Ethics and governance in the European Financial centers

As Kenneth Blanchard said, "Managing only for Profit is like playing tennis with your eye on the scoreboard and not on the ball" (K. Blanchard, The power of Ethical Management. Ballantine, 1988, p. 109).

 

This is exactly what the CSSF is doing in its latest press release relating to the Global situation of undertakings for collective investment.

 

As at 30 April 2009, total net assets of undertakings for collective investment and specialised investment funds reached EUR 1,592.932 billion compared to EUR 1,526.563 billion as at 31 March 2009, i.e. a 4.35% growth on a monthly basis

They explain that the positive statements regarding the coordination of macroeconomic policies, made during the G20 summit in London, as well as indications of a mitigation in the deterioration of the economic outlook in April, contributed to the increase of equity prices on almost all equity markets. Thus, most equity UCIs recorded gains in April compared to the previous month.

The Luxembourg UCI industry registered a positive variation amounting to EUR 66.369 billion during April. This positive variation is composed of EUR 59.364 billion resulting from the positive impact of the financial markets and EUR 7.005 billion originating from positive net issues

 

Investors in Ucits funds will face possible higher fees if European Union plans to tighten up rules surrounding safekeeping of fund assets become law, reported the Financial Times.

Bloomberg recently quoted Luc Frieden.

 

What he said is worth commenting. 

 

 

“The principle is very clear: the custodian bank has to indemnify (…) Regarding the law, the situation is not that difficult: the custodian bank has a responsibility to make restitution for these assets”, Luc Frieden said.

 

Yes the principle is clear, but it is as well pragmatic, word that Luc Frieden is no longer saying. Let’s read again what Luc Frieden wrote five years ago:

 

“I want to ensure that Luxembourg remains a leading player in the world of investment funds. Based on clear and pragmatic legal rules that are fully compliant with the EU legal framework as well as on the unique international experience built up over the past decades, the Grand-Duchy of Luxembourg will continue to undertake every effort to develop Luxembourg as the European hub for investment funds both for European and non-EU financial operators. » (Fundlook, July-September 2004, page 3)

 

What do pragmatic legal rules mean?

 

Article 10 of the UCIT directive states that “ 1. No single company shall act as both management company and depositary”. This paragraph was purely removed to only transpose literally paragraph 2 that states that “2. In the context of their respective roles the management company and the depositary must act independently and solely in the interest of the unit-holders.”
What is not prohibited by the law is possible. When one knows that Luxembourg is a small jurisdiction where there are many conflicts of interests, requiring acting independently and solely with no requirement of being distinct legal entities is a beginning of problem. It is exactly like the law firm in Luxembourg that is both UBS’ and HSBC’s lawyers, provides the Chairman of ALFI, members in CSSF committees (e.g. Banks Committee or Lawyers Committee) , and takes part in the writing of the legislation in Luxembourg.

 

I will quote again Circular IMS 91/75 (as amended by Circular CSSF 05/177) dated 21 January 1991 that states that “The concept of custody used to describe the general mission of the depositary should be understood not in the sense of “safekeeping”, but in the sense of “supervision” (…) The depositary has discharged its duty of supervision when it is satisfied from the outset and during the whole of the duration of the contract that the third parties with which the assets of the UCI are on deposit are reputable and competent and have sufficient financial resources. “ Such provisions does not comply with article 7 of the UCITS directive that states that “A unit trust's assets must be entrusted to a depositary for safekeeping”

 

 

Madoff did not happen by chance in Luxembourg as the pragmatic legal and regulatory framework opened the drift.

 

It seems that nobody in Luxembourg, Frieden included, commented Commissioner McCreevy’s statement that “the minimum high level principles of the UCITS Directive have been transposed in very diverging ways by Member States, which means that some EU investors in UCITS funds are better protected than others”.

 

 

 “An international arbitration will be a more professional and fast solution that is probably more satisfactory to all (...) I prefer an arbitration of two, three years than having 100 court cases decided in 10 years”, Luc Frieden said.

 

Is the Luxembourg justice not reliable?

Who would pay for such international arbitration? Investors, who already lost money?

 

As I said, it is morally up to the Luxembourg state to pay for the Luxalpha disaster. The only way for investors who are victims of the pragmatic legal and regulatory framework to be respected would be a payment by the Luxembourg State that would go later before the court for the refund in the legal and regulatory framework it enforced.

 

Should this simple solution had been implemented when I stated it, early this year, the Madoff story would be over in Luxembourg.

 

It is now only beginning after what stated the CSSF in its latest press release.

 

 

 

Have in the future “Luxembourg as the European hub for investment funds both for European and non-EU financial operators”, Luc Frieden said.

 

I am afraid it will no longer be the case unless leaders are changed.

 

They are not. For the moment…