All natural or legal persons who exercise a professional activity within the financial sector are subject by law to authorisation and ongoing regulation by the financial services supervisory authority (Commission de surveillance du secteur financier - CSSF). In addition to banks, the law targets a vast range of "financial sector professionals" known as PSF (to use the French acronym). It distinguishes between three types of activity: the PFS investment firm, "specialised" PSF and "support" PSF.
By "investment firm" is meant investment advisers, brokers in financial instruments, commission agents, wealth managers, professionals acting for their own account, market makers, underwriters of financial instruments, distributors of units and/or shares in undertakings for collective investment (UCIs), financial intermediation firms and investment firms operating a multilateral trading facility (MTF) in Luxembourg.
The "specialised PSF" is engaged in financial services activity other than investment. This category includes registrar agents, professional custodians of financial instruments, operators of a regulated market authorised in Luxembourg, operators of payment or securities settlement systems, currency exchange dealers, debt recovery, professionals carrying on lending operations, professionals carrying on securities lending operations, professionals providing fund transfer services, administrators of collective savings funds, managers of non coordinated UCIs and professionals providing company formation and management services.
A third group, "support PSF" refers to any firm pursuing an activity related to, or complementary to, a financial sector activity. This category covers company domiciliation agents, client communication agents, administrative agents of the financial sector, primary IT systems operators of the financial sector, secondary IT systems and communication networks operators of the financial sector.
Investment firms are eligible for the European passport, permitting them to offer their services throughout the European Union once they have obtained authorisation in one Member State. This privilege does not apply to specialised PSF and support PSF,
By regulating and supervising a wide range of technical, administrative and communications related activities, the government seeks to facilitate the outsourcing of non-core activities by ensuring a high quality of service and professional confidentiality.
In order to encourage the sub-contracting of non-core activities to specialist service providers, the Luxembourg government has put in place specific regulation for companies that supply specialised services to financial institutions.
In 2003, the status of Financial Sector Professional (PSF) was thus extended to cover businesses carrying on operational services that imply access to confidential data.
In order to differentiate, from a functional point of view, those PSFs exclusively offering operational services from PSFs engaged in financial services, such as asset management, four categories of PSF were recently grouped together under the term "Support PSF":
- client communication agents
- administrative agents
- primary IT systems operators
- secondary IT systems and network operators
These service providers are subject to authorisation and ongoing supervision by the CSSF, like the financial institutions themselves, so helping to reduce operational risk and guaranteeing the application of confidentiality rules.
The law requires service providers to respect strict auditing rules and to apply best practice standards in order to protect the confidentiality of client data to which they have access.
This approach is unique to Luxembourg and has contributed to the development of a centre of excellence in the regulated outsourcing of a whole range of activities, adding a further incentive to companies for consolidating their central services in Luxembourg.