Claude Marx, Director General, Commission de Surveillance du Secteur Financier








Last September, on the occasion of ALFI’s Global Distribution Seminar, Freddy Brausch (Partner, IMG) had the privilege to interview Claude Marx, Director General at  the Commission de Surveillance du Secteur Financier. It was the opportunity to publicly discuss , among others , Brexit , “ Luxembourg substance “requirements  , the CSSF’s organisation and supervisory practices , now and going forward:

Mr. Marx, what are your first impressions of the six months in office? What are your thoughts?

I joined the CSSF in February this year. For the first time, the CSSF has a Director General who is not a public officer as I came from the private sector. My first (good) impressions  were to find a small but very sharp management team of three managers who have a combined working experience of more than 100 years.

I also found an enormous wealth of experience and knowledge within the divisions that the CSSF has and that is quite impressive.  You can go down many levels of the hierarchical pyramid and you will still be impressed by the knowledge that you find.

The scope of the CSSF’s missions is very broad; you are all familiar with some of the main stream activities and missions: banking / investment funds supervision but we also supervise FSPs (“Financial Sector Professionnels”)– which is an important part of our mission. We also have other missions like the supervision of the audit profession and there are other missions to come. 

It is important to have moves between the public and private sectors. There are very few examples of this in Luxembourg – you may have heard of a minister who left the government and went to work for a bank- This is an exception- I am myself a banker and insurer and I left for public office. I believe that the country would benefit from having more of these moves. This could be achieved in a variety of different ways (secondments, training, and recruitment).

It is important to keep the dialogue ongoing – which has in some way made Luxembourg’s success (the so-called Luxembourg model). The dialog of all stakeholders of the financial sector is important. This may sound obvious but this is something which you have to work on every day because it could easily derail or get forgotten. It is  important that the CSSF speaks to industry professionals and associations as it is to have a dialogue with the Ministry of Finance – it is important that this “ecosystem” is preserved-.

To deal with all this, our team is growing: at the beginning of the year we added a fourth senior manager and two weeks ago we have recruited a CEO, for the first time as part of our management team.

What are the challenges?

The environment is still a challenge. In the post crisis environment, the financial services industry is not the most popular industry at large (although this is a little bit less the case in the fund industry than in the banking industry) …

One of the challenges that we face is the public opinion but also enhanced attention from the media. We are also under scrutiny by foreign governments.

Post crises, the regulation has become very intense and complex. We are dealing nowadays with a European and international dimension and we are facing the European and international environment plus our local environment.

The internal challenge is the rapid growth of the regulator - 6 years ago there were 300 people working at the CSSF. Today we are close to 700.We need to care about efficiency, about business continuity, succession, IT security. The organisational model of an organisation that doubled in size in only a few years is put in question.

When discussing Luxembourg vs other jurisdictions with clients, the market is telling us that the regulator comes on top of the list in terms of choosing the place to do business, to settle down. Sometimes we hear, that the Luxembourg regulator is not always predictable and transparent enough. Some comments are made about speed and consistency –– for instance, when it comes to the review of a fund file, sometimes we experience four levels of review of the same file and not always an optimal coordination of those that are working on a file.

Can you comment on this Mr Marx?

These are difficult subjects for many reasons; As a reminder, and as previously mentioned we have moved from a local environment of regulation to a crowded and complex EU / International regulatory framework.  We have seen a lot of new regulations with, each time, several layers of regulation: Level 1 , level 2, level 3, , RTS’ (regulatory technical standards). Further, we are seeing different interpretations of the same concepts as well as constraints about timing  (not necessarily at Luxembourg level), UCITs V (level 2) and  PRIIPs are two examples of this.

In this complex and (over-)crowded regulatory environment, what we have tried to do and we will do more so in the future is not only publish circular letters. We will also publish more Questions and Answers and Frequently Asked Questions. We are already at the 10th version of FAQs on AIFMs, we have FAQs on UCITS. We also use this form of communication for more topical subjects such as Remote Identification, Cloud Computing, Outsourcing, etc...

Exchanges of view with the industry it is fair to say that are very important on topics like:  remuneration and governance. This is to be continued.

Responsiveness and fast delivery is a complex issue and is multidimensional: we have to recruit and train a lot of people. 8 out of 10 new recruits are non-Luxembourgers; we also use new ways to recruit, like social media. All this will help beef up the divisions and help faster and better delivery. On the other hand, as far as the quality of the file submitted to us goes, it is fair to say that quality is sometimes patchy. We are preparing to give guidance on this and on our expectations / requirements as well. There are two sides to the coin.

An early enough contact with the CSSF is very important. It is also a tradition to allow easy access to the CSSF management. But you can also access divisional heads. The market should make more/better use of it. We are having in a constant review of our processes. We work on optimizing there permanently.

Mr Marx, over the last few years, in respect of the consultative committees bringing together the industry and the CSSF -  that are crucially important to what we do and also to being able to change in a world that is constantly changing- things have not always been ideal either because there were too many topics facing us or because there were too many people around the table. We know that CSSF is thinking of reorganising the consultative committees, could you confirm this to us and give us some indications?

The first analysis that was done in the area of investment funds is to look at where the focus is today. It used to be a lot on the product. Today is less on the product and more on the fund manager. So the “Comité OPC” (the UCITs Committee) will be replaced shortly by a Comité GFI “gestionnaire de fonds d’investissement”(the “Managers” committee). Talking about RAIFs, there is no regulation at product level for those and we just look at the AIFM. It is consequently important that we focus on the specific problems and challenges facing investment managers. Then this new Committee will re-organised in a number of sub-committees and technical committees, we would like to set-up. There should be reflection separately on risk management, reporting issues and so on. The idea is to have a new committee on what is relevant to most of the people and that will be divided in various technical-subcommittees where the industry will be participating in those exchanges.

Mr Marx, you stressed that there is a changed European-International environment – where you are being watched closely. Can you briefly tell us about this changed environment but also what goes with it – i.e. where supervisory practices will change where new practices will be introduced?

This is reality and not a theoretical concept. Today there is a European eco-system we are very much part of.; Of course there is the Banking Union on the banking side – and that is very new; we are only in year two of that. It is a very integrated model where systemic banks  are no longer supervised by the CSSF but directly by the European Central Bank in Frankfurt.  On the investment funds side we are not that far but we are part of EU system and we have various EU authorities (i.e. ESMA) that  regulate parts of what is relevant to the funds industry. The topics addressed by ESMA for instance are numerous and complex. They result in technical standards and interpretations that are critically important when it comes to having interpretations of our own, we also should always remember that we don’t have only friendly neighbours and that we have jurisdictions that  complain to these authorities, wanting to make sure that there is always a “level playing field”. In view of this we have to explain why we have this or that interpretation of a concept, why we have this practice and whether it can be accepted by all. This is the reality. This is happening actually. As I said before, we don’t expect big new pieces of the European rule book to come about. They are now all known and nearly implemented: see PRIIPs KID, MiFID 2. But what is today the focus really is the technical implementation of those rules and we are not entirely there yet. That is why the dialogue with the industry is so important, i.e. on where we are – on the status of implementation – but also on questions of interpretation and the actual implementation.

What this new environment has done to us also is that it has resulted in a shift of priorities on what we supervise and how we supervise. The supervision was largely a desk based supervision. A supervision based on reports submitted to us. This is not a standard that can any longer be accepted in an integrated European environment. There is clearly an expectation to do more onsite visits and so the obvious focus here is going to be the investment funds managers. Within that environment we will specifically focus on risk management and on governance. These are two topics that are very important among others and we are in the process of setting up a team of people at the CSSF that will perform onsite inspections in the several hundred ManCos that we supervise. A related area is sanctions.  More and more European regulations provide for sanctions that have very little to do with the fines that the CSSF used to impose. Here too, times are changing.

Still on the changed European and international environment, Mr. Gramegna has previously referred to the International Monetary Fund and to the review that, at present is ongoing. People should be aware of it though this is not something that is largely publicised. We had an ESMA peer review on prospectuses. This is an example  peer reviews. They are time consuming and labour intensive. This year we had  inspections from IMFat the beginning of the year, a so called Article four review. We have two further audits from the IMF; one which is currently ongoing on and which we will conclude next Monday, another one starting at the end of November, running until the end of the year. Just to give you an idea, in preparation of these, we got hundreds of questions and we had to provide thousands of pages of answers. It is an important exercise for all of us, because depending on the outcome it will influence the rating of the country so that ultimately it is important for all. There will be a discussion at the Board  of the IMF with Madame Lagarde in May 2017 and then these reports will be published. Once we have finished with all this at the end of the year, on the 1st of January we enter a new review circle by the Financial Action Task Force which is a three-year review circle and there will be an audit by the FATF of Luxembourg – if our “clients” say they are supervised, we are supervised too.

Let’s move to and deal with Brexit.

Brexit is characterised by uncertainty.  The market players don’t know exactly what they will be faced with going forward? What we can see is that the several actors don’t want to be caught unprepared, so they prepare for the different scenarios and this is starting now. Luxembourg is in the discussion; it includes those that are already here and those that don’t have a foot in continental Europe and that going forward may not have any other choice but to be present in Continental Europe, either by extending their existing license or going for a new licence, typically a MiFID licence. Substance, shared resources, delegation  back to London (as long as possible)  all towards business continuity, as mentioned by the Minister, earlier this morning  are the buzz words.

What is your view on all this?

I think in an ideal world, as a regulator, what we would do now is to talk with the UK regulator or various other regulators and we would try to figure out a kind of  Memorandum of Understanding on how we can work together tomorrow. This is neither possible, nor desirable. As it was mentioned this morning, nobody knows at this stage which model of cooperation with the UK will be implemented. Could it be anything close to being part of the EU, like the EEA has, or a third party type of association.  We don’t know where this is going to land and that’s why we are reminded by the European Authorities, like ESMA, that we should take a “business as usual” approach until such day when the new system is in place?

We are ourselves interested very much in where all this is going, because we want to prepare as much as possible in advance. We are witnessing interest the UK players in this topic now. We have met a number of large institutions from the UK already. We are meeting them this week and all the time and we are available to meet them at CSSF management level, where, we are making ourselves available. What the major institutions that we’ve seen so far, tell us is that the decision on their future operating model is taken today. they will not wait until article 50 is triggered, or whether negotiations have started, where they are going or where they will end up. They are already very deep into an analyses of how their operating model should look like going forward and they will make decisions on this operating model in the next weeks and months.

What that means for the CSSF is that we are meeting the people now. We are telling them how the process works and what the minimum expectations are. You have in a very diplomatic way eluded to the very important question which is the question of the required local substance; so what substance is required here? I think there are a few points to be mentioned here. First, we are not opposed to the continued  use of very large operations in the UK, which is the desire of most institutions. To be honest, I don’t think Luxembourg could accommodate institutions, each with hundreds of employees – not a realistic scenario. So the model will be to set up a regulated entity in Luxembourg, and then delegate or outsource part of the activity back to the UK. That is indeed possible in Luxembourg. It is possible for the EU entities within the group, it is possible outside of the EU, so from that perspective, the UK is fine for the time being.

We are careful nevertheless on the minimum required substance. First of all the reputation of Luxembourg is at stake. Secondly we have to be mindful that – on the 1st of January next year we will enter into a system of country by country reporting where what for instance the UK head quartered group does abroad, will have to be detailed in the annual report, country by country. it would indeed look very strange if there was a small subsidiary here with, say, three employees that generates hundreds of billions of transactions and generates a profit of billions or tens of billions. That would be not good for the reputation of Luxembourg.  Then there is the tax aspect as well – a very hot topic today. What we expect is very clear. You have to have a very solid authorized management in Luxembourg and you have to have key functions in Luxembourg. You have to have an  accounting function here so that at the end of the day you have onsite a balance sheet and you have accountants who can answer questions as to the reporting that is being done. If you think about it, this is not a very heavy infrastructure. We are talking about not a lot of people. For the international players that want to establish here, if the expectation management is done properly, I think it can work. Of course we know of proportionality and we are also willing to apply proportionality. We are willing to request less in the initial phase, depending on how the business evolves, or depending on an agreed time frame. As long as there is a clear set of rules , and agreement  on when the operation will be fully running and when the decisions will be taken here and the company is fully established in Luxembourg. Then should be no problem.  Until then we are ready to apply proportionality and agree on a staged approach. Those are the messages that I can give about Brexit, which is, by the way, not directly  a regulatory topic.