Ethics and governance in the European Financial centers

A couple of weeks ago in an article I underlined a telling censorship on the depositary issue in the Alfi News Digest that was published on 13 July 2009 for July 2009.

 

The Alfi News Digest for July-August 2009 was published on 28 July 2009

 

There is a very good summary of the consultation on the depositary issue:

 

EC : public consultation on the UCITS depositary function

Against the background of recent discussions on the legislative framework for UCITS depositaries, the European Commission has launched a wide-ranging public consultation in terms of depositary’s duties, responsibility regime, organisational requirements, eligible criteria and supervision. The consultation also covers issues which are not directly linked with depositaries duties but which are particularly relevant for ensuring an increased level of investor protection within the UCITS framework (for example valuation).

The consultation is available at: http://ec.europa.eu/internal_market/investment/depositary_en.htm

The deadline for responses to this consultation paper is 15 September 2009.

Responses should be addressed to: market-depositary-consultation@ec.europa.eu

 

Maybe the ALFI contribution to this public consultation will be prepared by Rafik Fischer, currently member of the Board.

 

He is responsible for the depositary bank issues among ALFI’s vital issues.

 

He is the one who admitted the influence of the ALFI on the regulator in 2005 "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”

 

He can be found for many years on the board of Directors of the CSSF, in the Prudential regulation consultative committee, in the Pension funds committee, in the Undertakings for collective investment committee, where he regularly had a very close and direct say on the evolution of the Luxembourg prudential regulatory in the name of the ALFI.

See for example Annual Report 2008.

 

Such influence on the regulator in not acceptable.

Unless one finds it normal that

- Audited should have a very close and direct say on their auditor’s methods and duties

- Tax payers should have a very close and direct say on the tax administration’s methods and duties

- Students should have a very close and direct say on their professor’s methods and duties

- Subordinates should have a very close and direct say on their management’s methods and duties

- etc

 

Fernand Grulms, who chairs LFF, published an interesting article in German to fustigate the study published by the Cercle de Coopération and fustigate experts or bloggers, of which myself.

His article is very telling.

He uses the usual smear tactics: take one detail out of the discussion such as an error, a bad translation or faulty grammar, blow it up into a major, major flaw, and use it as a demonstration that the whole study, argument, article or whatever is peinlich, peinlich, peinlich. You don't have to address the real issue anymore.

But the issue remains as there is no corrective action and may explode later…

But the issue remains and may explode later...

He says: "Alle Unzulänglichkeiten, Falschaussagen und Fehlinterpretationen dieser “Studie” darzulegen würde den Rahmen dieses Beitrags sprengen. Dennoch war das Manuskript ein gefundenes Fressen für selbsternannte Experten und  Blogger, die dieses sofort ungeprüft und unkritisch zum Anlass nahmen, den Finanzplatz Luxemburg (abermals) durch den Dreck zu ziehen."

(Freely translated: To expose all shortcomings, false statements and false interpretations of this “study” would go beyond the scope of this contribution. However this manuscript became a feeding frenzy for all self-proclaimed experts and bloggers, who seized the opportunity to use it immediately, without critical questioning, to smear the Luxembourg financial center (again). )

Fernand Grulms fustigates self-proclaimed experts and bloggers.

ABBL’s opinion in the framework of the transposition of the Second Directive already fustigated in 2003 the "critiques des spécialistes autoproclamés de l’étranger" (free translation: critics from self-proclaimed specialists abroad).

I will only state that most self-proclaimed professionals in Luxembourg did not see that the fight against tax havens was serious and did not anticipate changes.

He concludes "Dieser ist in den vergangenen Monaten in ausländischen Medien häufig angegriffen worden, nicht selten waren die Vorwürfe völlig aus der Luft gegriffen. Dass nun luxemburgische ONGs ebenfalls auf diesen Zug aufspringen, ist mehr als bedenklich. Dass sie sich dabei auf derart unseriöse “Studien” stützen, ist mehr als nur peinlich. Und dass sie dafür auch noch öffentliche Gelder ausgeben – denn besagte nicht-Regierungsorganisationen werden auch mit luxemburgischen Steuergeldern finanziert – kann man als skandalös bezeichnen"

(Freely translated: It (the financial center) often came under attack these past months in foreign media, and quite often the criticism was pure invention. The fact that Luxembourg NGOs now also get onboard that train is more than questionable. The fact that they thereby use such un-serious “studies”, is more than embarrassing. And the fact that they spent taxpayers’ money on this – because these NGOs are also funded with tax payers’ money – is outright scandalous.)

This means that there cannot be any public financing for those who question the dysfunctions in Luxembourg. I kew it.

The organization for NGOs lives among others from public Luxembourg taxpayers money. So does LFF. It might be that an argument by the ONGs can be defeated and contradicted. Then LFF should do it.

But what if LFF promotes and supports faulty policies that will eventually hurt Luxembourg's reputation much more than a study by a charitable organization, because clients' money can be lost?

See for instance the analysis for investor compensation schemes that will be in my guide.

Jean Guill, CSSF, is quoted by Reuters.

What is said by the Luxembourg regulator seems very naïve as Jean Guill implicitly admits that Luxembourg regulation opened the drift with Madoff

It is said that 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.

Circular IML 91/75 states that

1) 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”

2) The depositary has discharged its duty of supervision, when it is satisfied from the outset and during the entire duration of the contract that the third parties, with which the assets of the collective undertaking are on deposit, are reputable and competent and have sufficient financial resources

 

Additionally EFAMA published a survey on the main tasks and responsibilities of depositaries at national level across Europe. The purpose of this survey was to identify a number of important aspects related to the legal and operating status of depositaries and to emphasize on the principal duties and liabilities of these institutions with respect to the investors and the fund (see page 6 ).

As regards the extent of the duty of supervision, it appears in this survey that among the jurisdiction in the framework of the survey (Austria, Czech Republic, Finland, France, Germany, Ireland, Italy, Luxembourg, Norway, Portugal, UK), Luxembourg seems the only one with such lax clause for the depositary to discharge its duty of supervision (while the duty of safekeeping does not exist) to a third party all the more than it does not comply with the definition of the word supervision : the effective critical watching and directing is no longer done with such clause.

I do think that if the clause had not existed in the Luxembourg regulatory framework, precisely the very good reputation (Jean Guill’s wording) would definitely not have been the criteria to invest with Mr Madoff.

 

If Luxembourg continues to deny the realities of the world and to disregard the fact that it is in an awkward position vis-à-vis the other jurisdictions, the financial center will collapse.

 

In his recent open letter in the Lëtzebuerger Wort Jean Meyer questionned “« Dois-je accepter que la réputation affaiblie des banquiers du monde entier serve de cheval de Troie a ceux qui veulent enfoncer la place financière luxembourgeoise? (free translation : “Should I have to accept that the weakened reputation of the bankers worldwide would be use as a Trojan horse for those that  want to ram the Luxembourg financial center?)

 

However the problem is that the financial center is being rammed by its actors themselves.