Investor protection and education go hand in hand
“Financial regulation that is too much driven by political considerations is not the right way to go”, says Jean Guill at the Alfi Global Distribution Conference in association with NICSA & the Hong Kong IFA in Luxembourg. The head of the Luxembourg financial supervisory authority, CSSF, understands the political backlash following the financial crisis, but is against overreacting and regulating everything straight away.
Jean Guill says it is obvious that part of the legislation introduced by directives such as the Alternative Investment Fund Managers Directive (AIFMD) and the latest Directive on Undertakings for Collective Investment in Transferable Securities (UCITS) is due to the Madoff affair. Before that scandal erupted, he had had doubts about the clarity of the definition of the role and responsibilities of the depositary bank, but a situation had not risen to test it.
At the same time, he underlines that whatever measures you take, fraud cannot be eradicated by legislation. “You can try to be preventive and you can come up with solutions in case something happens, but you cannot regulate fraught. The sanction powers of the regulators are on the one hand extremely diverse from one EU Member State to the next and on the other hand very inadequate when it comes to sanctioning in an efficient an reasonable way”.
Jean Guill adds that the work of the EU Commission to improve the situation shows that none of the national regulators is really in a good position and Luxembourg is certainly not among the best. A bill has been submitted to Parliament in order to complete the powers of sanction of the CSSF.
Mr Guill firmly believes that the crisis has been useful in a certain sense. “Luxembourg branches had to justify to their headquarters why they were in Luxembourg and what services they could perform more competitively from this location. That led many financial institutions to reinforce their structure here and to create a hub within their group for certain activities”.
Size does matter
The head of the Luxembourg financial supervisory authority admits that reputational risk is more dangerous in a small country than in a large one. “We are a small regulator in a small country with a big financial centre. There is peer pressure from the other national regulators and also from international institutions like OECD or the IMF”.
The CSSF has upped its staff substantially in recent years but the main challenge remains the same; to cope with the sheer volume of regulation that has to be complied with. One of the missions of the CSFF is investor protection, the heart of CSSF’s work as Jean Guill puts it.
He follows with an example from the fund industry. “UCITS has become an internationally recognised brand because it offers investors a very high level of protection. Now it is time to do something about investor education, which has to go hand in hand with investor protection.” He finishes with a piece of advice to the industry. “The fund industry has to make sure that the brand name of UCITS is not damaged and that the new (alternative) brand, that is to say AIFM, is up to the same quality than UCITS.” CW