The reputation of Luxembourg’s financial centre depends on the quality of its work. The Commission de Surveillance du Secteur Financier (CSSF) supervises banks, investment funds, financial experts and auditors. Sustainability and digitalisation – these are the challenges facing the financial centre and the supervisory authority alike, explains Claude Marx, Director General of the CSSF.
More and more staff, more and more duties: at this rate, can the CSSF preserve the qualities it is known for, namely rigour, proximity to “clients” and short decision lines?
This is a key challenge. I am convinced that we can still master it today. We must combine the integrity and rigour of our work with proven qualities like short decision lines, proximity and accessibility – although accessibility is not to be confused with cronyism. To prevent this, we have incorporated security mechanisms into our operating procedures. For example, all decisions that can be appealed or that create a financial obligation for the CSSF are taken jointly by five directors.
A visit from the FATF* is scheduled next year. What does this inspection mean for the CSSF?
We are continually under inspection. The FATF visit is no exception. In the last three years alone, there have been four inspections by the International Monetary Fund. The EBA** recently carried out an investigation into money laundering. In addition to this, we also participate in numerous peer reviews. In contrast to the 2010 assessment, this time the FATF will check not only whether we have the appropriate legal arsenal, but also how it is applied. This will involve many players – the judiciary, police, notaries, lawyers and jewellers. The CSSF has an important position in all this, as the FATF takes a risk-based approach to the inspection. Risks such as money laundering and terrorist financing are inherent to the financial sector, primarily in areas under our supervision, such as private banking.
How is the CSSF preparing for this inspection?
In conjunction with the Ministries of Justice and Finance and other authorities, we have carried out a national risk assessment based on the FATF methodology. This was a kind of self-assessment of our country. Now we must increase the training provided within individual economic areas to ensure that all players are aware of the importance of the fight against money laundering. We organise training ourselves, and some of our employees also participate in external training.
Is there any risk of Luxembourg being put on a black or grey list as a result of the inspection?
The assessment is somewhat more subtle. A country can be “fully compliant”, which is very rare. The next level is “largely compliant”, and the worst rating is “non-compliant”. It is in Luxembourg’s interest to be in one of the top two categories.
An outside observer could get the impression that the CSSF has been taking tougher action for some time now when it identifies serious shortcomings at banks in Luxembourg. Is that related to the upcoming FATF visit?
There is no connection. We have been taking tougher action for quite a while now. We are convinced that the financial centre will only be taken seriously if we are strict in enforcing the rules. The majority of Luxembourg market participants work as they should, but are penalised by the fact that there are still some black sheep. The rules to combat money laundering have been more or less the same for around 30 years, yet there are still players who are too lax in applying them. We show no leniency in such cases.
During recent years, the CSSF has increased staffing levels massively. When will this recruitment drive come to an end?
The CSSF currently has around 900 employees. In my opinion, this is how many we need to do our work. At the same time, we continuously review our procedures to ensure that they are appropriate to the ever-increasing scope of our duties – this is the premise of lean management.
The Danske Bank scandal highlighted the weaknesses of the existing supervisory system. Does the EU need a unified supervisory authority?
I don’t want to comment on individual cases. However, I have to say that Europe has not covered itself with glory in the fight against money laundering and financial crime. In the last few years, there have been a number of high-profile cases highlighting that anti-money laundering measures haven’t always been effective.
What lessons can be learned from these cases?
I do not believe that a centralised supervisory authority for Europe would have prevented these cases. How could a body located in Frankfurt, or Luxembourg for that matter, have stopped money laundering in Greece or Estonia? The fight must take place on the ground, at the local level, where there is an understanding of the local environment. This is where the work of the police, judiciary and supervisory authorities must become more efficient.
In your public missions and speeches, you emphasise that sustainable finance is the future of the financial centre. What exactly do you mean by this?
The fundamental issue is that if we don’t make a commitment to climate protection, and if we do nothing to achieve the sustainability targets defined by the UN, the earth will be uninhabitable tomorrow. We won’t need the CSSF and we won’t need any banks either. So how can the financial centre contribute to sustainability? Huge amounts of money are required to effectively combat climate change and limit global warming to a maximum of 1.5 degrees Celsius, the target set by 195 countries across the globe at the 2015 COP 21 in Paris.
The EU Commission has calculated that up to 2030, some EUR 180 billion will be required for climate protection. Luxembourg is one of the EU’s largest financial centres. If you add up all the assets managed in Luxembourg – investment funds, private client assets, life insurance – you get a spectacular EUR 5 trillion. Luxembourg should set itself the ambitious target of investing 10% of this – EUR 500 billion – in sustainable projects. Our country could make a substantial contribution to combating climate change that way.
Is it the role of the CSSF to promote a sustainable financial centre?
One should never lose sight of the CSSF’s mission: to serve the public interest. This includes our main goal of ensuring a properly functioning, stable, trustworthy financial system. But it must also include helping make sure we leave our children with a planet that is habitable. In this respect, our commitment to a sustainable financial centre is perfectly legitimate. And it is in the interests of the entities we supervise as well. The role of the CSSF also includes financial education. It is important to make young people aware of the challenges of tomorrow. We need sustainable financial education.
And sustainability is closely tied to the issue of digitalisation. We have a duty to ensure that the entities we supervise are profitable, but they can only achieve this in the long term with the help of digital technologies. The same applies for sustainability. Taking a short-term view, this concept can still be airbrushed out of a company’s business plan today. From a longer-term perspective, only the companies that embrace sustainability will survive.
But aren’t good products the most important thing for companies?
Tomorrow’s clients will only use companies that contribute to sustainability. This is already obvious – the Friday school strikes show this. What’s more, companies that ignore sustainability will soon find themselves unable to recruit employees. Young people want their jobs to be meaningful. An employer that does not include sustainability in its corporate culture will not be helped by good products alone.
How can the CSSF position itself to understand and monitor decisions that will be taken by self-learning technology in the future? Can new technologies even be supervised using traditional financial sector rules?
It is key for the CSSF to be at the cutting edge of technological development today, or it will be unable to supervise these technologies tomorrow. This is part of our CSSF 4.0 strategy. Robo-advisors – portfolio management based on artificial intelligence – are already used by traditional asset managers. The key principle is that people must always remain in control of the machines. The algorithms used in artificial intelligence must be documented and their development must be traceable.
Will robots replace traditional bankers?
I don’t believe the bank of tomorrow will be nothing more than an app on a smartphone. Ultimately, the banking business is built on trust. People are not ready to trust robots with their money, just as parents are not willing to entrust their children to self-driving cars that are 95% reliable.
* The Financial Action Task Force (FATF): a leading international body for combating money laundering with its head office in Paris
** European Banking Authority
(Interview: Pierre Leyers – Luxemburger Wort)
The views and opinions expressed herein are those of the interviewees and do not necessarily represent the views and opinions of KPMG Luxembourg, Société coopérative.