Financial regulators across the European Union next year will embark on a comprehensive review of costs that investment firms charge for their funds. Claude Marx, director general of Luxembourg financial supervisor CSSF, on Wednesday elaborated on some of the next steps. The industry, he said, needs to maintain its focus on efficiency, which also is in the interests of investors.
Marx, during an on-stage interview at the Private Assets Conference of Alfi, the Association of the Luxembourg Fund Industry, urged the industry to keep finding opportunities to delegate and outsource non-core services.
“We also see that the cost of business and the cost of management is a big challenge,” Marx said. “I think here, we have to be very careful. It’s vital that we keep the possibility to delegate because it’s also about efficiency and not replicating in every centre of all the expertise. So at the end of the day, it’s in the interest of cost reduction, and it’s in the interest of investors, the counterparties, that we make sure that we have sufficient substance, you know, in our, in our offices here. I think this is well understood by the industry. We need to make this point again and again and again, in order to be able to continue to delegate and to outsource.”
The CSSF last month ordered investment fund managers of Ucits funds in Luxembourg, home to about a third of all such funds in Europe, to review, and if necessary correct, the way they calculate the costs and fees of their investment funds and report back to their national regulator before April 1 next year. The CSSF findings will feed into a Common Supervisory Action on costs that the EU’s financial authority Esma has announced for 2023. Marx made clear the cost review is being done because Esma has asked for it.
“Well, people think they have a miserable life because they get questions from us,” Marx said. “But I can tell you, nobody gets as many questions as the CSSF.”
Better regulation needed
Alfi director general Camille Thommes pointed to the increased costs of financial regulation that the industry faces. “What would be wishful to have, is better regulation, to make sure that the various pieces are aligned, not contradicting,” he said, referring to the mis-timed introduction of various pieces of EU legislation on sustainable finance, including the Sustainable Finance Disclosure Regulation which largely depends on data that will only become available once other, related regulation takes effect.
“It’s something that creates additional costs because you have to change continuously,” Thommes said.
Regulatory costs
Marx acknowledged that the costs stemming from regulation indeed are considerable, but underlined that it’s not the CSSF that is responsible for the new rules.”If we are pragmatic, there is a cost of regulation. There is a lot of regulation, level 1, level 2 and so on. By the way: it’s not the CSSF who makes that regulation,” he said.
Instead, he again urged investment firms to focus on their core business. “You should really try to focus on your core business and outsource, mutualise your non-core aspects. Compliance, KYC are very expensive, with very expensive staff. If we can outsource to specialist providers that’s good.”
“We should improve productivity, improve profitability by making good use of digital tools. I see that many core systems are being replaced. That is all positive,” Marx said.
Asked about this month’s visit to Luxembourg of the Financial Action Task Force, the world’s anti-money laundering body, Marx said the visit was just completed recently. “I won’t comment on the process itself but we had our last evaluation in 2009. What is new this time is the assessment of the effectiveness of the system. It’s fair to say there has been huge progress made in this area since 2009.”
‘AML is in the DNA of all players in Luxembourg’
And: “We don’t live AML or worry about AML because of an audit or a virtual assessment. It is in the DNA of all players in Luxembourg. That is very important. It’s fair to say that this is being taken seriously by all supervised entities in Luxembourg. Collaboration has been very good so far.”
When it comes to anti-money laundering in Luxembourg, Alfi’s Thommes said the sector has not acted differently than normal during the FATF visit to Luxembourg. “Some ‘alternative facts’ media have reported we were hyper active recently. That was not the case,” Thommes said.
Marx reminded the audience also of the many uncertainties that are still a factor investors need to consider. “Capital markets are fragile - see what happened with the UK’s mini budget. We have an interest rate reversal. We were used to low and negative rates for ten years. They are now in positive territory. This has led to a credit risk.” He also underlined the “multi-facetted political risk.”
“We have the war. But also we have a crisis with Iran. We have Taiwan, we have North Korea. So it’s really special. And as Camille said, you know, we are a centre with local funds, but with a global reach, we have global investors, we have global investments.”
NAVs down in line with rest of Europe
“It is really special. We are a centre with local funds, but with a global reach. There has been a serious impact on net asset values, almost exclusively driven by market depreciation,” he said, adding that the CSSF continues to monitor asset values.
In terms of net asset values, Luxembourg is not behaving differently than other jurisdictions in the EU. “NAVs went down in line with what is happening in other EU countries.” he said.
Addressing the 38 Luxembourg Ucits funds with exposure to Russia and the Ukraine, Marx said that Luxembourg has resolved the issues with these funds by enabling the creation of six “side pockets”. One fund has been liquidated. “There was not much guidance from Europe, but we gave guidance that the market needed,” Marx said.
Looking ahead to 2023, CSSF has a list with supervisory priorities that is “longer than the Christmas and Santa Claus list”, Marx said. Among the priorities: ESG and sustainable finance (introduction of the SFDR RTS in January, with 13 new standards taking effect) , regulatory convergence among EU national financial supervisors, pre-contractual disclosures, liquidity management and liquidity risks in funds.
Marx also announced that 2023 for Luxembourg will bring a financial sector assessment programme by the International Monetary Fund, or IMF. The previous such review was in 2017. “This is an important exercise, a very comprehensive review of the state of the financial sector,” Marx said.
CSSF will, in cooperation with Esma, also focus on the cross-border distribution of investment funds. It foresees delivering a report on this topic in March 2023. As part of that review, the marketing communications of a total of 85 funds will be tested, as part of a sample of 44 Management Companies.
Addressing 2023, Thommes expressed confidence on the fundamental state of Luxembourg’s asset industry: “Our industry certainly has to brace for more pains in the short term before we can see any long term gains,” he said. “The fundamental progressives of Luxembourg, they’ll remain although we as an industry are the cornerstone, and we need to set the right priorities, taking the right actions going forward, and that’s part of our job to convey that message to policymakers.”