Ethics and governance in the European Financial centers

The ethical one always happens to be right, and proof of this will be immediate.

In a press release dated 28 May, it is stated that: Commissioner McCreevy initiates clarification of UCITS (Undertakings for Collective Investment in Transferable Securities) regulations regime. Commissioner McCreevy announced today in Brussels that he intends to clarify and strengthen provisions of the UCITs regime particularly as regards the liability of depositories. He announced he will launch a consultation before the end of June to deal with inconsistencies in the application of the UCITS directive which were shown up by the Madoff scandal. One of the consequences of the Madoff scandal in the EU is that it affected retail investors who had invested in certain UCITS funds the assets of which had been entrusted to a Madoff entity as a sub-custodian. Last December (MEMO/09/27) Commissioner McCreevy informed Ministers of Finance that he had asked his services to work closely with the Committee of European Securities Regulators (CESR) to look into the liability of the UCITS depositories in the 27 Member States. The outcome of this review by CESR is now known and it shows that the minimum high level principles of the UCITS Directive have been transposed in very diverging ways by Member States. The outcome is an unlevel playing field. This means that some EU investors in UCITS funds are better protected than others. On the other hand, the Commission has made stringent proposals on the regulation of depositories, their liability, eligibility, etc in its recent proposal for Alternative Investment Fund Managers (AIFM) (MEMO/09/211). According to this proposal, depositories should be credit institutions based, authorised and supervised in the EU. Their liability has been strengthened, including an inversion of the burden of proof, and there are clear provisions on delegation as well as on the conditions under which assets can be entrusted to depositories outside the EU. Mr McCreevy wants to extend such provisions to UCITS funds. The new proposal should at least cover what the AIFM proposal covers. It would not be appropriate to have a less stringent approach for retail investors than for professional investors.

It seems that the embarassing findings were not circulated in Luxembourg, the jurisdiction that aims to promote, through the LIGFI, stronger ethical practices and standards based on the principles of integrity: transparency, fairness, responsibility and accountability. However the ABBL published information, which is to its credit.

"The minimum high level principles of the UCITS Directive have been transposed in very diverging ways by Member States."

This is what I have explained on this blog several times. I had contacted Commissioner McCreevy in a letter dated 13 February 2009 to report and demonstrate the pragmatic transposition in Luxembourg that opened the drift with Madoff. In the answer on behalf of Comissionner McCreevy, which is dated 19 March 2009, Niall Bohan confirmed that the European Commission attaches great importance to addressing the questions relating to the way in which the depositaries of the UCITS funds have discharged their responsibility, as the role  of the depositary is a cornerstone of the UCITS regulatory framework by ensuring the safe-keeping of assets.

I cannot understand that politicians and professionals in Luxembourg claim, and are still claiming, that the transposition was faithful all the more than the recent CSSF decision on UBS was disappointing, but so compliant with the business culture of the center: the CSSF stated again that "Luxembourg law applicable to Luxembourg depositary banks in their role as safe-keepers of UCI's assets reflects faithfully the provisions of the European Council Directive 85/611/EEC ".

This statement only does not comply with facts, legal and regulatory facts.

As I demonstrated for deposit-guarantee schemes, the business culture to fool the client and international organisations, thanks to a misleading wording in the local texts,  has not changed, which build a country risk for the client as the outcome is once more an unlevel playing field.

Some leaders in Luxembourg should definitely quit the business on the principles of integrity: transparency, fairness, responsibility and accountability.