ILA & PwC Fund Day 2021: the traditional New Year updater

One of ILA’s traditional January events, the ILA/PwC fund day, was this year held virtually over two mornings on 18th and 19th. Last year this event attracted 200 people in person, and a similar number viewed on-line this time.


The event was once again hosted by Mike Delano, assurance partner with PwC. He began by introducing ILA Chair Carine Feipel, who after a reminder of some of the specific work ILA has done for fund corporate governance last year (including four specific forums for directors and eight for conducting officers) and a look forward, highlighted recent developments about director’s responsibilities on AML. 

She highlighted that ILA’s position is that “directors are not service providers, but they are members of the company’s corporate body and represent the company.” ILA has sought to discuss and clarify this with the Registration Duties, Estates and VAT Authority (AED), a key player in the local implementation of AML rules. 

However before these talks could take place, the AED sent a letter to a number of ILA members (and others) asking them to complete an AML questionnaire. ILA recommended its members complete the questionnaire, but, Carine said: “it was impossible for us to provide guidance on how to do this because one size doesn't fit all, and there are so many different ways that directors sit on boards.” ILA also sent a position letter to the AED at the end of December, explaining the Institute’s position. Efforts to talk to the AED remained on-going at the time of the Fund Day. 

Carine also informed viewers that ILA produced a position paper on the AML bill currently going through the Luxembourg Parliament, and this has been sent directly to Parliament as well as the Chamber of Commerce. 

Vigilance on cyber-security

The pandemic is another reminder for directors that they need to keep cyber security risks and policies under repeated review. Famously, the move to mass working from home has increased the prevalence of successful hacking, lack of attention around malware, increased the temptation for disaffected employees and more. Koen Maris, Cybersecurity Leader with PwC Luxembourg talked about how boards should address these threats from a strategic perspective. 
“Your security is my security,” is how Koen underlined the interconnectedness of IT systems. Thus when working with partners, suppliers, and customers each link carries a degree of risk which must be understood and mitigated. “Third party risk management is required, so for example, if you have a supplier that is critical to the functioning of your organization, you need assess them and their security policies. You could maybe outline some ground-rules in a contract, and take precautionary measures in case of an incident,” he said. 
If a crisis does hit, Koen said calm and transparency are key to avoiding the worst. For that, forward-planning is required. Even if it is impossible to strategise for an unpredictable incident, this process is needed to give executives and boards a mental map of how to proceed. Of central importance is communication to staff, clients, suppliers, regulators, the police and so on. “Customers are waiting for you to tell them what to expect, and it’s better that bad news comes directly from you than from a journalist,” said Koen. 

What’s next for fund regulation reform?

An overview of on-going fund industry regulatory reforms and supervisory projects, together with their implications for local fund directors, was given by the CSSF’s Pascal Berchem of the supervision of management companies department, and Alain Hoscheid of the prudential supervision of undertakings for collective investment and risk management department. Jérôme Wigny, a partner with Elvinger Hoss Prussen was in the chair.

Long form report and Management Letter overhaul

The long form report (LFR) is in the process of being revamped, and this will be of direct relevance to directors who will have to approve the content. This will be facilitated by the procedure taking place on the CSSF’s e-desk portal, which will also enable reports to be downloaded. The project will consist in introducing for both the authorized investment fund managers and regulated investment funds a self-assessment questionnaire (SAQ) and a new separate report prepared by the external auditor on specific points of the SAQ.

There are two main motivations for the reform: to bring the report up-to-date with the current market and regulatory environment, and to make the self-assessment questionnaire and the new auditor report easier to use and complete, both in terms of content and that they will be accessible via the e-Desk electronic portal.

A broad aim for the investment fund manager part is to verify the compliance with the requirements of CSSF 18/698, with the aim of putting risk scoring on each IFM. External auditors will have to check selected points of the self-assessment questionnaire following agreed-upon procedures.

This will be relevant for Chapter 15 ManCos, AIFMs, self-managed SICAVs,AIFs and UCITS Raifs and partnerships will only be captured if they are managed by a Lux AIFM. These procedures will not be wholly new for many funds, but will a novelty for SIFs and SICARs.

With regard to the Management Letter (ML), the reform will not ask additional work / other procedures to the external auditor other than the ones already performed in the context of the statutory audit. The only changes / enhancements relate to the form and content of the document.

The LFR / ML reform work is being conducted within specialist committees gathering representatives of both the Institut des réviseurs d’entreprises (IRE) and the fund industry. Circulars or regulations will be issued by the CSSF for introducing these reforms.

Liquidity risk

There followed an overview of ESMA’s on-going supervisory work agenda. 

A common supervisory action on UCITS liquidity risk management (LRM), launched in January 2020 by ESMA, was seeking to verify compliance of IFMs with UCITS LRM requirements. This was carried out through requests for data from UCITS managers in two stages, with a sample of this data analysed in more depth. Topics addressed related to pre-investment controls, liquidity assessments, data, governance / control mechanisms and KIID disclosure. The CSSF handed over its report to ESMA at the end of last year and first results should be expected in the coming months. Mr Hoscheid gave a preliminary high-level view on first results.

Fees examined 

There was also mention of an ESMA common supervisory action on costs and fees of UCITS, and this was launched in early January 2021 by ESMA. This move highlights the extent to which fees are really on the agenda of regulators, the panel noted.

AML/CTF - ready or not?

Funds companies have their hands full of AML/CFT concerns.  Up-coming are the visit of the FATF, a revamped CSSF questionnaire, new ALFI guidelines, a new approach to audit, evolving thoughts on risk appetites, and more. “AML/CTF - ready or not?” was discussed by Birgit Goldak, risk assurance partner at PwC Luxembourg, Guilhem Ros, head of division for the offsite AML supervision for collective investment at the CSSF, and Isabelle Scherf, global head of financial crime compliance for Fidelity International.

FATF imminent

The CSSF is not the authorities in charge of the coordination of the FATF Mutual Evaluation of Luxembourg, that is the perview of the Ministry of Justice. Nevertheless, to the best of our knowledge the arrival of the FATF assessment team is “imminent” said Mr Ros. He also offered some advice about how to prepare by notably having a look at the FATF methodology, in particular Immediate Outcome 4 which is of direct interest for the Private Sector. 

New CSSF questionnaire 

From 15th February, the CSSF’s AML/CFT questionnaire will be accessible online, and Mr Ros gave some practical insights on completion. A particularly significant change from last year relates to the OECD’s work to cut “proliferation financing” related to weapons of mass destruction. Keeping a history of the form-filling process was recommended by Ms Scherf “to ensure that your messaging remains consistent year-on-year,” that this information can be shared and agreed with colleagues, and to help when the CSSF returns with questions. “I really urge everyone to make sure they understand the questions before completing the form,” she added.

New ALFI guidelines

The finishing touches are being put to new ALFI guidelines, Ms Scherf explained, particularly with the need to ensure they are aligned with the revamped 12/02 circular. “We’re not trying to provide an A-to-Z checklist of what compliance officers and directors should do. We've attempted this numerous times in the past, but our industry is extremely diverse, so no one-size fits all,” she said.

New audit approach

The CSSF’s new approach to AML work for external audit was discussed, with implementation probably due for the end of this year. There will be a new circular which will define the scope and explain the modalities of completion of the AML report which scope is likely to be the same as the yearly CSSF AML/CFT questionnaire. The goal of the new approach is to have coherence, less overlap between the different actors, and increased cost efficiency.

Write a risk appetite

As for a risk appetite policy, the panel agreed that every company needs one. “When you write a risk appetite, keep it short and be sure that you can comply with it rather than having a very complex methodology,” Ms Scherf advised. “A risk appetite is also meant to help everybody in the company understand how far the employees can go and what controls they should have,” she added. Ms Goldak added: “it’s all about documenting what you do. And do more of this when the risk is high, and less when the risk is lower.” Mr Ros expressed his agreement with these approaches. 

Raising governance standards

Is Luxembourg moving towards higher standards of corporate governance? Evidence in the 10th ILA/PwC Luxembourg Fund Governance Survey suggests so, with greater prevalence of independent directors and increasingly diverse boards. The impact of Covid and ESG was also probed. After these results were presented, some of these themes were discussed by an expert panel.

Greater independence

Board chairs and members, conducting officers, and corporate secretaries from 122 investment fund and management companies covering both liquid and alternative products were surveyed. They represented 69% of the UCITS market and 44% of AIF AuM, and fund promotors were from 22 different countries, but mainly the UK, Switzerland, Luxembourg, the US and France. 

The number of independent board members rose from 30% in 2018 to 35% in 2020 on average. For funds this figure tended to be higher: 42% for UCITS and 49% for AIFs, with the proportion closer to a quarter for Super ManCos and UCITS ManCos. 

The practice of having directors sitting on both the board of a ManCo and the fund managed by that ManCo has declined considerably. For example, for Super ManCos, this declined from an average of 4.7 directors sitting at both levels in 2014 to 1.3 in 2020. Circular 18/698 counseled against this practice given the risk of conflicts of interest.

More diversity

Compared to the average director with links to the executive board, the average independent director had slightly more board experience. As well, they were much more likely to have acquired or to be acquiring ILA certification (40%), were older, and were more likely to be female (28% compared to 19% with fund promoters and 9% service providers). 

The proportion of women on boards is inching upwards, from 14% on average in 2016, 16% two years later to 22% last year. The average was highest for UCITS funds (31%), but was around half that figure for AIFs, AIFMs and Super ManCos. UCITS ManCos reported nearly a quarter of their directors being women.

What skills?

A board skills matrix is a method for measuring whether boards have the expertise they need, but of the firms surveyed, only about one-third used this technique. Those who did use a skills matrix were asked which profiles were required to be on their board. Portfolio management experience was said to be a necessity for almost all boards, with a variety of regulatory, product and distribution skills being required by between two-thirds and three-quarters of boards. ESG expertise was only needed by 37% and cybersecurity just 16%.

The extent to which ESG has shot up the agenda is reflected in more than half of directors surveyed undergoing ESG or SRI training. Also 64% of UCITS boards and 48% of AIF boards had reviewed the implications of ESG regulations. However, around 70% of boards did not have a common definition of ESG, with a similar proportion not having distinguished which ESG risks and opportunities are of strategic significance. 

DAC 6 for Directors

The sixth directive on administrative cooperation (DAC 6) is the EU’s latest attempt to help tax authorities get a handle on so called “aggressive” tax avoidance by multinational companies. What directors need to know about this was highlighted by Antoine Badot, partner, alternative investments at KPMG Luxembourg and Vilma Domenicucci, senior tax advisor at ALFI. 
“This directive is not designed to increase businesses taxable basis directly,” Mr Badot explained. “It requires the exchange of information on tax structures that are potentially aggressive arrangements with the tax authorities of the 27 member states,” he added. On this basis, policymakers will be able to make adjustments in the tax law to close the loopholes as they see fit. 
The most pressing need-to-know for boards is the final deadline for filing reportable arrangements is 28 February 2021. This relates to reporting arrangements the first implementation step of which took place between 25 June 2018 and 30 June 2020, while reportable cross border arrangements occurring from July 1st 2020 have to be reported by the end of January 2021. The directive introduces new duties for a range of professionals who may qualify as either “primary intermediaries”, i.e. any person that designs, markets, organises, implements, or makes available a reportable cross border arrangement, “secondary intermediaries” who provide services to that end and/or for taxpayers. Penalties for a failure or shortcoming to report or notify remain high, as in previous versions of DAC: fines up to €250,000 per arrangement 
Details on the interpretation of DAC 6 concepts, in particular the knowledge or expected knowledge of arrangements by professionals acting as intermediaries were explained during the session, with Ms Domenicucci paying particular attention to the needs of the fund industry. However, viewers were warned that there is no one-size-fits-all solution, and each organisation and their board need to analyse arrangements they are involved in on a case-by-case basis to define the extent of their obligations under DAC 6. 

Fund industry roadmap for 2021

A view on the key developments that fund directors should keep an eye on this year in terms of regulatory and market matters was given by Frédéric Vonner, regulatory advisory partner at PwC Luxembourg, in the “Hot topics in a slide” presentation. 

The EU Action Plan of Financing Sustainable Growth is front of mind for many, with the SFDR kicking in on March 10th 2021, while the publication of its regulatory technical standards is due in the coming weeks. “We expect the level 2 of SFDR to come into force from the start of January next year, so all preparatory work has to be conducted this year,” Mr Vonner said. 

As well as various SFDR deadlines throughout the year, he pointed to the revision of the non-financial reporting directive (NFRD) with a proposal expected in the first quarter of this year. The revision of the 2014 directive might cover additional environmental and social considerations, and also respect of good governance principles, such as human rights, anti-corruption and bribery, and diversity on boards. 

Another key area of attention is the revision of the AIFMD, with the ESMA consultation closing on 29th January 2021. Topics addressed in the consultation range from the delegation model, investor protection and financial stability matters to  sustainability, harmonization with the UCITS framework and more.

The last item developed during the presentation are the new rules on the crossborder marketing of funds, which will enter in effect on 2nd August 2021, with changes affecting both to UCITS and AIFs. 

Also potentially imminent is the arrival of the FATF team in Luxembourg to conduct a broad audit of the structure and effectiveness of the country’s AML/CFT framework. Back at the EU level, work is on-going regarding fund costs and fees. Last, the never-ending saga of how the UK will be treated post Brexit, and potentially how this might change other relationships with third countries, is still a focal point for the year that just started. 

CSSF takes stock and looks forward

As has become somewhat customary, an interview with Marco Zwick, director of the CSSF ended the conference on a strong note. He began by highlighting lessons learned from the health crisis, and was gratified that “our financial industry has remained quite robust. Luxembourg was able to demonstrate that we were well equipped, and did not have to invent new tools to cope with the crisis.” He congratulated the industry for having reacted so effectively. He feels the stress-tests requested by the CSSF and ESMA had bolstered preparedness amongst industry professionals, but also the regulators. 

Success, but room for improvement

In particular he remarked how existing liquidity management tools such as swing-pricing worked well for funds managing liquidity risk, with the result there were very few fund suspensions during the height of market turbulence. That said, he noted that the crisis revealed weakness in the way the market dealt with liquidity mismatches, particularly for money-market funds. Work is on-going at the European level to look into this. “Liquidity buffers were not really in danger, but we shouldn’t be complacent,” he noted, adding that the CSSF is also attentive to risks of how working from home relates to AML, cyber crime and substance.

He mentioned how confinement has required the CSSF’s on-site inspection teams to move to carry out virtual onsite visits. “These have worked well as much of our work is based the review of management material and checking system, and we can do many of these things remotely,” he said. Some institutions worry about being contacted several times by the CSSF in relation to surveys, but Mr Zwick said they should “take it as a compliment as certain entities are big and represent a large market share.”

AIFM, delegation, passporting

Looking forward, “one of the remaining questions from a macro economical perspective remains systemic risk, such as how problems with shadow banking could affect banks,” he noted. This is on the agenda of leading European and global regulators. The CSSF also “heartedly endorses the review of AIFMD”, a regulation which has been “broadly successful”. He called on industry players to respond to the Commission’s consultation on AIFMD and indicated that the CSSF would respond as well.

He expressed the CSSF’s concern about discussions around changes to rules on delegation and passporting of the depository function. He pointed to the risk of “detaching oversight of the fund depository from the country of origin, even though at the moment there is strong cooperation between national control authorities.” Before considering change he would first like to know: “why are we questioning something which has not been identified as a key issue by the external expert reports produced at the request of the European Commission?” Similarly for delegation, he said the current system has proven that it works for the past decades. For example, all Brexit related relocations to Luxembourg had been OKed by ESMA in terms of substance of the investment management company.

FATF visit imminent?

The visit by FATF was delayed due to the pandemic, and the new date could be known soon, and could be as early as this spring. Mr Zwick reminded viewers that this audit is designed to check both technical compliance and effectiveness of AML/CFT work. He also repeated the recommendation that industry professionals should read the national risk assessment and the subs-sector risk assessment for the investment fund industry, and either put systems in line with this or have good reasons why there are divergences. 

SDFR preparedness

Regarding ESG, he mentioned the CSSF’s fast track procedures for prospectuses is designed to help industry professionals meet the SDFR deadline. He made two related appeals, especially that this should not be seen as an invitation to take short cuts. “There have been criticisms that this procedure will facilitate greenwashing, but we are determined to carry this out correctly, and everyone should take their responsibilities serious, including directors acting in a ‘fit and proper’ manner.” He also asked that these documents should be filed with the CSSF as soon as possible. Also on the agenda is reform of important CSSF circulars 02/77 and 91/75.