage varies between financial institutions depending on their size. For the smallest institutions, this percentage can reach 52%.
"It's a real problem of proportionality," analyses Olivier Maréchal. "The smaller the bank, the larger the share of investments that must be devoted to regulation.”
Proportionality as a battle horse
Proportionality is the battle horse chosen by the Association of Banks and Bankers, Luxembourg (ABBL) to bring the debate to the public square. For Camille Seillès, secretary general and member of the organisation's executive committee, "this is a real issue that is beginning to be recognised at the level of the European authorities. In a study published on 7 June, the European Banking Authority (EBA) made a whole series of recommendations aimed at better calibrating prudential reporting with the objective of reducing the cost of this reporting by 25%.
He continued: "In our view, many regulations are calibrated to large banks. In Europe, most banks are smaller. This is particularly the case for financial institutions in Luxembourg. We can question the relevance of certain obligations, certain constraints that represent a real administrative burden that can ultimately compromise their profitability. The issue here is ultimately that of the diversity of the European banking sector with its large, medium and small players. We are currently witnessing a phenomenon of concentration in the banking sector to achieve economies of scale. If we take this logic to its logical conclusion, we risk ending up with only a few large systemic players, which could pose a problem in terms of financial stability and even competition law.
The ABBL intends to take this demand for proportionality and flexibility to Brussels whenever necessary.
As for the review of the Mifid regulation currently underway, for example. "For us, the watchword is to think about whether the information provided to investors should be of better quality than quantity. At present, we believe that, whatever the investor's profile, banks are required to provide a whole range of information which, in practice, does not always prove to be the most useful or the most relevant for the investor. The reflection that we would like to see undertaken at the level of the regulatory body is to push towards a degree of information that is more qualitative and better adapted to the real needs and profile of the investor.
A request to the government for financial support
For the ABBL, which does not question the merits of successive waves of regulation, there is a need to add some value to the debate on the overall regulatory burden on the sector. Technology is another part of the debate.
Although we cannot outsource the responsibility for applying a regulation," Olivier Maréchal points out, "we are witnessing the development of the automation of certain functions. Such as the production of documents or the collection of information from customers. "There is a whole assembly work that digitalisation facilitates. But this requires significant investments. Investments that are necessary for a modern and competitive financial centre, stresses Camille Seillès, who refers to the last coalition agreement which provided for support for the digitalisation of the financial sector.
“What form should this support take? This must be discussed with the government. We have already made suggestions via the UEL, notably on taxation. We can imagine a tax credit or a deduction that would support digital transformation projects."
The study also notes a shift in the regulatory approach. In 2014, in the wake of the previous financial crisis, the emphasis was on the prudential aspect. This was the heyday of the Basel agreements and automatic information exchange. Then there was a shift towards more behavioural regulation with the fight against money laundering and investor protection (Mifid). The next step will be related to sustainable finance. "We are moving more towards what interests the client and the investor. The added value for society is more palpable. Regulation has to be aligned with the wider objectives of society, and all the major institutions have already jumped on the bandwagon to integrate the sustainable finance dimension into their strategy," notes Catherine Bourin, a member of the ABBL's executive committee. The cost is worth it.