Independence of Luxembourg financial watchdog 'never in doubt'
The former head of Luxembourg's financial regulator has downplayed suggestions the Commission de Surveillance du Secteur Financier (CSSF) could be open to political or industry interference.
The International Monetary Fund (IMF) recommended in a report last week that the Luxembourg authorities should consider changing the structure of the financial regulator.
Jean Guill, who retired as director general at the CSSF in 2016, told the Wort there had never been political interference from any government minister.
"We have always insisted the IMF may be theoretically right but that, in practice, there has never been any doubt about the independence of the CSSF in the supervision of the financial sector," he said.
Some of the recommendations could be taken up in the future if there were changes to the law related to the CSSF, he said, but he added that it would not be a "real change" to the regulator's operations.
Risk of interference
The CSSF is responsible for the prudential supervision of Luxembourg's financial sector with the exception of major international banks, which are regulated by the European Central Bank, and insurers, which are regulated by the stand-alone Commissariat aux Assurance.
Investment firms, investment funds, securities markets, payment institutions, the audit profession and local banks all fall under the CSSF's remit.
It shares the supervision of bank liquidity with the Banque Centrale de Luxembourg (BCL).
The IMF's report acknowledged that it had found no evidence of political or industry intervention at the CSSF but argued the current arrangement "does have the potential for interference in the future".
The international body recommended that the CSSF no longer report directly to the finance ministry, answering instead to parliament.
It also suggested the composition of the non-executive board be changed to comprise independent directors with expanded powers, instead of the current structure, which includes industry associations and ministry appointees.
The IMF said the CSSF should be in a position to determine its own budget and be responsible for the hiring and dismissal of executive staff. It should also consider signing a memorandum of understanding with BCL to define the division of duties more clearly.
The CSSF declined to comment on the IMF report.
Left-of-centre MP Franz Fayot (LSAP), President of the Economics Committee in Luxembourg's parliament, said there had been significant progress since the 1980s and 1990s, when the financial regulator had a much closer link to the ministry – especially as it no longer had a role promoting Luxembourg as a financial centre.
He said questions surrounding the independence of the board, however, were "justified criticism".
"Is it advisable to have the industry associations sitting on the board?" he asked.
"Or should there be more independent people, more civil servants, more people like retired bankers, or people who are no longer active in the industry but who have experience in the financial sector? That is something worth a discussion.
"But you always have the difficulty in Luxembourg that it is a small country, and the pool of possible people from which to choose the board of the CSSF is always quite limited."
The government is considering reinforcing the CSSF's sanction law, Fayot said, adding that changes to the board structure could, in theory, be included in that legislation.
Independence of mind
Dirk Zetzsche, Professor of Law and Holder of the ADA chair at the University of Luxembourg, said it was surprising the IMF would insist on such a formal definition of 'independence'.
Since the financial crisis, informal criteria such as 'independence of mind', for instance – an individual's ability to make decisions for the public good rather than an individual or private good – have become more important, he said.
For financial regulation, 'independence' and 'ignorance' can also be dangerously close together, Zetzsche argued.
"Very often, when we ask for independence, we get people who have no idea how the industry works, and that's, of course, weakening the supervisory institution rather than strengthening it," he said.
One strength of the CSSF is that it has a much lower turnover of staff and revolving door with the financial industry compared with, for instance, UK financial watchdog the Financial Conduct Authority – perhaps leading to less influence from financial firms on staff eyeing future job prospects.
"Many Luxembourgers are members of the civil service, and, usually, they fulfill a public function," he said.
"They defend their financial centre in a way they know that every crisis or every fraud harms them.”