Preparing for the avalanche
The flood of new European and international regulation is considered one of the most critical challenges the finance industry will have to face in the years to come. In the media, the term “regulation tsunami” is often used. But KPMG Luxembourg prefers to speak about it as an avalanche. At the conference “Riding the Regulatory Avalanche” Charles Muller, Partner of KPMG Luxembourg, talked about the new mindset the industry is facing.
“This regulation wave is not a tsunami but an avalanche, because you can survive it if you are prepared and if you know what to expect”, Charles Muller, KPMG Partner and European Investment Management Regulation Centre of Excellence, said in his opening remarks. He underlined that since the beginning of the financial crisis in 2007 and 2008, the spirit of the EU-Commission has changed.
“Before the crisis you had an EU-Commission that consulted the industry in order to have efficient laws. You had white papers, green papers and consultancy meetings in order to get the regulation going. With the beginning of the crisis and at the same time the establishment of a new Commission the Alternative Investment Fund Managers Directive (AIFMD) was implemented unilaterally, with no white or green paper or consultancy meetings but just the objective to get the directive out.”
He added that this was the new attitude the finance industry would have to get used to: speedy regulation, more regulation and directives that are effective immediately, without implementation periods. Apart from the wave of new regulation the industry is facing, there is also an element of punishment to the new regulation, as Charles Muller put it.
“There is no difference made between banks and investment funds, because the whole industry is considered as being responsible for the financial crisis. That is why the Commission wants to talk about sanctions. All the texts I have seen will include sanctions. These go up to 10% of the turnover of a company. The financial transaction tax is the ultimate sanction for the bad guys out there. We shouldn’t forget that this tax is not only paid by the bad guys but also by the pensioner who holds money in his pension fund.”
Too complex and risky?
Another trend highlighted by Charles Muller is the fact that more and more decisions are not being taken in Brussels, but at a global level. “At several meetings EU-Commissioner Michel Barnier made it clear that his main objective is to implement the G-20 decision agenda. Up to now, every country praised itself for the excellent laws adopted on local level and the “bad” decisions coming from Brussels. Now Brussels applauds its own good decisions and blames the G-20 and other international bodies for the “bad” law texts.”
Charles Muller warns that the European finance industry shouldn’t be naïve and monitor what is going on at the Financial Stability Board, which makes recommendations about the global financial system or at IOSCO, the International Body of Regulators, because once decisions are taken at an international level, it is impossible for Europe to adopt laws contradicting them.
As a fund industry, Luxembourg will face the UCITS 5 Directive with three topics on the agenda: depositaries, remuneration and sanctions. He talked about the lessons learned from the Madoff crisis. “One of the questions to be raised is: what is a retail product? Have we gone too far in Europe with our UCITS regulation? We have to ask ourselves if there are products that are too complex or too risky for retail investors”.
Talking about investor protection, Charles Muller wouldn’t be surprised to see the EU-Commission coming out with its own version of the Volcker Rule. The Volcker Rule consists of the idea that a bank that has clients’ deposits should not invest in an exceedingly risky manner. This rule is part of the Dodd–Frank Wall Street Reform and Consumer Protection Act originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker. CW