Two months before the deadline for the implementation of MiFID II – one of the most complex and expansive pieces of regulation for the financial sector in recent years – Luxembourg is lagging behind in transposing the EU directive for Markets in Financial Instruments (MiFID) into national law.
Last month, the European Commission sent two letters of formal notice to Luxembourg about failing to implement MiFID. Like all EU member states, the Grand-Duchy should have transposed the regulation into national law before July 3.
Even now, at the end of October, Luxembourg's Chamber of Deputies has still to vote on the draft law, which leaves "room for uncertainty", says Anne-Sophie Minaldo-Baucheron, Head of Regulatory Services at KPMG Luxembourg.
Eugène Berger, President of Luxembourg's Finance and Budget Commission and member of the Chamber of Deputies, told the Wort English that, before a decision is taken on transposing the directive, the State Council must give its feedback (avis de conseil de l'etat) on the contents of the draft law.
If the council has no major observations or changes to propose, the draft law could be finalised before the end of the year – otherwise, the legislative process might take until January or February, according to Berger.
When asked about how market players would be able to meet the directive deadline in early January if Luxembourg fails to produce a final law by then, Berger says he is confident it will be transposed based mostly on the current text and that there will be no major changes. He adds that financial services in Luxembourg already have a good understanding of what is required of them.
Plenty of grey areas
Dubbed as a "real game-changer" for financial services and spread over thousands of pages of legislation, the regulation demands greater transparency and investor protection.
It will have a huge impact on a large number of market actors in Luxembourg, ranging from banks and professionals of the financial sector, such as investment firms, to the Luxembourg Stock Exchange, as well as, indirectly, management companies as manufacturers of financial products. But for experts, some aspects of the directive are less than straightforward.
"There are plenty of grey areas in the text," Minaldo-Baucheron warns, which is why she believes the first two semesters of 2018 should be seen as transitional.
The fact no law has been passed in Luxembourg makes banks take decisions based on assumptions, and, in some cases, no implementation is seen as the safer option.
"What I encourage my clients to do, each time they take a decision to implement or not to implement – because sometimes you lack information and guidance – is to document that," says Minaldo-Baucheron. If, based on the information available, no decision can be made, "if you demonstrate to the CSSF [Luxembourg's regulator] you are aware of the roadmap and that some elements are not yet perfect but under progress, I assume you are quite safe".
Discussion and fine-tuning
Financial services companies expect the CSSF to show some understanding for efforts already made. "What is important, from January 3, is that financial institutions can demonstrate that, 'yes, we are in line and we have put in place all the disposition to operate in line with the regulation'," says Laurent Collet, Strategy Consulting Partner at Deloitte Luxembourg.
The situation will not be "100% perfect" on the first day, he says, adding that time will be needed for both financial actors and the CSSF as the local competent authority "to work together in the new environment".
"The first weeks, we anticipate discussions and fine-tuning between all stakeholders, banks, various associations and the regulator to ... arrive at the perfect situation. It will take some time."
Financial services providers expect the CSSF to conduct onsite visits, but the timing and the structure behind them are still to be clarified. When contacted by the Wort English, the CSSF declined to make any comments before the law was passed.
A pragmatic way
As for the expectation for Luxembourg's parliament to transpose the regulation, Alain Hondequin, General Counsel Business Clusters at the ABBL, speaks of "trust" – trust that authorities will transpose the regulation in a way that is "in the interest of both the investor and the professional actor".
"I don't think transposing the directive as such into law is a major concern," he adds. "It's important to put into place some of the more technical aspects of MiFID II, [and] that we have clarity on the rules to be applied. I think that is a question of dialogue with the authorities."
Christopher Larson, Programme Manager at ING Luxembourg, refers to it as a "pragmatic way", one that "takes into account the requirements of the financial industry" and says no "additional burden of extra layers of legislation" is expected, as it is not in the culture of Luxembourg's lawmakers.
"We have a tradition in Luxembourg of implementing and writing laws that are nearly 100% aligned with a directive and the regulations," he says. "I think it's good Luxembourg is behaving that way."
However, he also acknowledges that, should the law in Luxembourg differ fundamentally from the European directive, it would be too late for banks to implement, and that will create an issue.
And, according to Larson, financial institutions and the CSSF alike will need to digest the directive and its implications. The regulator must deal with a significant operational burden, given that they will receive the daily transaction reporting and other less frequent reports from all market players in Luxembourg.
"We believe it's more realistic to envisage questions or an audit in 2019," he says. "Based on past experience, this would be reasonable to say. Nevertheless, we will be able to demonstrate that our approach in implementing MiFID II was serious and comprehensive. I am not sure that is the case for all the players in the market."
Despite industry expectations the CSSF will be somewhat tolerant, Minaldo-Baucheron warns that the regulators' behaviour has evolved. "We have seen that some regulatory bodies, such as the Financial Conduct Authority (FCA) in the UK and the French Prudential Supervision and Resolution Authority (ACPR), have been quite lenient, giving companies time to adjust, time to comply. But whether the CSSF will be lenient or not, in this case, is very difficult to answer."
Nevertheless, in the run-up to the deadline on January 3, 2018, based on a poll conducted by the ABBL, a large number of banks seem confident about their implementation and say they will be ready by the end of the year.
"We are very comfortable in saying that banks in general, in Luxembourg, will be ready for implementation," says Hondequin.
For example, Larson at ING Luxembourg says the bank is on track with its original plan and is "confident it will be compliant at the end of the year". However, he also acknowledges that, at this stage, "the planning is stretched" and that the bank "cannot afford any particular problems or delays".
At the ABBL, Hondequin is certain that banks in Luxembourg "will be very active and watchful" of the implementation of rules. "If corrections need to be made in this initial phase, [banks] will certainly be very active in doing so," he says, adding that "the impact of MiFID II on how investment firms interact with their clients is enormous".
And when considering the costs involved, according to an EY report, implementing MiFID II is shaping up to be the most expensive regulation for financial institutions. Banks in Luxembourg spent in 2015 a total regulatory budget ranging from €395 million to €458 million. If aggregated, this total regulatory compliance budget would represent almost 1% of Luxembourg's GDP.
(Roxana Mironescu, email@example.com, +352 4993 748)