Ethics and governance in the European Financial centers

In rhetoric, wooden language (calque of the French expression langue de bois) refers to a diverting of attention from reality by using certain vague and ambiguous words, such as banalities too abstract or pompous, which appeal to sentiment and emotions rather than to facts.

This is unfortunately how the Chairman of ABBL expressed himself  in an article to my attention that was published recently in the Lëtzebuerger Wort.

 

It is strange that there cannot be any critics in this jurisdiction. Critics are said to be against Luxembourg, which is not the truth. I am afraid that “soft law” and self regulation does not work especially in a small jurisdiction like Luxembourg where there are many conflicts of interest.

 

I cannot agree when he states regarding my views on the Madoff affair in Luxembourg: « vous adoptez les raccourcis insidieux qui prétendent que ce serait la législation luxembourgeoise qui aurait permis et «ouvert la voie a la dérive avec Madoff». C'est une machination sans nom qui profite du caractère dramatique de cette fraude gigantesque et de la complexité technique de la matière pour semer le doute dans les esprits et pour déprécier notre crédibilité sur un créneau essentiel de nos activités. En réalité, rien ne permet d'affirmer en droit que le Luxembourg aurait a s'inspirer auprès d'un quelconque autre pays européen. »

 

(free translation : you adopt the insidious shortcuts which claim that it is the Luxembourg legislation which has  allowed and “opened the way to the Madoff drift”. It is a machination without name which takes advantage of the dramatic situation of this gigantic fraud and of the technical complexity of the matter to sow the doubt and to depreciate our credibility on an essential pillar of our activities. Actually, nothing allows to affirm legally that Luxembourg should get inspiration from any other European country.

 

Investors will judge on the light of the report I sent to the European Commission to answer the public consultation on the depositary (Download report).

 

One can deplore that Luxembourg’s special liability towards the investors from which the professionals want to withdraw, with the support of the European Fund and Asset Management Association (EFAMA), which is not willing to easily identify liabilities among its members either.

 

It is demonstrated, thanks to public and official sources that:

 

-         The actors of the Luxembourg financial sector do not hide that the financial sector strongly influences laws and regulations and strongly influences the regulator in its duties. Rafik Fischer, Vice Chairman of ALFI, stated in 2005 for Fundlook in an article titled "Shaping the Regulatory Environment" : "The relationship between the Luxembourg Commission de Surveillance du Secteur Financier Luxembourg ( CSSF ) and the Financial centre it supervises has always been described, and rightly so, as being heavily influenced by a true common interest approach. (...) The Luxembourg Investment Fund Industry has regularly had a very close and direct say on the evolution of the Luxembourg prudential regulatory environment governing the collective Investment Industry. (...) This influence has been exerted directly and indirectly by the lobbying initiatives taken on the level of the different professional associations, be it ALFI or ABBL , but also and more importantly, trough a direct association with the Luxembourg Supervisory Authorities by means of a number of standing committees (...) It is in those Committees which have proven instrumental in launching new legislative initiatives like the International Pension Funds or the SICAR ( société d’investissement en capital à risque ) and providing pragmatic and timely solutions to the evolution of the industry". In other words, ALFI which includes bankers, lawyers and auditors, decides of the regulatory environment and of what is to be done by the regulator.

-         Contrary to the talks about the “faithful transposition” of the UCITS directive, there are clear discrepancies between the UCITS directive  and Luxembourg texts on precisely the points related to the Madoff affair in Luxembourg (UBS being management company and depositary, which is proscribed by the directive to prevent the conflicts of interest but is authorized by the Luxembourg law; no safekeeping duty in the Luxembourg law whereas it is prescribed by the directive…) : there was a crippling misleading communication among the actors of the Luxembourg financial center. This is even more disturbing as it is easy to check in a branch of industry such as finance,  where confidence is a paramount.

 

The Madoff fraud shows the relative country risk for the investor in Luxembourg and it shows that the European investment management industry is unable to tell the truth and gain the investors’ and the European Commission’s respect. All the talk about compliance in Luxembourg as a regulated financial center (fight against corruption, fight against money laundering, fight against tax evasion…) is unfortunately tainted with suspicion

 

Mr Meyer appeals to sentiment and emotions rather than to facts.

 

The drama is that in this jurisdiction everyone sees the world like a fish from inside its bowl. There are problems and issues in Luxembourg which represent a huge reputational risk. Government and professionals should seriously take criticisms into consideration and address those concerns and the risks they describe, by tightening up the ship, instead of fustigating those who are the critics.