ILA & PwC Fund Day

Summary Articles

Key 2022 highlights for fund directors

The 15th edition of the ILA PwC Fund Day has been split in two due to Covid, explained the event host Mike Delano, Chair of the ILA Investment Funds Committee and a Partner with PwC. The first half was held online on 18th January, with the second half scheduled for 8th March online. Mike introduced ILA Chair Carine Feipel who spoke about some of the Institute’s plans that are of particular relevance to fund directors.

There will be the launch of a sectorial certification programme for fund directors this year. This can be taken as a stand-alone course leading to a Fund Governance Diploma, but to receive the certification as an expert in fund corporate governance would require directors to have first completed ILA’s general directorship certification programme. To participate in the fund certification course, it will be necessary either to be an ILA certified director or be an experienced professional in the fund industry with at least 3 years experience. 

Carine said plans to launch the course in February have been disrupted by the pandemic, as this ten module, two week course needs to be held in-person. The first week will now be in October 2022, with the second in February next year. Carine thanked the large team which continues to work on this project. For more information, click here.

More generally, she spoke of ILA’s on-going IT transformation, which will see change in the applications being used, such as with the creation of a learning management system. “This will really change the way we manage our training and our entire education programme and will give you a better experience when you interact with ILA on training,” she said. There will also be a new website, and Carine asked for patience and understanding as inevitable glitches are ironed out.

“ILA is also engaged in the major task of defining what is meant by an independent director in Luxembourg, and what you need to do to qualify as one,” said Carine. The goal is to provide answers to questions such as, “how much time must pass having left an organisation as an employee before one can be considered to be independent?” and “if one is an independent director for a number of years, does this independence wane, and if so, what should happen?” The aim is to give guidance on such questions to individuals and boards.

Carine also reminded members of the on-going outreach tasks performed by the Institute, with on-going dialogue with ministries, professional associations and others. For example, ILA continues to work closely with the Ministry of Justice regarding the AML implications for directors of guidelines on the operations of trust and company service providers. 

She ended with some diary notices, highlighting that the AGM will be on 15th June, and that the Directors’ Day is scheduled for 17th November. 

CSSF’s 2022 agenda 

Presentations by the CSSF, with Marco Zwick, director, and chefs de service Pascal Berchem and Alain Hoscheid, featured an overview of the regulator’s agenda for the year, and close detail of key recent changes. 

Mr Zwick opened by welcoming ILA’s initiative to set up a dedicated training and certification for fund directors. He also called the institute’s role as the voice of corporate governance “a very important contribution” to the Luxembourg fund centre. He then turned to regulatory priorities for 2022, partly a continuation of lessons learned during the pandemic in 2021. 

Liquidity management is to remain a key regulatory topic on the European and local level. Although a major European common supervisory action by ESMA on this topic was completed and the results published last year, Mr Zwick said this had not ended work on the matter. “There's also going to be a continued discussion around liquidity mismatch for open ended funds, and also money market funds are still under scrutiny,” he said, with the CSSF, ESMA, IOSCO and the Financial Stability Board all currently working on papers on this topic. 

He mentioned the common supervisory action on costs and charges for which the CSSF sent its input to ESMA in December 2021. The results are currently being studied by ESMA, and “I think we can also expect a publication on this topic in the coming months,” he said. Regarding post-Brexit authorisation processes when UK companies set up an office in EU Member States, Mr Zwick said a peer review will be undertaken by ESMA to check how this process was handled by national control authorities 

The AIFMD review will be a key concern for independent directors, not least due to the questions around delegation. He said that throughout this review process, “the good news is that in the contributions of private and public actors to the proposal made by the European Commission, the concept of delegation, per se, has not been brought into question.” He said this view which the CSSF shared during the discussions has been taken up by the European Commission which sees delegation as contributing to the success of EU fund managers and investment funds. 

“Nevertheless, there are always areas of improvement in terms of harmonisation, for instance, and having a coherent approach on delegation activities and the supervision of them,” he said. He was gratified that many of the ideas taken up at the EU level, for example in terms of substance of investment fund managers, have been anticipated in the approach adopted in Luxembourg via CSSF circular 18/698. Discussion is currently ongoing regarding how delegations outside of the European Union should be notified to ESMA. 

ESMA has also taken a view on the use of liquidity management tools, saying their use should be notified to national control authorities, which also is in line with practice in Luxembourg when prospectuses are reviewed by the CSSF. That said, Mr Zwick pointed out that it is not the national regulator’s role to intervene each time such a tool is used. “As long as they are in line with regulation and disclosures to investors, then it is ultimately the fund board’s responsibility to intervene in terms of the use of liquidity management tools,” he said. 

On the regulation and directive on cross border distribution of collective investment undertakings, Mr Zwick said the CSSF are currently looking into the implications of this regarding marketing material in the broadest sense, including the use of electronic media. As for AML, he confirmed that the pandemic-delayed FATF visit is now due for October or November this year, and that work will continue on the implementation of the new EU AML package. 

On ESG, he mentioned the need to associate the risk management process with product categorisation. He noted the absence so far of the ESG regulatory technical standards which he hopes will be published “very shortly.” He recognised that the detailed requirements and shifting deadlines around ESG have been “stressful” for both the industry and also regulators.

Regarding teleworking regulation, he noted that the circular has not yet been made applicable. as the CSSF are waiting for a period of stability in how the pandemic affects working arrangements. Then the CSSF are currently working on a circular on central administration, with the publication processes timed to take into account potential changes from the AIFMD review. 

Later in the morning, Pascal Berchem and Alain Hoscheid – “the chief architects of the two new circulars that we have for ManCos and for funds,” according to Mike Delano – gave some detailed explanations of the new procedures as a result of the reform of the Long Form report for both investment fund managers and investment funds. In particular they explained what funds, ManCos and external auditors need to know about the new long-form reports and the changes to the management letter. The goal is to streamline the form-filling process and to facilitate the use of this data in the risk-based supervision performed by the CSSF. Besides the reform of the Long Form report, they presented preliminary results on the ESMA Common Supervisory Action (CSA) on Costs and Fees and gave an outlook with regard to the 2022 ESMA CSA on valuation. Finally, an overview of the cross-border fund distribution directive, particularly related to marketing materials, and related impacts was given.

Cross-industry view of AML

An “AML Update” panel followed, with a detailed look into fund directors’ responsibilities regarding evolving anti money laundering rules. The session featured representatives from across the sector, chaired by Birgit Goldak. AML Services Partner at PwC Luxembourg.

On the upcoming CSSF AML survey, Guilhem Ros, Head of Department - OPC AML at the CSSF reminded the audience that the form will be available for completion from 15th February, with a deadline of 15th April. “If you had to complete it last year, you have to do so again this year,” he said, that means authorized investment fund managers, registered investment fund managers, Lux branches of foreign investment fund managers, and funds which have not appointed an investment fund manager. He said the CSSF had kept changes from last year to a minimum, but there are some new questions, such as on tax crime as a predicate offence of money laundering, proliferation financing and virtual assets. 

There were three recommendations for successful completion of the form from Géraldine Mascelli, Executive Director - Head of Compliance with Vontobel Asset Management. “Start completing this survey as soon as possible” she said. She welcomed the four-week extension of the deadline but said that this should not be a signal that the task can be delayed. She even recommended starting work before the survey is published on the CSSF’s eDesk platform. The RR and RC, as well as the senior management and the board of directors also need to be heavily involved in the process, she said.

Ensuring a well-planned process was her second recommendation, with clear definitions and understanding of who should complete what tasks and when. Finally, time needs to be taken to ensure consistency with previous years, and to document any changes in case the CSSF asks for clarification. 

Francesco Lupini, Global Financial Crime Director & MLRO at J.P. Morgan Bank Luxembourg echoed these recommendations, adding that particular care and time should be taken if a service provider has been changed in the previous year. This extra effort would help to ensure that information flows and that answers are consistent. Ensuring LuxTrust tokens will not expire before 15th April was an additional tip from Mr Ros, as the ability to file these reports via eDesk requires these to be up-to-date.

A lengthy, detailed discussion of the AML implications of new CSSF circulars (such as 21-788 and 21-790) and procedures followed, with particular focus on the implications for fund businesses. The panel pointed out that some of these changes require additional levels of reflection and work from boards.

Seven key fund-board topics

Seven topics that are likely to be discussed by fund boards this year were highlighted by Olivier Carré, Financial Services Market Leader at PwC. These were in addition to other subjects being discussed over the morning.

Crypto assets are coming under increasing scrutiny from European and national regulators, Oliver said, with recommendations having been published of how funds and banks should treat these. Not only do the technical aspects of managing such assets need assessment by boards, but so do related AML KYC risks. 

MiFID reform will see changes with regards to clients’ “sustainability preferences” which requires work from distribution partners regarding client profiling and how distributors will offer advice. These changes are set to be implemented from the middle of this year. 

ESG was the third topic on Oliver’s list, with him highlighting in particular the need for product compliance with level two RTS standards. There are also additional disclosure requirements and the need for awareness of investment restrictions, with the filing and endorsement of reports by the CSSF needing to be completed by the end of the year. As well, he pointed to “principal adverse impact reporting” duties, with this year being the first period under scrutiny, with SFDR requiring data to be collected for reporting by the end of June 2023. He also noted the on-going political discussions about the inclusion of gas and nuclear power in the green investing taxonomy. 

Fourth and fifth on the list were AIFMD reform and depositary bank passporting rules, changes which have been on board agendas for a while. The reformed ELTIF could be significant, with Oliver saying the rules make this vehicle “more fit for purpose” than its “cumbersome” predecessor. Boards may need to familiarise themselves with the specific regulations and various potential product and distribution risks.

His final point was to highlight the advent of the European single access point (ESAP) initiative which will be “a single repository for financial information” starting in 2024. “There will be a number of disclosures that you as a management company will need to make which end up in a centralised register in the EU,” he said. This will feature a new type of data disclosure interface, even if the details of the information to be logged will not change much. “The type of information available will be much more comprehensive at an EU level,” he added.