There is too much focus among financial players in the grand duchy on the rise in administrative penalties, while more focus should be paid on the US debt ceiling, the head of Luxembourg’s financial regulator has said.
Claude Marx, director general, Luxembourg Financial Sector Supervisory Commission (CSSF), was speaking at the Cross-Border Distribution Conference on Thursday.
The financial sector’s voice does get heard in Brussels and it is “very important” for the grand duchy’s next government to be aware of what the financial centre brings to Luxembourg, he stated. Marx also commented on the pending Financial Action Task Force report, artificial intelligence and plans to revamp the CSSF.
The total amount of penalties levied by the CSSF rose from approximately €4.3m in 2021 to €6m in 2022, observed Lou Kiesch, a partner at Deloitte who served as moderator. Could Marx “sympathise” with financial firms who feel under increase regulatory pressure, Kiesch asked.
Levying fines was “only a small part of our work, but it’s a part that gets lots of attention,” Marx replied. “To put this in perspective,” the CSSF oversees more than 18,000 firms and products, collectively looking after more than €6trn in assets. The penalty numbers “may be spectacular” but represent “relatively small amounts” compared to the overall size of Luxembourg’s financial sector.
About half of the total amount of fines issued are for late submissions. Those are typically small amounts, but quickly add up. Levying a fine is a “failure” because it means both the firm and the regulator caught the problem too late. At the beginning of each year the CSSF sets its annual budget forecast for fines at €0, he stated.
“International firms coming to Luxembourg are not looking for the least regulatory oversight,” he said. “It’s the contrary.” Global financial outfits want to point to robust regulatory oversight when speaking with corporate HQ and investors. This was frequently the case during the Brexit migration period, when dozens of financial outfits shifted operations from the UK to Luxembourg (and other EU financial hubs).
Late last year, the Financial Action Task Force, an international body, concluded its routine inspection of Luxembourg, which included a peer-to-peer review of the CSSF and onsite checks of financial firms. (Other organisations and sectors were also audited.) Marx called the inspections “time consuming… but necessary.”
A short initial statement on Luxembourg’s performance is expected following the FATF plenary session on 19 June, while the full report is expected to be released in late August or in September, he said.
US debt ceiling
While the US debt ceiling--the maximum amount that the federal government can borrow to finance its budget--is not widely discussed in Europe, “it is something we should watch carefully,” Marx commented. Without a legislative compromise, Washington could hit the ceiling as soon as next week. If that should happen, the US could potentially default on its sovereign debt, which would roil confidence in global markets. Or Washington could implement “harsh cuts on spending” which would likely lead to a global recession.
While there is “not much we can do,” Marx said the CSSF is following the situation “closely” and urged others to as well.
Financial industry heard by policymakers
Some in the financial sector have complained that industry views were not solicited and not taken into account in the European Commission’s planned retail investment package, unveiled on Wednesday. Marx pushed back on that perception, saying there was “ample” consultation with stakeholders. He noted that talk a few months ago of a total ban on inducements (sales commissions) failed to materialise. The commission instead wants to introduce some minor guardrails and review inducement rules again after 3 years.
Similarly, supposed restrictions on fund delegation (where various functions are handled in different jurisdictions) do not appear to be on the cards. “As far as I’m aware, it’s not being discussed” by EU leaders.
The CSSF has bulked up in recent years to keep pace with growth in the financial sector. It has grown from 600 staff seven years ago to around 1,000 today. But it “can’t recruit 1,000 more IT experts” to keep up with technological change.
“No one was born an expert in DLT or AI,” Marx remarked. So the regulatory agency has embarked on its “CSSF 4.0” strategy, which includes an increased staff training push, moves to improve data management (including a joint research project with the University of Luxembourg on possibly using an AI tool to conduct preliminary prospectus reviews) and an internal efficiency drive.
The CSSF will increasingly be supervising algorithms and robots, Marx noted. Although “I hope we won’t have robots at the CSSF supervising other robots,” he said in jest.
After this autumn’s parliamentary elections, regardless of the government’s composition, Marx said he hoped leaders will remain conscious of the positive contribution that the financial sector makes to Luxembourg’s economy and society. Since the 2007-08 financial crisis, that has not always been a popular view, he conceded. But stakeholders, Marx stressed, need to be aware of the importance of Luxembourg’s financial centre, how it works and what challenges it faces.