The regulatory tsunami that the financial sector has experienced since the 2008 financial crisis is far from over. After a period of calm, a new wave of regulation is coming. It is green. The new leitmotif is the transition of the economy to carbon neutrality. And since the financial sector is responsible for providing the economy with the energy it needs to function, it is in the front line of this transition.
Sustainable finance is rapidly gaining ground, particularly in Luxembourg, and ESG products are enjoying their heyday. For financial institutions, the transition is total, from a commercial, operational and human resources point of view. Increasingly, regulatory affairs are entering the discussion, even becoming one of the main factors in the ongoing transformation.
Like the financial institutions, the supervisory authorities have taken over the field of sustainable finance. They are recruiting ESG coordinators and organising dedicated training programmes for their staff. In February, the European Securities and Markets Authority launched a roadmap on sustainable finance, putting the fight against greenwashing at the top of the agenda. By definition, financial institutions are in close proximity to companies and can therefore influence their compliance with ESG rules.
Institutions facing market failures
The problem is that, at present, non-financial data reported by companies still tends to be incomplete or inaccurate. Yet this data is at the heart of financial institutions’ ESG analysis. Once again, supervised entities will be held responsible for market failures to the extent that they are unable to mitigate and manage the risks.
With the taxonomy related to the Sustainable Finance Disclosure Regulation, adopted in April, many fund managers in the market are busy reclassifying their funds as article 8 or article 9. However, many are reluctant to reclassify their funds as article 9 because of the data challenges. If there is any uncertainty, the regulator’s guillotine blade will fall immediately upon application for authorisation.
In addition, since August, the EU’s Markets in Financial Instruments Directive (Mifid) requires distributors of investment products to ask their customers to create a sustainable finance profile. This is something that the Luxembourg Financial Sector Supervisory Commission (CSSF) is already prepared to check. For those who did not know, ESG has become a regulatory issue.
AML compliance has many years to go
At the same time, the regulatory past is reminding the financial centre of its importance. The Financial Action Task Force returns in November to assess the country’s capacity to fight financial crime. The recent update of the anti-money laundering law indicates that all the final details are being finalised before the assessors arrive. Luxembourg wants to avoid being singled out again for an international ‘name and shame’, as was the case for the last evaluation in 2010.
For a decade, successive governments have been working to strengthen the country’s anti-money laundering system. From the regulator’s point of view, the work accomplished has even made Luxembourg more robust than other European states. As a result, the pressure on the supervised entities has been such that professionals in the financial centre regret that the cost of compliance has reached record levels, making some account openings more advantageous abroad than in Luxembourg.
However, the FATF’s assessment will not mean the end of the anti-money laundering regulatory agenda. While the European legislator has favoured the use of six consecutive directives since 1991, it now plans to make its standardisation work more effective by means of regulations. These texts will give rise in 2023 to the Anti-Money Laundering Authority (Amla), whose mandate will be to directly supervise certain players in the financial sector on a European scale. This is a giant step towards the long-awaited convergence of financial supervision and capital union. Currently, no less than 719 job offers on the market contain the word “AML”, a sign that the financial sector is not at the end of its tether.
This article was published for the Paperjam + Delano Finance newsletter, the weekly source for financial news in Luxembourg. Subscribe using this link. Originally published in French by Paperjam and translated for Delano