“I see opportunities arising from digitalisation,” Claude Marx, director general of the Luxembourg Financial Sector Supervisory Commission (CSSF), said on Wednesday, particularly in terms of making products more accessible to investors. New product offerings--including green products and Eltifs--will also provide opportunities. Eltifs (European long-term investment funds) have had a limited success so far in the retail space, and Marx thinks that this could become “quite a success” after the review of the Eltif framework, which is likely to be concluded at the end of this year.
“We’ve seen a surge in private markets in Luxembourg,” added Camille Thommes, director general of the Association of the Luxembourg Fund Industry, “and we have the necessary toolbox to cater to its needs.” Another opportunity relates to sustainable finance. It’s a complex, challenging topic, but it “presents loads of opportunities for asset managers, if they do it right, and follow words with deeds,” Thommes continued.
Looking ahead to the next 12 months, sustainable finance and ESG is one of the big subjects for the regulator, said Marx, who added that they are looking at the ESMA supervisory briefing of May 2022, which aimed to provide guidance on the integration of sustainability risks and disclosures in the area of asset management in Europe. “The focus here is pre-contractual disclosures,” Thommes stated, “and also the integration of sustainability risks in the investment fund managers’ risk management.”
Sustainability integration and harmonisation
Sustainability was indeed a key theme of the Alfi conference. During a panel on greening private debt strategies, experts mentioned the importance of due diligence, data integrity and engaging with borrowers when integrating ESG considerations into the debt package.
Douglass Welch, portfolio management conducting officer at Pemberton Asset Management, highlighted the importance of collaboration and harmonisation of standards and terminology. For example, Pemberton is trying to implement standardised questionnaires and create standardised terms for margin ratchets – a tool used in private debt to incentivise compliance with ESG criteria. Having a single source of ESG data will make it easier for borrowers or private equity companies, he said.
What else will the CSSF focus on?
Marx mentioned other points that the regulator plans to focus on in the coming months, including liquidity risk. “Further work is being conducted to reduce liquidity mismatch, to issue guidance on the use of liquidity management tools.” Data-related monitoring is important here as well, added Marx. “This is the highest risk, actually, on the agenda of the ESMA.”
The CSSF will also focus on asset valuation and cross-border activities. There will be follow-up on this at the EU level, as well as on the national level, investigating how cross-border work is being carried out, how it is controlled, and the risks it poses to investors.
We have a massive training programme ongoing for anything to do with new technologies. Because tomorrow, we will need to supervise algorithms.
A financial sector assessment by the International Monetary Fund--the last was in 2017--may also occur next year, according to Marx. “It’s a very important exercise, not so much known in the country, because a very comprehensive report on the economy is published.” The report is also taken into account by rating agencies and other stakeholders.
“The last point is the cross-border distribution of funds,” said Marx. Following a directive and regulation in 2019, every two years, a report must be made on the effectiveness of cross border distribution. The next one will be delivered by the CSSF in March 2023.
Beefing up CSSF staff
Digitalisation isn’t just applicable to investment funds--it’s something that will also help modernise the CSSF. The CSSF can’t simply keep growing linearly in response to the increased volume and complexity of regulation, said Marx. They’re beefing up staff, as well as implementing a modernisation programme, called CSSF 4.0.
The CSSF 4.0 programme, launched pre-pandemic, has a few elements. “One component is to review all process in the CSSF,” said the director general of the regulator. “We’re also digitalising the CSSF, equipping the CSSF with digital tools and also making use of machine learning and artificial intelligence.” These are research projects in progress with the University of Luxembourg as there’s nothing “off-the-shelf” that can be applied to the CSSF.
“We are training our people. I think we have a massive training programme ongoing for anything to do with new technologies,” said Marx. “Because tomorrow, we will need to supervise algorithms. Nobody was born in the CSSF as a supervisor.” Trainings are also focused on green finance, which Marx called “huge,” and is in line with the emphasis on sustainability during the Alfi conference.
The CSSF is also standardising and automating their submission process, and in November launched a standardised prospectus for Ucits.