Speaking at the ALRIM Winter E-Conference 2021, Marco Zwick, Director of the Commission de Surveillance du Secteur Financier (CSSF), said that while Luxembourg’s risk model protected the financial sector during the Pandemic, particularly from cyber and liquidity risks, the financial industry must embrace new ways of working and recognizing new risks.
What are the key risks that the financial sector has faced during the Pandemic?
With the turbulent markets at the start of the Pandemic, some companies faced increased financial risks through lost activities, losses incurred or reduced profits. But Covid showed that the most important risk is the risk of human capital. Healthy human beings are always needed, especially when people outside our organizations are trying to take advantage of weaknesses arising from the Crisis. But the asset management industry has not seen a significant increase in cyber-attacks. Funds also confronted another risk as discussions around sustainable finance are giving rise to the risk of “greenwashing” – misrepresentation and mis-selling of ostensibly sustainable products. Fortunately, the Pandemic’s impact was mitigated by fund teams implementing effective risk management and diversification strategies.
«The risk posed by liquidity issues has kept funds busy over the past 12 months. »
How did the financial sector address the risk of liquidity constraints?
The risk posed by liquidity issues has kept funds busy over the past 12 months. But Luxembourg deployed several liquidity-management tools, which, with the industry showing a high level of maturity, have ensured resilience. Liquidity mismatches by open-end and money-market funds posed a risk of contamination spreading to the real economy. But we realized that funds were conservatively managed and at no time were their liquidity buffers exceeded. We had the opportunity to test our liquidity-management tools and found that there was no need for new tools. We would, however, like more cooperation on a European level to see whether our liquidity-management tools can be deployed collaboratively with other jurisdictions.
How has CSSF’s supervisory role been altered as a result of the Pandemic?
As the supervisory authority, the CSSF had to find new ways of working. Our agents started working remotely to ensure the continuity of financial supervision. We could not perform on-site inspections in a classical sense, so we developed Q&As to address issues, including liquidity management and management of active breaches of net asset value (NAV) calculations. Out of caution, we may have overestimated the risks arising from not being able to supervise in person. But we used screen-sharing tools to enable us to operate in the same way as we would if we were performing our inspections in your office. Despite these constraints, we covered more than 90% of assets under management daily throughout the Pandemic.