Ethics and governance in the European Financial centers

In only one week Jean Guill, new director CSSF, killed the credibility of the Luxembourg regulator.

The process started on Monday in the framework of an interview with Reuters. Guill said that the Luxembourg financial watchdog could not have detected Madoff's fraud and that it never had any reason to suspect such a crime. The watchdog had been aware that Luxalpha and other funds' assets were managed by Madoff. It did not oppose the contracts the custodian banks signed with investors limiting their responsibility as custodian. "People did not invest with Mr Madoff because they thought he was a thief, but precisely because he had a very good reputation. People thought that explained why he could give good results," Guill said.

I had commented that on my blog to underline that the Luxembourg regulator seems very naïve as Jean Guill implicitly admits that Luxembourg regulation opened the drift with Madoff

I guess Luxembourg professionals read my blog.

On Thursday Jean Guill rectified what was communicated on Monday. « Non, la CSSF n'avait aucune connaissance de l'implication de Bernard Madoff dans Luxalpha et les autres fonds. De surcroît, il n'est pas d'usage que la CSSF reçoive le bulletin de souscription d'un fonds. Et donc ne pouvait pas s'y opposer. » (free translation: No, the CSSF was not informed any of Bernard Madoff’s involvement in Luxalpha and the other funds. In addition, it is not use which the CSSF receives the application form of funds. An therefore it could oppose).

I contacted Reuters to tighten up the ship and they confirmed by mail that they stand by their version and have nothing to add to what they published.

The process ended on Friday with an interview available on the ABBL (the Luxembourg Bankers’ Association) website: he states that “the new management team of the CSSF sees no need for a “revolution” in the CSSF’s style or supervision. We will continue to exercise our duties with meticulous care and to adopt a prudent approach, as was the case in the past.”

He does not call for a true independence of the regulator in this small jurisdictions were there are many conflicts of interest and where professionals admit that the regulator is practically closely monitored by the financial sector.

This is exactly what means “"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" (Source: Rafik Fischer, Vice Chairman, ALFI, in 2005)

Additionnaly he does not explicitly call for the relevant change suggested in March by the Commission on the Financial crisis in its report. The report stated « le rôle de la CSSF, défini à l’époque comme celui non seulement d’un contrôleur du secteur financier mais encore d’un promoteur de la place doit être revu afin d’éviter tout équivoque sur sa mission essentielle qui est celle de la surveillance prudentielle » (free translation: “the role of the CSSF, defined at the time as both a controller of the financial sector and as a promoter of the financial center, must be re-examined in order to avoid any ambiguity on its essential mission which is that of the prudential monitoring”)

The so-called regulated financial center is being rammed by its actors themselves because of a terrific communication, whether it is the one of the CSSF or the one of LFF, and because they have created an insulated culture that systematically excludes any information that could contradict its reigning picture of reality.