Ethics and governance in the European Financial centers

Jean-Jacques Rommes (ABBL, General Manager) wrote an interesting article in the Editorial for the Luxembourg Banking Quarterly - 2/2009.

The last paragraph is worth commenting.

It states:

Whenever things go wrong, blame is a common knee-jerk reaction. Yet, blaming is only ever useful insofar as it may lead to identifying the real issues that need be discussed and the real problems that need to be solved. Like everyone else involved, banks and bankers must accept responsibility for mistakes that have been made, but, more importantly, our profession must act responsibly by participating constructively in the shaping of a regulatory and financial environment that will allow us to prevent a repetition of what we are currently going through.

Is Rommes’ Statement credible?

Should such editorial be written in another jurisdiction than Luxembourg, it would mean an awareness and commitment for regulation.

How credible are professionals who are practically unable to take their responsibility in the Madoff story because of their influences on the regulation in the jurisdiction and who only accept right minded contributors in the discussion may identify with relevance  “the real issues that need be discussed and the real problems that need to be solved”.

The risk is that they hush up critical issues and problems as they have always done to focus on right minded issues and problems, with right minded experts that will produce right minded reports.

Ctitical issues and problems are

- revising and correcting the transposition of directives,

- strengthening supervision and sanctions in Luxembourg by reducing official influences,

- sanitizing the judicial and regulatory haven.

But there is nothing about that in the Government programme that LFF translated online.

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.

I have noticed with great satisfaction that my blogs about the Luxembourg financial center got great attention in many places, and at the same time I'm disappointed that only in Luxembourg they are often misread as being "negative". I certainly disagree with some of the common understandings among professionals there, and I wondered who could be those who are open minded enough to have a look at the arguments instead of the messenger, and see them as "positive" contributions.

I believe that those who were willing to pick up directly on the discussion about what I consider to be dangerous shortcomings, will be the most likely to have a serious second look at the issues. They are the most likely to be able to salvage the center's reputation, when they realize later that the way to defend the financial center is not by hushing up issues, but on the contrary by tightening up the ship. I only hope it will not be too late.

I'll review those leaders, the points of disagreements and possible remedies by starting a list of the prominent hope bearers: the Luxembourg professionals white list.

Let's start with jean Meyer.

Jean Meyer chairs the ABBL (the Luxembourg Bankers’ Association).

He is aware that the financial center depends on the head offices where the decision making power is. He stated on 25 April 2006, one month before the release of my book (Vus... Pas pris! Paris, Le Publieur), that "les acteurs financiers luxembourgeois appartiennent pour leur très grande majorité à des grands groupes financiers internationaux. Ils doivent se battre, au jour le jour, au sein de leur groupe pour drainer et attirer de nouvelles affaires vers le Luxembourg. Et pour chaque nouvelle transaction, ils sont en concurrence avec d’autres entités du groupe." (free translation: the Luxembourg financial actors belong for their very large majority to large international financial groups. They must fight, from day to day, within their group to drain and attract new business towards Luxembourg. And for each new transaction, they are in competition with other entities of the group).

With the conflicts of interest that are unfortunately standard in the Luxembourg regulation because of the actors’ very close and direct say on the evolution of the Luxembourg prudential regulatory environment governing the collective Investment Industry, Jean Meyer as a smart lawyer cannot ignore the consequences of changes to the language of European directives: words added or removed under the influence of professionals may modify the enforcement European directives or other international texts and denature their objectives.

The consequence is that Luxembourg is currently a risk for the brands of international financial groups as the Luxembourg prudential regulatory environment is in question. The UBS-Luxalpha affair is revelatory of a regulatory subordination to professionals that influence the regulator in its duties (they participate in the drawing-up and the interpretation of regulations relating to their specific field) to the point that regulation failed.