After completing a similar transition last year for the supervision of investment fund managers, Luxembourg’s financial supervisors, in close cooperation with bank sector representatives, now have adopted a major modernisation of its banking supervision by overhauling what is known as the Long Form Report. Both banks and supervisors see the new approach as a major step forward.
Investment Officer spoke with Nele Mayer of financial supervisor CSSF and Pierre Gilles at Luxembourg bank sector association ABBL. The new approach, from 2023, introduces a different approach to the audit work to be conducted for the 100 or so banks supervised in Luxembourg, they explained. ABBL also welcomed the changes and is keen to make this exercise cost-neutral.
With the new approach, Luxembourg sets out its own course among German-language countries where, for many years, a single annual report, known as the Long Form Report, has played a key role in the way banks are supervised. In recent years however it became clear that such a paper-based one-time annual exercise, which in some cases anointed to 200 pages, is no longer efficient.
‘Gradual, staggered approach’
“There was a need to modernise and to streamline the content… especially when we saw that the digital aspects became more and more prominent,” said Nele Mayer, head of the banking regulation and implementation department at the CSSF, referring to the “gradual, staggered approach” towards modernisation that has been adopted for the financial sector.
“For sure, this long form report had to be revised and needed to become more efficient for all parties involved,” said Gilles Pierre, head of financial markets and banking supervision at ABBL. “This was a process that was not necessarily efficient, and which needed to be made digital in the digital era. We needed more efficient tools for the banks and for the CSSF. We have clearly a joint interest in revising completely the reception and the form of the long form report.”
In the old regime, each one of the hundred or so Luxembourg banks was required to produce a single comprehensive report that often consisted of between 100 and 200 pages, depending on the complexity and size of the institute, that would address issues like governance, credit risk and IT risk, and that would include a broad assessment by external auditors.
Self-assessment with an audit
The new approach includes two pillars. It splits this work into a self-assessment questionnaire that is filled out by the bank itself, and a separate audit conducted by external auditors on a specific topic defined by CSSF. For 2023, auditors will be asked to review bank risks in relation to the EU regimes on Mifid2 - the Markets in Financial Instruments Directive - and PSD2 - the Payment Services Directive.
“The long form was originally introduced already in 2001, and there Mifid and PSD2 were not really on the radar,” said Mayer. “We found that, especially for Mifid2 and PSD2, we wanted to have some more comfort, because it was not so extensively covered in the existing long form report.”
Other themes that will be covered in 2024 and 2025 are credit risk, IT risk, deposit risk, related parties and large exposures. The seven topics that have been identified will be audited once every three years on a rolling basis also following a risk based approach.
Additional supervisory costs
ABBL’s Pierre said that banks are concerned about the magnitude and impact of the different audits, especially the costs, an aspect that is still being discussed with CSSF. “It will be necessary, from our side, first to mobilise internal resources to provide the information to the external auditors and so on. On the one hand, there is the question of extra costs. It is a specific audit but it’s up to the bank to pay for this. It’s a work in progress of course, we share the objective to have it as cost-neutral over the cycle of three years, so that the new procedure will be kept cost-neutral for the banking sector.”
Asked about the costs, Mayer said CSSF recognises the administrative burden for the implementation of all the requirements, but also pointed out that banks will save costs because they are no longer required to produce a comprehensive traditional long-form report.
“We were very cost conscious. We didn’t want to create additional costs,” said Mayer. “So we also tried with the implementation of this risk based concept to keep costs at an acceptable level. At the moment, until now, all the banks had to provide this long form report on an annual basis. So this will no longer be required. Thes bank will save all the cost they need to pay at the moment to their external auditors for the establishment of this long form report.”
CSSF over 2021 achieved turnover of 123 million euro, an amount that is raised mostly through supervisory fees for the financial sector.