CSSF circular

Substance – Quo vadis?


Silke Bernard: “Although large parts of the circular do reflect current (written and unwritten) CSSF practice, it contains a few clarifications and requirements that were so far not common regulatory practice.” (Illustration: Maison Moderne)

On 23 August 2018, the CSSF issued its long-awaited circular 18/698 on the substance of Luxembourg management companies. After a relatively short but (as it seems) intense consultation process, the CSSF has made public what can be seen as a new cornerstone in the Luxembourg regulatory landscape.

On 101 pages, the CSSF summarises its positions and expectations regarding the establishment, approval and running of Luxembourg management companies.

Looking at the volume of the circular and its great level of detail, one may wonder what it means for Luxembourg and Luxembourg-based management companies. Is this the start of a new era? Or is it a mere transcript of the regulatory practice that has been applied by the CSSF over years? 

It’s none of both

At first sight, the circular is indeed a compilation of current regulatory practice. Those active on the Luxembourg market will identify many of the CSSF’s positions taken over past years and will find it helpful to see such practice reflected in a circular and thereby “officialised” for all Luxembourg actors. We hear from industry players that they welcome the circular as it gives a great amount of comfort to the market – including to potential new market entrants.

They now have a clear picture of how they have to organise and what they are expected to do. By its new circular, the CSSF has put an end to something it was sometimes (rightly or wrongly) blamed for, that was an alleged lack of transparency of its regulatory practice, especially for persons outside the Luxembourg financial market. One should, however, not stop reading here.

Clarifications and requirements

Although large parts of the circular do reflect current (written and unwritten) CSSF practice, it contains a few clarifications and requirements that were so far not common regulatory practice. By writing them down in a circular, they have now become (subject to any derogations) generally applicable rules. Some of these aspects may easily be overseen – they fit so nicely into the description of the regulatory practice which sounds very familiar... But they are important and it is advisable to read the circular carefully to spot these points.

One that has already been largely discussed is the new (numerical) approach to the number of mandates that can be exercised by directors. But there are others. For instance, the circular now clearly states that a Luxembourg management company with less than three full-time equivalent fee earners is considered being a letter-box entity (with the consequences we know). Also, there are clarifications on delegation arrangements and the obligations of the delegating management company. The reception of regular reporting from delegates will no longer be sufficient but a full renewal of the initial due diligence is required to take place every three years. This may mean quite some additional work, e.g. for actors providing third-party management company services. 

These are only a few examples, and everybody should read carefully what precise expectations one will have to comply with. 

So, does this mean Luxembourg becomes a place where management companies are no longer welcome? 

My answer is: No, quite to the contrary. Luxembourg has always been a place where supervision has been taken seriously. The CSSF has always tried to understand business models, to make sure proposed set-ups can work in practice and are sound and robust to make the Luxembourg funds market a strong and reliable place for investors. 

The new circular confirms such regulatory approach. It provides a great level of transparency, reliability and comfort to the market while at the same time keeping a considerable level of flexibility that will allow the CSSF to adjust its individual regulatory assessment to specific situations. 

My hope would be that the new circular will make Luxembourg an even more welcoming place for asset managers and that it will provide investors and markets with a high level of trust into the Luxembourg regulatory environment.