Luxembourg’s banks in 2020 budgeted €548m for compliance with existing regulation. This includes investments and recurring costs related to the implementation and monitoring of regulatory compliance.

The budget was up 17% compared to the 2017 edition of the study. And 13.9% of the banking sector employees work on regulatory matters, a 73% increase in three years. On average, 38% of investments by banks are related to regulatory compliance but for smaller institutions, this can be as high as 52%.

“This is a real problem of proportionality,” said Olivier Maréchal, partner at EY. “The smaller the bank, the greater the share of investments that must be devoted to regulatory matters.”

“This is a real subject that is beginning to be recognised at the level of European bodies,” said ABBL secretary general Camille Seillès about the issue of proportionality. “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%.”

Many of the regulations are aimed at larger banks, Seillès said. “In Europe most of them are smaller. This is particularly the case in Luxembourg. One can wonder about the relevance of certain obligations, of certain constraints which represent a real administrative burden which can ultimately compromise their profitability.”

Quality over quantity

Seillès warned that the European banking sector is losing in diversity. “We are currently witnessing a phenomenon of concentration in the banking sector to achieve economies of scale. If we follow this logic to the end, we risk ending up with only a few large systemic players, which can pose problems in terms of financial stability, or even competition law,” he said.

And the ABBL isn’t afraid of taking the matter to Brussels, for example for the current review of Mifid regulation.

“Whatever the profile of the investor, banks are required to provide a large amount of information which, in practice, is not always the most useful or the most relevant for the investor,” Seillès said. “The reflection that we would like to see initiated at the level of the college of regulators is to push for a level of information that is more qualitative and ultimately better suited to the real needs and profile of the investor.”

The ABBL doesn’t question the merit of successive waves of new regulation but wants to see more attention paid to the burden these pose. And technology could be an area of interest in this respect.

Government support to go digital

While compliance cannot be outsourced, it can be automated, said EY’s Maréchal. “There is a whole lot of assembly work that digitalisation facilitates. But that requires significant investments.”

Seillès in this context said the government in its 2018-2023 coalition agreement had pledged to support the financial sector as it digitalises to help stay competitive.

“This must be discussed with the government,” the ABBL secretary general said about what shape this support could take. “We have already made suggestions through the UEL, particularly 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. It was the heyday of the Basel accords and the automatic exchange of information.

Emphasis then switched to more behavioural regulation in the fight against money laundering and investor protection (Mifid). The next step will be related to sustainable finance, the report expects.

“We go more towards what interests the client and the investor. The added value for society is more palpable. The regulations must be aligned with the broader objectives of society, and all the major institutions have already set the train in motion to integrate the sustainable finance dimension into their strategy,” said Catherine Bourin, member of the ABBL management board.

This story was first published in French on Paperjam. It has been translated and edited for Delano.