Ethics and governance in the European Financial centers

Jean Guill was interviewed by Les Echos.

 

What he said is worth commenting:

 

L'information afférente au sous-dépôt de l'intégralité des actifs d'un OPC auprès d'une seule et même entité constitue une information nécessaire qui devrait être mentionnée dans le prospectus de vente d'un OPC. Il en est de même pour les clauses limitatives de responsabilité qui auraient vocation à s'appliquer à tous les investisseurs et qui n'ont pas été négociées individuellement. Il s'est avéré que dans le cas de Luxalpha, ces deux informations ne figuraient pas dans le prospectus. En principe, la CSSF vérifie, par exemple, si de telles clauses limitatives de responsabilité peuvent être valables en vertu de la liberté contractuelle ou si la formulation desdites clauses est contraire à des dispositions d'ordre public, parce qu'elles dénaturent, le cas échéant, les obligations principales de l'intervenant concerné ou auraient comme conséquence d'externaliser une de ses prestations essentielles

(free translation : The information relating to the under-deposit of all of the assets of a UCITS at one sole entity constitutes esential information which should be mentioned in the prospectus. It is the same for provisions that limit the liability which would have vocation to apply to all the investors and that were not negotiated individually. It proved that in the case of Luxalpha, this information did not appear in the prospectus. In theory, the CSSF checks, for example, if such provisions that limit the liability can be valid under the terms of contractual freedom or if the wording of the aforesaid clauses is contrary with provisions of public order, because they may denature the main obligations of the actor concerned or would have as a consequence the outsourcing of one of its essential services)

 

 

Then I read again CSSF CIRCULAR 05/177 dated 6 April 2005 that states that “From now on, persons and companies subject to the prudential supervision of the Commission de Surveillance du Secteur Financier ("CSSF") are no longer compelled to communicate to the CSSF, for comments, the content of their advertising messages intended for distribution to their clients or to the public. (…) Obviously, the persons and companies subject to the supervision of the CSSF must continue to comply with the rules of conduct of the financial sector both in Luxembourg and abroad, in refraining from issuing misleading advertising material with regard to the services offered and by mentioning, where necessary, the particular risks inherent to these services and in bringing to the client's attention his own responsibility »

 

Luxalpha was created in February 2004.

 

The critical question in the debate is: when did UBS create its subscription form that limits the liability and specified the particular risks inherent to the services and brought to the client's attention his/her own responsibility?

 

When I read the Luxalpha documentation,  a provision is written in the subscription form, to be signed by investors or their agents, that states that assets would be “safekept” by a US broker – although it did not name Mr Madoff, and investors would bear most of the risk of that broker’s default. A subscription form is not an advertising material but it seems that UBS complies with the spirit of circular 05/177 that requires to mention, where necessary, the particular risks inherent to the services and bring to the client's attention his/her own responsibility. What UBS did.

 

If the subscription form was created after CIRCULAR 05/177, I am afraid there is definitely a correlation between the new rule that was decided under the influence of the ALFI in the pragmatic committees and the subscription form that was circulated with the litigious provision.

 

Moreover, Jean Guill said “en principe”. I am afraid this means there were anyway no obligations for UBS to submit documents. He did not say that the submission was mandatory. Otherwise he would have said something like “legally”.

 

As I said a lax business environment with many conflicts of interests is responsible for the Madoff affair in Luxembourg.

Persian Letters (Lettres persanes) is a satirical work, by Charles de Secondat, baron de Montesquieu, recounting the experiences of two Persian noblemen, Usbek and Rica, who are traveling through France. In Paris, the Persians express themselves on a wide variety of subjects, from governmental institutions to salon caricatures.

 

As this is summer time, I would like to offer some goodies on this blog with a couple of Venezuelan letters. These will be an exchange of e-mail between two Venezuelans, the first one, Manuel, residing in Venezuela and the second one, Jose, travelling in Europe.

 

 

 

Read First Letter

Read second letter

Read third letter

 

 

 

From: Manuel

To: Jose

Sent: Sunday, August 16, 2009 3:25 PM

Subject: European UCITS Directive

 

Dear Jose,

 

I have vaguely heard about this issue of the UCITS directive. But you know our media are not covering the topic.

 

Can you tell me what the problem is?

 

Cheers.

 

Jose

 

 

From: Jose

To: Manuel

Sent: Sunday, August 16, 2009 11:25 PM

Subject: RE: European UCITS Directive

 

Dear Manuel

 

The problem is that France, which is a competitor for the investment funds industry, is jealous of Luxembourg’s success in the development of investment funds.

 

Madoff is firstly an American affair where the control system by the public authorities undoubtedly failed. (http://www.agefi.lu/mensuel/Article.asp?NumArticle=11177) .

 

As part of the  Financial power, 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 as well as on the introduction of new legislation in this specific field of financial products. Those efforts were always undertaken with the sole aim to enhance the attractiveness of Luxembourg in an industry sector which, based on the tremendous success experienced over the past decade, has become of essential importance to the Luxembourg economy as a whole.

 

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 providing pragmatic and timely solutions to the evolution of the industry.

 

Critics that are ill-informed would see potential conflicts of interest which may result failures control system by the public authorities . But it is normal that the business community decides of the legislation and regulation to be enforced, including sanctions that are applicable to those from the business community who do not restect the rules.

 

Anyway, as the Chairman of the ABBL said in the Wort (the newspaper that is close to Juncker’s party) to reply to an ill-informed Frenchman, nothing makes it possible to affirm in law that Luxembourg would have to be inspired by legislation in other European country.

 

It was definitely up to the Luxembourg business community and its clever professionals to decide of the depositary duties and of the regulatory duties. As far as auditors are concerned, in the framework of the transposition of the 8^th Directive, auditors will be controlled by the CSSF which is a very good thing for the coherence of the system: the financial institutions controls the regulator through its influence and the regulator is gonna control auditors. This way the auditees from the financial institutions will practically control the auditors, which is normal as auditees pay for the audit service.

 

Cheers

 

Jose

 

 

 

Persian Letters (Lettres persanes) is a satirical work, by Charles de Secondat, baron de Montesquieu, recounting the experiences of two Persian noblemen, Usbek and Rica, who are traveling through France. In Paris, the Persians express themselves on a wide variety of subjects, from governmental institutions to salon caricatures.

 

As this is summer time, I would like to offer some goodies on this blog with a couple of Venezuelan letters. These will be an exchange of e-mail between two Venezuelans, the first one, Manuel, residing in Venezuela and the second one, Jose, travelling in Europe.

 

 

Read First Letter

Read second letter

 

 

 

From: Manuel

To: Jose

Sent: Saturday, August 15, 2009 8:18 PM

Subject: Leadership

 

Dear Jose,

 

Thanks for all these explanations.

 

I understand now the reason why Hugo Chavez expelled foreigners critical of Venezuela. “No foreigner, whoever he may be, can come here and attack us. Whoever comes, we must remove him from the country. I'm talking about some gentlemen who come here for conferences.”, he said.

 

In Luxembourg, the will is the same.

 

The experience of Luxembourg demonstrates that Venezuela is a democracy and Chavez a great politician.

 

However it is not by chance that he has been awarded so many honorary degrees: Honorary Doctorate in Political Science (Kyung Hee University), Honorary Doctorate in Jurisprudence (Autonomous University of Santo Domingo), Honorary Doctoral Professorship (University of Brazil), Honorary Doctorate in Economics (Beijing University)…

 

Cheers.

 

Jose

 

 

From: Jose

To: Manuel

Sent: Sunday, August 16, 2009 7:45 AM

Subject: RE: Leadership

 

Dear Manuel

 

These degrees remind me of Prime Minister Juncker: he has the honorary title of doctor honoris causa by the philosophy department of the Westfalian Wilhelms-University in Münster. He is doctor honoris causa in law by the Democrite University of Thrace, doctor honoris causa by the University of Pittsburgh (Pennsylvanie), doctor honoris causa by the University of Strasbourg…

 

I don’t think that President Sarkozy has got so many prestigious university titles that demonstrate political experience and leadership.

 

That is the reason why when Prime Minister Juncker states that Luxembourg is not a tax haven, he is more credible than the French President who does not have such international university recognition.

 

That is the reason why when Prime Minister Juncker states that Luxembourg transposed faithfully the UCITS directive, he is more credible than the Ministry of Economy in France and than Commissioner McCreevy that both do not have such international university recognition.

 

Cheers

 

Jose