Luxembourg’s financial supervisor CSSF on Thursday acknowledged that there is ‘some’ room for improving its international cooperation with other supervisors after a peer review conducted by the EU’s securities markets authority found a number of shortcomings in the supervision of financial institutions that provide cross-border services to retail clients under the European passporting system.
A peer review of financial regulators in six EU countries, including Luxembourg and the Netherlands, conducted by Esma, the European Securities and Markets Authority, found that national supervisors need to “significantly improve their approach in the authorisation, ongoing supervision and enforcement work, relating to investment firm’s cross border activities.”
The peer review assessed how national authorities supervise investment services provided by financial institutions - banks and investment firms - to cross-border retail clients using a passport under the Mifid II framework that entered into force in 2018.
Significant cross-border activities
In addition to CSSF and AFM in the Netherlands, this exercise focused on Germany’s BaFin, CZB in the Czech Republic, Cysec in Cyprus and MFSA in Malta, given the significance of cross-border activities for firms in these countries.
Esma concluded that it sees a need for “calibrating their supervisory work to the nature, scale and complexity of those firms’ cross-border activities and the risks they pose.” CSSF was assessed on six activities relating its ‘home capacity’ for Mifid 2 supervision and only partially met expectations on authorisation activities, arrangements for ongoing supervision, day-to-day supervision and investigations and inspections.
Unlike AFM, Bafin and CZB, peer reviewers were unable to assess the ‘host capacity’ of CSSF for processing of passport notifications, and enforcement and sanctioning “due to the lack of relevant examples,” according to the Esma review.
‘Some areas for improvement’
CSSF acknowledged that there is some room for improvement when it comes to international cooperation.
“None of the recommendations were individually addressed to the CSSF, but we fully accept Esma’s conclusions,” a CSSF spokesperson told InvestmentOfficer.lu.
“Esma identified that the CSSF appears to have established adequate processes in relation to the passport notifications and – with some areas for improvements – in the context of cooperation. The CSSF was assessed as fully compliant for these topics,” the spokesperson said.
The outcome of the peer review appears somewhat embarrassing for Luxembourg, which prides itself in having become a key international financial hub and a leading European centre for investment firms looking to serve clients in multiple EU member states. Firms with a home in Luxembourg collectively manage about 5800 billion euro in assets.
Protecting retail investors
Presenting the peer review, Esma chair Verena Ross said that, as Europe is striving to develop an effective capital market at a time that retail investors can increasingly gain access to investment opportunities across the EU, a key mission for supervisors and regulators is to ensure investor protection and the proper functioning of the single market.
“Effective supervision of cross-border activities by [national authorities] is crucial to ensure that retail clients benefit from the same level of protection regardless of where the firm providing those activities is based,” Ross said.
Esma said that its recommendations “aim to significantly reinforce the cross-border supervisory framework. For a first time, it made use of a legal tool to order a national authority to change its practices, issuing so-called Article 16 recommendations to the Cyprus Securities and Exchange Commission, or Cysec.
‘Aggressive marketing’ from Cyprus
The six-country peer review showed that Cyprus had “by far the highest number of complaints relating to firms’ cross-border activities and of requests from other NCAs relating to Cypriot firms’ cross-border activities. A large number of Cypriot firms pose a high risk of investor detriment, due to the frequent provision of services involving speculative products, with aggressive marketing behaviour.”
Esma said that Cysec’s supervisory activities have “overall proven insufficient”. Cysec now has two months to implement the recommendations.
