PLACE FINANCIÈRE & MARCHÉS — Marchés financiers

Podcast – Shaping Finance

Claude Marx, le point de vue du régulateur

Tous les 15 jours, Nicolas Mackel, CEO de Luxembourg for Finance, invite des leaders de haut niveau des secteurs européen et mondial des services financiers à partager leur point de vue dans le podcast Shaping Finance. L’invitée du 12e épisode est Claude Marx, directeur général de la CSSF.

Welcome to the podcast that shares the views of high-level leaders in the European and global financial services industry.

Nicolas Mackel . – “Welcome to Shaping Finance, a podcast which offers a platform to high-level decision makers and shapers in international finance. My name is Nicolas Mackel, I’m the CEO of Luxembourg for Finance, and the host of this podcast.

My guest today is Claude Marx, the director general of the CSSF, Luxembourg’s Banking and Securities Supervisor. Claude is also a member of the board of supervisors of the European Securities and Markets Authority and he was appointed to the CSSF in 2016 and has just been confirmed for a second term of another five years. He has a career in law practice, banking, as well as in insurance. Claude is a trained lawyer who holds master’s degrees from Paris as well as from London. Welcome to Shaping Finance, Claude.

Claude Marx . – “Good morning.

NM: Well, the global financial crisis of 2008 triggered a massive regulatory response to correct some market weaknesses. How would you assess this regulation from today’s point of view?

“Well, the global financial crisis of 2008–2009 triggered a deep recession in developed countries with unemployment rates rising to above 10%, both in the US and in Europe and this crisis showed significant weaknesses in the then applicable framework. Especially the framework applicable to banks. The global financial crisis was substantial. The policy response was to correct these weaknesses and the policy response was equally substantial so to say, proportionate to the magnitude of the crisis. And coordination was ensured through the G20. And this is important because this led to a common worldwide response. We had to avoid at that time national initiatives, because they could have hampered the free movement of capital and fragmented global financial markets. So I think it’s important to briefly go back to what were the weaknesses that needed a fix at the time in order to understand the framework of today.

I think first after the bankruptcy of Lehman Brothers, new regulations were enacted to mitigate the failure of banks that are deemed too big to fail. Too big to fail, that’s banks when the failure could jeopardise the stability of the financial system. And in the EU there was also a recognition that large banking groups need central supervision. Today, to the best of my knowledge, we have 115 banking groups in the eurozone that are directly supervised by the ECB. And this is the first pillar of the banking union. Large banking groups also have to prepare for all the resolution in order to ease the adverse impact when they fail.

And resolution is the second pillar of the banking union today. So the second weakness that we saw during the crisis was that bank runs occurred. And this happens when people lose confidence in the bank. And then run on the bank to take out their money.

Northern Rock is an example in the UK. And in order to mitigate such bank runs, we need good deposit guarantee schemes. And so here in the EU, we did serious upgrades of these schemes. People used to have a guarantee of 20,000 euros for their deposit. Today this is 100.000 euro.

So people will be able to quickly recover a 100,000 euros within a matter of days if their bank fails. And with more money insured, there is less of an incentive to run on the bank. And actually the third pillar of the banking union today is the so-called European Deposit Insurance Scheme, or EDIS, which is not yet fully complete.

In addition, specific requirements were introduced to mitigate risk liquidity risk. And nowadays banks have to hold substantial amounts of liquid assets. These are assets that can be turned into cash to pay out depositors who wish to restore their savings. And this reduces the risk that a bank fails due to its inability to pay out depositors. And then the third point is that the bank’s capital base has been significantly strengthened.

During the financial crisis of 2008, banks had accumulated large amounts of significant losses, financial losses, which then had eroded their capital base. Significant amounts of public money had then to be pumped into the system that the states borrowed on the capital markets. And this has then contributed to the EU sovereign-debt crisis.

The 2008 crisis showed that the banks capital, that is the amount that bank shareholders put into the bank to support the business and absorb losses was not enough. And as a result today, both the amount but also the quality of the capital to run a bank have been strengthened. I think the policy response has not proven wrong so far. And allow me to say it withstood the test of the COVID crisis, at least for now.

Do we still have a healthy balance between the legitimate objective of sound market regulation and the necessary freedom to allow capital to move freely on a global scale?

“I think the first point here to make is that the repair work targeted mainly large international cross-border banks. And then the European Union has decided to apply these tools with little or no graduation to all banks. And so the result is that the burden was significantly higher for smaller banks.

But in the 2019 revision of the banking regulation, the EU has alleviated some of that framework for small and non-complex banks in order to tackle the cost of compliance concerns. Tsunami concerns as they are sometimes called regulatory tsunami. Small and non-complex banks are banks that if they fail it would not pose a significant risk to the financial system.

I see support for the sound and robust framework, post-financial crisis. I recognise that it’s complex, it’s multi-layered, it’s challenging for supervised entities that need to comply, but it’s also challenging for us as a financial regulator.

And we have actually upgraded the CSSF quite significantly over the past 10 years, we are close to a thousand staff now at the CSSF. We have invested massively in training, we have specialised much more than we used to be before. And I think we are now fit to cope also as a regulator with this complex environment.

But I equally think the next decade should be used to rethink some of that complexity and to reduce one of the big burdens for financial institutions, which is the reporting requirement, which is of no added value so to say for the supervised entities.

Of course, for us is of a big added value. But if we can find a way to work more on the risk-based approach, but also to find better ways of getting the information that we need, as opposed to this very manual and burden some reporting, this would greatly enhance the situation. I think that should be the challenge for the next decade.

Talking about the next decade, is regulation keeping pace with the rapid evolution of technology for instance?

“I think this is a very good question. We as a regulator, of course, we cannot ignore what is happening around us. Five, six years ago, a lot of people predicted the end of banking and banks with, so to say, being replaced by an app or by smartphone applications, this did not happen.

And it will likely not happen for a simple reason, which is trust and confidence. But having said that there will be profound transformations in the way banks will deliver their services and how they will organise themselves and their back offices. And there, technologies like the blockchain technology will be massively used in many ways for instance, to transfer shares of an investment fund will likely be done through the blockchain, but also other applications.

So the challenge for us as a regulator is to make sure we still cope with all the traditional tasks that we have, but that we are also able to control the new back office set up, that we are also able to check the robots that do the robo-advise and that we have good understanding of these new technologies.

We should also use new technologies for ourselves in terms of RegTech applications that are out there, in terms of cyber crime prevention. But also in terms of making use of artificial intelligence to automate to the extent possible jobs that today warrant a big number of sometimes university degree holders for repetitive tasks that are not of so big added value. And we could better employ those people with the use of technology. So I think training, but also making sure that we use the tools for ourselves as well. I think those two components are key going forward.

The EU has made over the last years, great progress and it’s regulatory framework and in the way supervision is exercised at the European level. Where do you feel there’s still a need for more European action?

“Well, the financial crisis has not only led to the creation of the banking union that I mentioned before in response to your question but has also triggered more important other reforms, not more important, but other reforms that aim at harmonising regulation in the finance area. But also see to it that it’s applied in a consistent way and regulatory convergence here is key.

So three authorities were created the so-called ESAs, the EBA, ESMA, and EIOPA. And to come back to your question, there will be need for more European action in several areas.

First, there is a need for stabilisation of the new rules and regulatory framework by the market, as well as by European and local authorities. Stabilisation is key. For planning purposes, also supervised entities need to have the comfort that they work in a compliant way, but that they can also roll out their business plans in safe way and predictable way.

Secondly, there is also a need for a harmonised framework when it comes to innovation, digital transformation and the shift to sustainable finance. Here, we need to do this in a harmonised way. We need to tackle questions as of not only the items I mentioned before, but also cryptocurrencies, tokenization, virtual assets, and so on. This need to be tackled in general through a good framework, but it also needs to be done in a harmonised way.

And then thirdly, we should complete the Capital Markets Union. This is important for the financing of SMEs as SMEs are the backbone of our economy. But this is also important to allow the European Union to compete internationally.

The European financial market is more than the sum of its components, and we should work together to let the European markets develop, innovate and enhance its resilience. The ESAs have played a good role in this alongside NCAs and we benefit from it.

Now, that does not mean that we should eliminate the healthy competition that we have today between EU member states. And it also should not mean that we should transfer all our powers to the ESAs.

If exactly on that point, I may ask you what should be the job division between EU authorities and the national competent authorities in the medium to long-term.

“So the ESAs should develop a single rule book. The ESAs should work on the regulatory convergence. The ESAs should tackle common issues. They should exchange on best practices and they should indeed avoid inefficient regulatory arbitrage. And the supervisory coordination network set up by ESMA in the context of Brexit is an interesting example.

Another example would be the creation of AML colleges by EBA. They aim at tackling money laundering and terrorist financing issues in banking and other financial service provider groups across Europe in a better and more efficient way.

The Brexit transition periods ended several weeks ago. During the entire time, the CSSF was particularly proactive in providing updates and communiques relating to the changes on the horizon. Now that we have passed that stage, how do you see the practical working relationship between both competent authorities, namely yourself and the FCA on the British side, evolving as Brexit has become a reality?

“Well, during the past four years, we have engaged a substantial amount of resources regarding the challenges posed by Brexit. And I think the objective here was to avoid damage that could have been created if there had not been a deal.

And we have undertaken for each type of financial service and entities under our supervision a thorough assessment of the potential cliff effect that comes from the termination of the transition periods with no agreement in general or no agreement on financial services.

We have also assessed the need for UK equivalence decisions and the necessity to enter into cooperation agreements with UK authorities. A milestone here was in the area of asset management and in particular, the delegation of collective portfolio management. The release in December last year of the CSSFs equivalence decision for UK firms providing investment services to certain clients in Luxembourg and the application of the third country regime to the UK.

Our work does not stop there, we will continue to monitor the situation in 2021 and beyond, as there is no clarity yet on a deal on financial services and given also the large dependencies vis-à-vis each other, but also the complimentary character of the respective finance centers. We will closely cooperate with the UK competent authorities, that is the PRA and the FCA.

We have actually signed a memorandum of understanding with the PRA and the FCA in April 2019 and we’ve also signed the multilateral MOU under the auspices of ESMA. And these cooperation agreements have allowed to avoid disruptions at the end of the transition period, as an example in the area of asset management cooperation between authorities is a requirement. So we’ve met that requirement.

And I think you know, we have to continue to watch what kind of a deal will happen in financial services and adjust accordingly. But I think we have prevented damage so far by spending a lot of resources on this topic.

When you talk about a deal happening in financial services, are you referring to the regulatory dialogue that is foreseen in the declaration annexe to the December 24th agreement and how important will this regulatory dialogue be?

“I think this dialogue will be ever more important than it used to be. And on several dimensions, I think that we need to interact with the PRA and the FCA on specific supervised entities. But we also need to have a dialogue on our respective supervisory expectations.

We need to establish sufficient points of contact and information sharing processes and so on. I am not worried from where I sit that the UK would significantly diverge from the current European framework. I think that it is well understood that this would be a lose-lose situation at the end of the day.

The public consultation on the future of the alternative investment fund managers directive has recently ended. From your perspective, what are some of the key issues that arose in the original directive and what are some of the possible policy solutions that could be implemented?

“Well, first I think I should mention that the AIFMD has been a success story for the European Union and also for the Luxembourg finance center. Since it entered into force in 2013, it has allowed the Luxembourg fund sector to build a second pillar next to the one that we started to establish 30 years ago, i.e. UCITS with the alternative investment fund managers and the alternative investment funds.

Like every piece of legislation, the AIFMD can be improved in certain aspects. But based on our experience, this review should be a limited review, should be reviewed to fix some specific points rather than a comprehensive revamp of something that has functioned well.

If it ain’t broke, don’t fix it. I think this is fairly important here. And based on the public consultation questionnaire, it seems though that the intention of the commission could be a broader review and this would actually also be in line with the ESMA letter to the commission of August, 2020.

Because this letter covered a broad range of issues, including issues which do not appear to have been a problem. An example would be the proposed review of the delegation and substance requirements. The current delegation on substance requirements have been applied in Luxembourg for long, and they have not created any issue and they have not harmed the good functioning of the AIFMD regime.

That being said, of course, there are some specific issues where we could enhance the directive and enhance the current regime. So let me name a few without going into too many details.

First, I think the AIFMD passport for third country AIFMs and AIFs. The third country passporting regime should be put in place to ensure a level playing field between the EU, AIFMs and potential third country managers.

And this, of course, now is a very important topic also with the UK being outside of the European Union. The proposed regime under the current directive has not been activated. It is very complex. It’s very time consuming, in relation to possible third countries.

And so third country regime should be put in place, which is less complex. Another issue we should tackle, which is related actually to this issue is the national private placement regimes. In that sense, here, we have a regime and this regime should be prolonged in the absence of any decision regarding third country passporting regimes.

Another issue is appropriate authorisation and registration. We have a concern with registered and sub-threshold AIFMs in relation to which the current directive only provides very limited powers to national competent authorities, like the CSSF. The current reporting obligations do not compensate such lack of power and control. And so the directive fear could be enhanced and the mandate to provide for additional powers for NCAs and certain products, governance rules.

Another area is the area of risk management, as well as leverage. I won’t go into detail here, but work is being done by IOSCO, the ESLB that could be taken into account. Also the commission, and this work could be taken into account when we’re forming the AIFMD.

And the last point I would mention is the point of valuation and liability regimes of external valuers that are being appointed. The negligence standards of external valuers should be revised and clarified. And what I mean here is the gross negligence standard, because the current regime prevents AIFMs to appoint an external valuer. External valuers do not accept the current liability standard.

Let me turn to two other issues that are very dear to your heart. Indeed, the first one is sustainable finance on which you have come out as a very strong advocate. The CSSF has also recently took steps to ensure that players in Luxembourg meet the sustainable finance disclosure regulation deadlines by introducing a fast-track procedure. From a regulatory perspective, there are a number of changes that are expected to come into play in the coming years. What will be the role of the regulator in the area of sustainable finance?

“Well, first I want to say that our fundamental role, of course, will not change. I think our fundamental missions are contributing to financial stability on the one hand and protecting consumers and protecting investors on the other hand.

But having said that, of course, our missions will become more extensive and specific when the new requirements resulting from the EU Green Deal and the translation of that in the area of sustainable finance come into force.

We have a proactive approach on sustainable finance, and that goes beyond insisting, of course, that the level one and level two EU law is being applied correctly. In this area, we are using soft law, we are using explaining, we are using persuasion in order to work towards the objective of the greening of the financial system as soon as possible.

We should always bear in mind that there is an overall urgent objective, and that is to avert a climate crisis and the reduction of greenhouse gas emissions, and to achieve the targets of the Paris Accord as well as the commission roadmap so we should always keep this in mind.

The CSSF was an early adopter of an awareness raising approach, and we continue to support various initiatives, but also to take some initiatives. We have an important role to play here, to encourage the acceleration of the transformation, but we also need to preserve the conditions for confidence.

So what does that mean in practice? We will continue to guide market participants, an example here is the transparency on sustainable investments and sustainability risks resulting from the SFDR that need to be implemented now in a very short period of time. We are also developing a supervisory approach to manage climate-related and environmental risks over time.

We will intervene actively at the level of European and international working groups. Here we have to bear in mind that this is a global crisis that needs a global response. The EU has the most advanced and best framework. It is legally binding, unlike many other responses, but we need to have common standards here on a global basis.

And then we need to educate investors in the context of responsible savings and investments. We have, for instance, recently collaborated with the ABBL to put to use educational videos on responsible investments and savings.

We will support any initiative that is justified from a risk-based approach and evidence-based, which can include forward looking perspectives on ESG and ESG factors even in the absence of a strict regulatory requirement of framework.

Of course, we will continue to support national initiatives such as the Luxembourg Sustainable Finance Initiative, which is to implement the sustainable finance roadmap that the Luxembourg government has designed together with the industry couple of years ago.

And so I think that the European commission has fixed as a key component of its Green Deal, the mainstreaming of sustainability in all EU policies and that is of course also a financial system. Sustainability needs to be integrated into the prudential framework, when it comes to the suitability of capital requirements for Green Assets for instance.

Our action is part of the European Commission’s action plan for financing sustainable growth. If I can add here that there have been many conferences in Luxembourg so far, and that is good because those conferences have raised awareness, especially amongst professionals, not so much the public, at least for now. But I think now we need to go beyond these generalist conferences where you’ll feel good when you come out of the conference, but then you don’t take very specific action.

I think now we need to focus on specific initiatives that professionals take in the area of sustainable finance. And here, I think it’s also important to remind people that sustainability is not equal to not-for-profit.

What we are talking here is huge business opportunities for those that embrace sustainable finance, but also dire perspectives for those who do not embrace sustainability because their gains will be short-lived.

Another topic dear to your heart is that of financial literacy and the COVID crisis has certainly underscored the need for an increased financial literacy across the globe. Indeed, many individuals, companies and economies are facing a period of heightened financial stress.

“One of the roles of the CSSF is that of financial education, to make people aware of the importance of finance and saving for the future. What are some of the key actions that you have taken in this space?

Well, the most important mission in financial education is probably to protect consumers from over-indebtedness. As a result of the current pandemic, many citizens face uncertainties due to lost income. They have trouble to pay their bills or to meet other financial obligations.

But even outside of such one of hopefully and extraordinary events, it is important that as many people as possible have basic knowledge about finance. Have a constant view of their income and expenses. I’m stating the obvious here but if we are a bit prepared in advance for uncertain times, then we are in a better position to face a crisis be it on a personal level or a more global crisis, I’m not even talking about a pandemic.

So establishing a personal budget is an important step to keep control over personal finances and to manage those efficiently. So we have developed various tools. There’s a tool also to assess your personal knowledge that we have developed.

We have a budget management tool, and we have plenty of information on finance topics on a dedicated website, which is called . We’ve also developed budget apps that can be downloaded from the Google Play Store or Apple’s app store, and many other tools for young adults, for kids, because financial education here really starts at the age of 10, 11. So people should make use of all these tools.

We’ve also seen during the pandemic now an increase of fraud schemes and scams. And so we’ve engaged in the publication of information and videos warning people of these fraud schemes and scams. And we provide advice on how to protect yourself against those. This is basically the core of what we have done in this context.

And as we come to the end of this podcast, let me ask you as is the tradition by now, what book have you recently read that you could recommend to our listeners?

“Well, since we are in a podcast here, I would not recommend a book, I would recommend a podcast, which I have discovered over Christmas last year. And the podcast is called Bill Gates and Rashida Jones Ask Big Questions. And this podcast covers interesting topics like the post COVID world, inequality or whether or not it is too late to stop the climate change.

I really recommend listening to these podcasts. They are 40, 50 minutes each. And Bill Gates has been very good in the past to predict certain things, but also to provide answers to important topics. So I think this is certainly interesting to listen to.”

Nicolas Mackel:

Thank you very much and thank you for sharing your insights with our audience. Thanks also to our listeners who have tuned in again to our podcast and our next step is owed. I will be speaking to Karine Szenberg, the head of Europe for Schroders. To stay up to date with our podcast, please feel free to subscribe on iTunes, Spotify, or Google. You can also find more information on our website,