Latest governance hot topics for financial sector institutions
Speakers: Claude Marx, Carine Feipel and Frederic Mouchel

 Claude Marx on greenwashing, digital assets, interest rates and more

CSSF director general Claude Marx gave his traditional overview of key, current governance topics at the end of the Directors’ Day. 

He made nuanced comments on expectations around the green investing revolution. He noted the considerable regulatory challenge, such as the go-live of no fewer than 13 regulatory technical standards on 1st January 2023. “I think it will be a challenge to be up to speed,” he said, also noting the pipeline of new rules for the coming years. Yet while having understanding that becoming fully compliant is a journey, he underlined that “there is an expectation by the CSSF that all this should be properly implemented.”

Alluding to a recent NGO report which accused Luxembourg banks of engaging in greenwashing and offering insufficient advice to clients about green options, Mr Marx said “training must happen for all client-facing people,” and referred to the importance of the tone from the top: “It is important that boards of directors ensure this is happening.” He also noted that boards should be aware of legal risks as greenwashing is already covered by rules around mis-selling, which has resulted in some tough regulatory action internationally.

Yet he pointed to the work being done by the industry in relation to new MiFID rules which only came into force in August this year. “This is a very important milestone as it forces financial services providers to enquire about their clients’ appetites for green products,” he said. “

As well as regulatory pressure, the market is also driving financial institutions to change. “There is no choice but to embrace the green finance revolution., If you fail to do that you will lose customers, and ultimately you will have difficulties to attract and retain staff,” he told the audience. “Reputational risk must be taken very seriously,” he added. He pointed to signs that the industry is taking this seriously, such as the moves to reclassify funds within the SFDR framework. 

The EU authorities are conscious of the risks around accusations of greenwashing and further work is being done by the Commission and the ESAs, on definitions and product names. 

He stressed the importance of pan-European regulatory convergence, rather than national legislators adding extra layers in their home countries. Talking of green investing, he said gold-plating would “create confusion in a situation that is already complex with rules from the EU, the US, the UK and more.”

Interest rates have returned, and while this puts pressure on many businesses, for the banking sector it is a mixed picture, Mr Marx said. The tougher economic environment increases the risk of loan default, but he noted that this remains at historic lows in Luxembourg. “But we must see how this evolves in the quarters to come,” he said, noting the considerable jump in provisioning by Luxembourg banks in the first half of this year. Yet on the other side of the ledger, he said that this new environment enables credit institutions to once again earn interest rate margins. 

He sketched basic principles for how boards should handle the range of risks faced by companies. He said the CSSF looked at internal control functions and the kind and quality of data boards are getting from the relevant teams. “We also look at the speed with which deficiencies are addressed, whether these were highlighted internally or externally,” he said. Boards should ensure that these questions are being addressed. 

On digital assets, Mr Marx mentioned the progress of the Markets In Crypto-Assets (MICA) regulation and the Digital Operational Resilience Act (DORA). These should become applicable in the second half of 2024 and first half of 2025 respectively. Attention is also being paid to distributed ledger technology. “DORA will be important because it will look in a very structured way into IT risk management, incident reporting, testing and outsourcing, particularly to the cloud,” he said. He used this opportunity to mention that the CSSF had been a pioneer in Europe on providing guidance on the use of cloud computing. 

Cyber-attacks have increased, coincidentally or not, with the start of the invasion of Ukraine, he noted. He added that the war also raised the prospect of sustained power outages in the future. He encouraged boards to examine their companies’ business continuity plans, as well as their resilience with regards to cyber security. 

He described how the CSSF is trying to make use of machine learning and artificial intelligence to help its teams. This includes a research project with the SnT of the University of Luxembourg. 

The meltdown and bankruptcies in the global crypto-assets market were discussed. Mr Marx said that CSSF’s analysis had revealed no direct negative impacts on Luxembourg-based players in this space. Commenting more widely, he said: “the CSSF should not be for or against a technology: we should remain technologically neutral.” However, he noted that unexperienced investors and even children were attracted by crypto-assets, marketed by influencers on social media, hence the need for financial education through similar channels.

He ended by noting that the Financial Action Task Force mutual evaluation was on-going, with the process due to result in a final report next June.

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