Claude Marx on the evolving regulatory environment - ILA Directors' Day
Directors face new regulatory challenges each year, and their role has never been more important. So it is welcome that the Directors’ Day drew to a close with the now traditional conversation with Claude Marx, director general of the CSSF. He spoke to Carine Feipel and John Li, members of the ILA board of directors
“When we see failings in AML [anti money-laundering] and other failings we also always see bad governance within that organisation,” was Mr Marx’s affirmation of the link between effective boards and businesses acting in a lawful and ethical manner. “When there are breaches we see a lack of control systems, a lack of board action, and insufficient dialogue between the board and the company’s control functions,” he added, before telling the audience: “you have to get involved as there needs to be dialogue and systems to support this, and this is your responsibility.”
Of course it is vitally important for each organisation to respect rules such as AML, with reputations and careers on the line, not to mention the potential for heavy fines. Yet Mr Marx added that there is also a wider responsibility to the country as a whole. He pointed out that too many people around Europe and beyond still believe unfair caricatures about the nature of business life in the Grand Duchy. If a major criminal scandal were to hit this country in the future it could have a serious impact on many innocent people’s livelihoods.
Increased CSSF checks
Thus it is for good reason that the CSSF has taken increased interest in the quantity and quality of independent directors in Luxembourg. Businesses having at least two independent directors “is a recommendation from our side,” said Mr Marx. By this he means true independence, not just people sent by head office. The regulator also looks at the quality of each individual and the board as a whole.
“The tone from the top is very important, and independent directors can influence this in relation to policies on communication, risk culture, the reporting of breaches and more,” Mr Marx commented. Flowing from this should come adequate procedures and policies. He also recommended dialogue between the board and control functions, ideally with this happening without the supervision of management.
Increasingly board members are being interviewed by the CSSF to gauge their aptitude and to gain an insider’s view of the business. As well, there have also been around 850 interviews with leaders of control function teams over the last three years. Not only does this offer an opportunity for the regulator to understand the organisations they regulate, they can also offer advice, as well as facilitating whistle-blowing for players who have been unable to change perceived malpractice internally.
Circular 18/698 and AML
CSSF circular 18/698 issued in August 2018 was a significant event for directors this year. Amongst other things, it limits to 20 the number of board mandates any single individual can hold, and restricts the time that can be spent on this work to 1,920 hours per year. Mr Marx confirmed that this applied to all types of organisation, whether they are financial holding companies, fund mancos, not-for-profits and the rest.
Action against money laundering is high on the CSSF’s agenda. Much of circular 18/698 relates to this, and there have been other efforts to make this a central concern for boards. For example detailed questionnaires have been sent to all fund management companies, following a similar exercise with banks two years ago. Mr Marx said he sympathised with the extra work this process is generating for nearly one thousand firms. But he stressed the importance of effective AML to the country. He said the questions are weighted and the answers will produce a four-step ranking which will indicate to what depth an entity will need supervision.
Big audits for 2019
Next year will see Luxembourg’s regulatory environment come under the spotlight from international organisations regarding anti-money laundering and financial crime prevention. All EU member states will have their AML procedures reviewed by the European Banking Authority over the coming years, and Luxembourg will be in the first wave in 2019.
As well there will be the major regular review by the OECD’s Financial Action Task Force. “This is a really thorough process for which we will have to provide highly technical answers,” said Mr Marx. As well as technical compliance, effectiveness will be tested in depth through a series of immediate outputs, with the regulators and significant players probed. As well as looking into banks, fund firms, insurance companies, accountants, law firms, and the rest (i.e. all entities subject to AML rules), he pointed out that one of the FATF's recent focuses was corporate and trust services providers.
Mr Marx was also asked to elaborate on what arrangements are being made for Brexit. He suggested that for the foreseeable future, little will change in UK financial legislation. The exit will require each of the member states’ supervisors to establish memorandums of understanding with the UK authorities to ensure that markets continue to operate smoothly. All market participants should be prepared for a hard Brexit, with no transition period, not an ideal scenario, he suggested.
The European Supervisory Authorities' (EBA, ESMA and EIOPA) roles are expanding. Mr Marx said that Luxembourg decided to take a proactive stance when dealing with the sensitive issue to relocations in the framework of Brexit. After the Brexit announcement, ESMA was concerned that UK-based asset management firms could set up shell companies or companies with little substance, and then delegate back functions to the UK, in order to retain access to EU markets and passporting rights. To allay these concerns, Luxembourg agreed to have companies moving to the Grand Duchy being required to have their files checked by ESMA. This process takes a few weeks, but the process has been satisfactory and applicants for Luxembourg licences have experienced no issues, as Luxembourg had required substance for a long time.
The principle of delegation and outsourcing have not been questioned, they are embedded in European legislation like the UCITS directive. The CSSF is represented at both the board of supervisors and committees and working groups of ESMA and the EBA, and is actively participating in their work.
He was also asked about the regulator’s approach to digital technology. While individual products like the Bitcoin may not survive, he was keen to point to the value of much of the underlying technology and concepts. For example, while there have been global concerns about some “initial coin offerings”, Mr Marx sees this as an important new form of financing. Legal questions (such as whether such products qualify as financial instruments or public offerings) should be tackled at EU rather than national level, he said.