Luxembourg regulator under fire

Luxemburg’s fund regulator, the Commission de Surveillance du Secteur Financier (CSSF), has come under attack from investor advocacy group Investor Protection Europe for perceived “lax, selective or oblivious supervision of Luxembourg funds”.

The controversy could have an impact on investors' perception of Luxembourg as the domicile competes for private equity business following implementation of the Alternative Investment Fund Managers directive. Private equity funds are regulated by the CSSF. 

The trouble started back in 2011 when the CSSF confirmed two violations in relation with bond fund Petercam L Bonds EUR Inflation-Linked fund (formerly known as Eur Medium). The fund had breached its investment prospectus by agreeing deals outside of its agreed scope, and the prospectus did not comply with Luxembourg fund rules.

With the help of Investor Protection Europe, investors asked CSSF to compensate some of their losses, citing CSSF’s Circular 02/77 as requiring the regulator to act. But after more than 18 months after the CSSF acknowledged the Petercam vehicle violated market rules, investors have yet to see the regulator take action on the issue, Albert Biebuyck, managing director of Investor Protection Europe, told PE Manager.

“It gives a very frightening feeling that the CSSF has an approach where in cases involving potentially high amounts of compensation they might be lax or selective,” he added.

Biebuyck also said that this is not an isolated incident. “Is this the tip of the iceberg? It is impossible to know but this is not the only case of inapplication of regulation that we have noticed in Luxembourg.”

The CSSF did not return a request for comment by press time. 

In a bid to increase pressure on the regulator, Biebuyck wrote letters to Luxembourg’s finance minister Luc Frieden, prime minister Jean-Claude Juncker and also a letter to Steven Maijoor, the chairman of the pan-European regulator the European Securities and Markets Authority (ESMA).

In the letters Biebuyck expresses concern that indecision on the issue from the CSSF might lead to an increase in violations of regulations by Luxembourg-based fund managers. He also suggests investors could lose confidence in Luxembourg as a domicile.

Anouk Agnes, deputy director general of the Association of Luxembourg Fund Industry, which promotes the country's investment funds industry, declined to comment on the issue. However, more generally speaking Agnes said that “it is clearly important that investors have confidence in the regime of a domicile and investor protection is a key element of regulation”.

Agnes added ALFI believes that Luxembourg has a reputation for maintaining a strong regulatory system.