Ethics and governance in the European Financial centers

Reuters has reported that experts said that the U.S. tax probe against Swiss bank UBS has killed traditional offshore banking and wealth managers will have to improve their offers to survive, bankers and industry.

“The entire offshore banking model seems to be dead,” said Teodoro Cocca, a professor for Wealth and Asset Management at the Johannes Kepler University in Austria.

“Forget bank secrecy and focus on onshore or on tax compliant business,” he told an audience of Swiss private bankers.

The press today reported that Luxembourg did not provide yet the money that was agreed to rescue Dexia.

 

Know more

A couple of months ago, LFF published the following press release:

 

According to the recently published World Economic Forum global ranking index for - countries with safe banking practices, Luxembourg ranks in second place worldwide, alongside Sweden, Australia, Denmark, Belgium and the Netherlands. The ranking is based on the opinions of executives in the industry and banks were scored between 1.0 (insolvent or in need of government aid) and 7.0 (healthy with sound balance sheets).  Luxembourg scored 6.7, in recognition of its healthy banking sector and high level of investor protection


There are 6 jurisdictions that rank in second place worldwide with the score of 6.7 but the 20th jurisdiction is scored 6.5, which is not a significant gap (See Global Competitiveness Report 2008-2009 page 469)

In the same report there are other topics for which the rank is not so good. For example:

- Efficacy of corporate boards page 393 is ranked 22nd (Corporate governance by investors and boards of directors in your country is characterized by (1 = management has little accountability, 7 = investors and boards exert strong supervision of management decisions).

- Protection of minority shareholders’ interests page 395 is ranked 31st. (Interests of minority shareholders in your country are (1 = not protected by law, 7 = protected by law and actively enforced). This is the same score as Namibia and Tunisia but this score is less important than... Ghana that is scored 5.4.

 

A new report is scheduled for release on Tuesday 8 September 2009. I will post an article on the possible evolution when it is released.

 

Above all there is like a discrepancy with another table that LFF could not ignore at it is quoted in its source : Top Twenty international Safest Banks.

 

There is no Luxembourg bank among the Top Twenty International Safest Banks:

 

Ranking index for - countries with safe banking practices	Top Twenty International Safest Banks
Canada (6.8)	2
Sweden (6.7)
Luxembourg (6.7)
Australia (6.7)	4
Denmark (6.7)
Netherlands (6.7)	2
Belgium (6.7)
New Zealand (6.6)	1
Ireland (6.6)
Malta (6.6)
Hong Kong(6.6)
Finland (6.5)
Singapore (6.5)
Norway (6.5)
South Africa (6.5)
Switzerland (6.5)
Namibia (6.5)
Chile (6.5)
France (6.5)	3
Spain (6.5)	3
Germany (6.1)	4
United Kingdom (6,0)	1

 

And there is no Luxembourg bank among the Top Fifty International Safest Banks.

 

 

 

What is therefore the issue with the Luxembourg communication?

 

The World Economic Forum's Global ranking index for countries with safe banking practices is based on the opinions of executives in the industry and banks were scored between 1.0 (insolvent or in need of government aid) and 7.0 (healthy with sound balance sheets) and does not take into account the issues raised by banks located in Luxembourg late 2008 (Landsbanki Luxembourg, Kaupthing Bank Luxembourg)

It was stupid to focus on a figure that underlines strong balance sheets of Luxembourg banks in the context of the fight against banking secrecy and to conclude it is evidence of a high level of investor protection.

 

The visible truth in public and official sources is that the client does not come first in Luxembourg:

-         the client does not exist in the regulator’s Committees: The members of these Committees represent the companies subject to the prudential supervision of the CSSF, professional associations representing the various segments of the financial sector as well as external auditors and legal advisers active in the financial field.

-         the regulator does not inform of every complaint filed with the State Prosecutor’s office.

-         the jurisprudence is not in favor of the investor : despite the fact that there is poor transparency on judgements, as explained attorney Alex Schmidt, the investor is not protected in Luxembourg when banks failed in their duty. In a book called La Responsabilité du Banquier en droit prive luxembourgeois (Banker’s liability in Luxembourg private law) he concludes that one could be pleased in that Luxembourg jurisprudence generally is very clear-sighted vis-a-vis the small investors (original text: “L'on pourra se féliciter de ce que la jurisprudence luxembourgeoise se montre généralement très clairvoyante face aux investisseurs à la petite semaine”). In other words in case of litigation because of a bank failure, there is a country risk as the foreign investor will not be successful before the court.

NB : The view of the pahe of the book with the critical quotation is no longer online, but the quotation is readable thanks to a google search:

 

 

I am afraid the above are definitely not an unhealthy combination of gratuitous assertions, hearsay, half-truths and concocted lies, unless one considers that sources from the CSSF and the justice in Luxembourg are dubious.

 

On the contrary gratuitous assertions, hearsay, half-truths and concocted lies are what are doing those who condone disfunctions and failures in public and official sources and are unable to make amend.

 

In a nutshell, the communication about high level of investor protection is deceptive. Definitely deceptive to fool clients.