Ethics and governance in the European Financial centers

The CSSF as of today published a press release that is worth commenting.

Firstly the CSSF seems that despite weaknesses that were identified by the CSSF in the infrastructures and procedures of the depositary bank, UBS was not fined. It definitely would have been in the UK by the FSA. UBS reviewed its infrastructures and procedures, that are now found to be convenient.  Pierre Reuter, from Luxembourg law firm Thewes & Reuter that is handling about 70 claims against Madoff-related funds, banks and auditors, quoted by bloomberg said: "It’s extremely frustrating for investors to see that the bank was faulted for a grave breach and now, three months later, everything seems to be in order" 

Secondly, the CSSF states again that the transposition of the UCITS directive was faithful, which does not comply with the synoptic table and Circular CSSF 05/177, which is quoted in the press release. Circular CSSF 05/177 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."

Thirdly and mainly, the CSSF states that “ As the CSSF has previously noted, UBSL shall have to indemnify a UCI depositor according to its obligations as a Luxembourg depositary bank, subject to valid and opposable contractual clauses to the contrary and, as the case may be, to a court decision in such matter."

 « Subject to valid and opposable contractual contrary clauses “ : This means that if the client signed any provision to discharge UBS’s responsibility, there will be no compensation.

Finally, ithe CSSF states that “the ordinary courts (juridictions de droit commun) are exclusively competent for any grievances regarding rights of a private law nature (droit civil). Therefore, only the ordinary courts (juridictions de droit commun) can establish the liabilities incurred and the damages to be indemnified."

This means that, as I had said, the client has to go to the court and the recovery of his/her money will be a long shot and very expensive.

It will be a long shot for investors who lost their money in Luxalpha to have it back:
1) From the administrative point of view, when processing a client complaint, the regulator CSSF’s positions are not binding on the professionals (See CSSF annual report 2007 page 162),
2) From a criminal point of view, the criminal liability of legal persons does not exist,
3) From the civil point of view, the civil jurisprudence in not in favour of the investor “from day to day” all the more than the CSSF admits possible valid and opposable contractual clauses contrary to the normal liability of the depositary: subscription documents for the Luxalpha Sicav explicitly remove UBS's liability if the fund's assets are lost. Under European rules, custodians such as UBS must take responsibility for "safekeeping" of a regulated mutual fund's assets. But the Luxalpha subscription form states that UBS "is not the safekeeping agent of the assets of the fund as the assets are safekept by the US registered broker-dealer"

Clients cannot be satisfied. That is the reason why proceedings are now underway in Paris for aggravated betrayal of trust, aggravated fraud, handling of stolen goods by a criminal group and money laundering by a criminal group, as Reuters reported.

I have reached a milestone in my studies about business ethics in the Luxembourg Financial Center, at a moment when most of its stakeholders finally seem to adhere, though reluctantly, to some of the ethical principles that I have always advocated. This requires that I thank those who encouraged these inedited studies in Luxembourg.

I would like to thank Bob Kneip, from KNEIP (formerly Kneip Communication). He is the one who is at the origin of my orientation towards the questions of CSR and ethics in Luxembourg. By his actions (see for example a conference that was given in March 2009)  he encouraged me a lot in my pragmatic approach, i.e. relating to matters of fact or practical affairs. 

I would like to thank the CRP Henri Tudor (which is not founder of the LIGFI, which is a good thing) and his Managing Director, who is retiring, which by refusing my project on ethics and CSR late 2004, made me start the studies with a freedom that I would not have had if deliverables had been subjected to validation at the CRP.

Should my project have been borne by the CRP, I would probably have produced politically-correct deliverables despite issues resulting from matters of fact or practical affairs not to worry nor to oppose the financial community.

Early this year I was quoted by the Financial Times.  

This is what I said: “The [financial centre of Luxembourg] wants to brush up its governance. If it doesn’t do that in the next few months, the centre will collapse. ”If the regulatory situation is not sorted out, dissatisfied investors and asset managers will move their business elsewhere.”

Two facts in the last couple of weeks demonstrate that the jurisdiction is unable to brush up its governance as it is in perdition.

1.      The launch of LIGFI

It appears that this institute has nothing to do with business ethics. Its genesis is an economic intelligence operation.

It is borne by professionals that never ever demonstrated a will to implement what they are now promoting: ethical conduct and its standards and practices in regard to the principles of integrity, which are fairness, transparency, responsibility and accountability.

All these professionals with business standing were especially unable to address the truth or reality of the Luxembourg shutter of the Madoff affair: the law of transposition of the UCITS directive removed two provisions of the directive and the depositary’s liability was rephrased in a way which opened the drift.

2.      The findings of the CSSF on UBS and Madoff

The findings of the CSSF on UBS and Madoff are not a surprise: all is now in order with UBS regarding procedures; it is up to the courts to decide compensations in the contractual framework between UBS and its clients that may include possible valid and opposable contractual clauses contrary to the normal liability of the depositary. It is a caricature.

The Luxembourg “system”, with all its “professional incest” (auditor-auditee, regulator-bank, administration-bank, and so on), because of the small size, is unable to produce anything else than an emollient conclusion from the regulator.

Investors and asset managers cannot be satisfied with such attempt to manipulate facts and such absence of governance in the jurisdiction.

Finance is too serious to be left to amateurs in business ethics…