Mon 11 Dec 2017
News - Directors' Day 2017 - Latest governance hot topics for financial sector institutions
Directors' Day 2017 - Latest governance hot topics for financial sector institutions

A lively, informative, and frank interview with Claude Marx, Director General of the main financial regulator the CSSF wrapped up proceedings. Wide ranging questions touched on subjects including global tax avoidance structures, Brexit, FinTech, and investment fund regulation.

Although he mentioned that it is not unlawful for clients of financial institutions to use offshore structures, Mr Marx had a warning for directors of such financial institutions: “they should have a solid understanding of the role of the use holding companies, and the wider potential implications.” He cited legal and reputational risks. He recommended that boards should review the risk appetite statements, be deeply engaged with debates about the morality as well as the legality of how their businesses operate. It is important for financial institutions to have independent directors.

He stressed that the CSSF is engaged in a regular dialogue with supervised entities about their current and future operations. He reckoned that the ever-growing amount and complexity of national, European, and international rules is a challenge. Imposing sanctions to enforce the rules is sometimes necessary, and fines are now mostly based on the turnover in recent Directives, which could result – and has resulted - in amounts of several million euros in severe cases. Mr Marx is also aware of the need to keep regulatory practice in step with new rules and a changing environment.

Current areas of work include moving even more towards supervision based on the risk assessment of the supervised entity, particularly in the area of AML/TF prevention, an assessment of the current long form report, the implementation of MiFID 2 and PSD 2.

“Brexit is a lose-lose situation,” was his gloomy summation. Although on the upside, numerous prestigious financial sector names are moving operations to, or strengthening their operations in Luxembourg, he sees a worrying bigger picture. “We have come across many questions where there is currently no answer, and we are only 15 months from the UK’s departure date,” he warned. Questions include the status of branches of UK-based institutions in EU 27 and vice-versa, the future of internal risk models, clearing, applicable law and jurisdiction and the question of equivalence are examples of challenges. A number of institutions are preparing for a cliff edge exit, in the absence of a deal between EU 27 and the UK.

Mr Marx commented on the current proposal by the EU Commission to review the operation of the ESAs. He believes that current regulatory arrangements are working well, and the proposed changes would add unnecessary complexity and cost, whilst not enhancing the efficiency of markets or consumer protection. He also discussed financial technology, recognising that the challenge is that most FinTech firms come from the tech side rather than the financial side. Here he sees again an important role for independent directors in giving these entrepreneurs focus and guidance.

Overall, he welcomed the trend towards a greater role for directors regarding how risk is managed within financial businesses, as well as regarding key topics such as compliance, internal control, audit and remuneration. Independent directors are part of good governance. He welcomed the generalised increase in quality of personnel on boards in Luxembourg.