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Exploring solutions for regulatory challenges Interview with Claude Marx

CLAUDE MARX, DIRECTOR GENERAL OF THE LUXEMBOURG FINANCIAL REGULATOR, THE COMMISSION DE SURVEILLANCE DU SECTEUR FINANCIER (CSSF), OUTLINES THE REGULATORY PRIORITIES FOR THE YEAR AHEAD.

Claude Marx, Director General of the Luxembourg Financial Regulator, The Commission de Surveillance du Secteur Financier (CSSF)

LFF: SEVERAL LEADING COMPANIES HAVE CHOSEN LUXEMBOURG AS THEIR NEW EU-BASE FOLLOWING BREXIT. DID YOU EXPECT LUXEMBOURG WOULD GET THIS LEVEL OF INTEREST AND WHERE DOES THE CSSF'S LEVEL OF EXPERTISE COME IN?

CM: From my point of view, the interest of financial companies in Luxembourg is not surprising considering that Luxembourg is a recognised banking centre in the Eurozone and the second largest fund centre in the world. Also, a large number of experienced and renowned service providers are established in Luxembourg so that financial companies may benefit from a robust environment simplifying the relocation process.

“The CSSF must ensure an impeccable quality of work and adequate response times while maintaining its budget so as not to discourage smaller players.”

The combination of a high level of expertise on the one hand, and responsiveness of the regulator on the other side, as well as the possibility to file in English have had an impact on the decision of several financial companies to come to Luxembourg. More generally, I think that the choice of location of the new EU-bases was influenced by strategic considerations such as the pre-existence of structures in other EU member states, the proximity to European supervisory authorities, the volume of activity in a Member State or the possibility of relocating existing human resources. This explains why Brexit relocations are not concentrated in one specific location but rather diversified among several European financial centres. At EU level, for instance, within the European Supervisory Authorities and at the level of the ECB, we are vigilant that regulatory arbitrage does not drive relocation choices.

LFF: WILL THE CSSF GROW AND HOW ARE YOU MANAGING COSTS FOR SUPERVISED ENTITIES BECAUSE SUPERVISION COSTS ARE HIGH AND INCREASING YEAR ON YEAR?

CM: The CSSF employs 771 people as at 1 March 2018 and continues to recruit specialists to fulfill its tasks as regulator and supervisor of the financial sector. We anticipate that the CSSF will employ more than 900 people medium term. We are relocating part of our staff into a new building at the beginning of 2019, and continue our investment in IT and other office equipment. The CSSF is also exploring on how to use new technologies like AI in the supervisory process.

LFF: YOU HAVE BEEN WORKING IN FINANCE FOR DECADES, AS CEO OF LOMBARD AND DEPUTY CEO OF HSBC IN LUXEMBOURG. WHAT DOES YOUR EXPERIENCE IN THE PRIVATE SECTOR BRING TO YOUR JOB AND YOUR VISION FOR THE DEVELOPMENT OF THE CSSF?

CM: There are both differences and similarities between the private and public sector. The main difference is the CSSF’s mission which is a public interest mission. This warrants amongst other things total independence and absence of conflicts of interest, which are guaranteed in the current operating model of the CSSF. There are also similarities between both sectors, for instance, operational challenges due to the rapid growth of the industry that we supervise, as well as the ever-growing complexity of the regulatory framework. The CSSF must be efficient in the sense that it must at all times ensure an impeccable quality of work and adequate response times while maintaining its budget within reasonable limits so as not to discourage smaller players. We need to review our work processes continually.

The rapid increase in our staffing has entailed both operational and HR challenges. We have recruited and will continue to hire both young graduates and people with work experience, often from the private sector, both Luxembourg and EU citizens. In general, I believe that more could be done to further exchanges between the public and private sectors, also outside of the CSSF.

LFF: IN LIGHT OF THE SSM, REGULATION IS INCREASINGLY NOW DOMINATED BY AUTHORITIES IN FRANKFURT. WHAT IMPACT HAS THIS HAD AT THE CSSF, AND HOW WILL THIS CHANGE IN THE FUTURE?

CM: The Single Supervisory Mechanism (SSM) constitutes one of the pillars of the European Banking Union, and the European Central Bank (ECB) is in charge of banking supervision in the Euro area. Several formerly exclusive competences of the CSSF were transferred to the ECB in November 2014. In this context, significant credit institutions are now directly supervised by the ECB, while less significant institutions continue to be monitored by national competent authorities like the CSSF. In practice, there is close cooperation between the CSSF and the ECB, and CSSF staff are members of joint supervisory teams for important institutions.

The CSSF is represented at the ECB’s supervisory board that discusses, plans and carries out the ECB’s supervisory tasks. All new credit institutions are authorised by the ECB, with national competent authorities being involved in the authorisation process.

LFF: DO YOU THINK THE SSM HAS IMPROVED SUPERVISION, SO WE HAVE A SAFER BANKING SYSTEM COMPARED TO THE YEARS OF THE CRISIS?

CM: The financial crisis of 2008 demonstrated that pre-existing national supervisory mechanisms were not able to prevent such a crisis. There is no doubt in my view that Banking Union has improved banking supervision and the safety of the banking system within the EU, in particular, due to the global assessment of systemic risks, the standardisation of rules and supervision mechanisms as well as the coordination of the supervision of banks within the EU monetary union. Banks today have more - and better quality - capital. The second pillar of the Banking Union, Resolution, has proven to be effective in preventing severe consequences of credit institutions that were at risk of failing. That being said, the Banking Union is not complete – more work will be done for instance on a common deposit guarantee scheme which is the third pillar of the Banking Union.

“There is no doubt in my view that the Banking Union has improved banking supervision and the safety of the banking system within the EU.”

LFF: FOR THE FUND INDUSTRY, THE ESA REVIEW COULD SEE PAN-EUROPEAN REGULATOR ESMA STRENGTHEN ITS POWERS. IF THERE IS A CENTRALISATION OF SUPERVISION, WILL THAT MAKE IT DIFFICULT FOR LUXEMBOURG TO LEVERAGE ITS EFFICIENCY AND ITS OPENNESS TO INNOVATION?

CM: Fund regulation is mostly based on EU Directives. Luxembourg was first in implementing the UCITS Directive into national law in 1988 and has developed into a leading centre for investment funds over the last 30 years. On the supervisory side, we have over 250 staff in charge of authorisations and supervision of investment funds. The depth of expertise and quality of control have contributed and continue to add to this critical development.

LFF: DO YOU THINK PSD2 WILL CHANGE THE PAYMENT INDUSTRY IN EUROPE?

CM: The purpose of PSD2 is the adaption of the current legal framework to progressive digitalisation of as well as the recent development in the payments market. These measures shall, in particular, ensure a higher security level in payment transactions and encourage competition in this sector. In my view, PSD2 will however not fundamentally change the payment industry in Europe but may have an impact on the number of actors and competitors active in this sector.T

LFF: WHAT ARE THE NEXT BIG SUPERVISORY TOPICS THAT YOU ARE FOCUSING ON?

CM: In 2018, the CSSF will focus, among other things, on the implementation of several significant blocks of regulation, MiFID II, PSD2, MCD (mortgage credit directive) and PAD (payment accounts directive) as well as on the application of the European regulations MiFIR and PRIIPs, for which the legislative process has not yet been fully completed.

Brexit and the degree of readiness of supervised entities will be another area of focus throughout 2018, as many institutions have ties to the UK.

Furthermore, the impact of the fourth anti-money laundering directive (AMLD), which has recently been voted, should not be underestimated. Indeed, the AMLD will not only extend the scope of application of existing national laws to a more substantial number of actors but will also restate existing internal organisation obligations applying to professionals. More generally, we remain vigilant and will monitor AML/CFT risks, as well as insist on appropriate governance, and effective second and third line of defence capabilities. Having started with banks, we are now in the process of rolling out questionnaires to all supervised entities to better assess various risks including the risk of money laundering.

Brexit and the degree of readiness of supervised entities will be another area of focus throughout 2018, as many institutions have ties to the UK.

LFF: WHAT ARE THE CHANGES FOR THE SUPERVISOR IN THE LIGHT OF BLOCKCHAIN TECHNOLOGY AND CRYPTOCURRENCIES?

CM: Blockchain technology has the potential to transform part of the operations of supervised entities. We are following this closely at various levels: our financial innovation team, supervision of PSF de support, banks, investment firms, investment funds, and our FinTech working group, just to name a few. The use of blockchain technology may require changes to our current legal and regulatory framework.

“Blockchain technology has the potential to transform part of the operations of supervised entities.”

Regarding cryptocurrencies, there is currently no legal framework, which in itself entails specific risks for unsophisticated investors who ultimately may lose all of their investment. While cryptocurrencies are relatively new, some of the risks associated with the use of them are old – money laundering, fraud, market abuse just to name a few. Neither the national competent authorities nor the ECB supervises cryptocurrencies. There are currently discussions at EU level regarding possible regulation, and we would certainly favour a European, rather than a national categorisation and regulation.

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