Prudential supervision for Professionals of the Financial Sector (PSF)

Article

Prudential supervision for Professionals of the Financial Sector (PSF)

Competent authority: Commission de Surveillance du Secteur Financier (CSSF)

Article 42 of the Law specifies that the CSSF, the entity established by the modified law of 23 December 1998, is the competent authority for financial sector professionals. It is responsible for the cooperation and exchange of information with other authorities and namely informs the competent authorities of other Member States responsible for the supervision of credit institutions and investment firms that it is in charge of receiving requests for exchanges of information or cooperation.

The CSSF conducts its activity in the public interest and satisfies itself that the laws and regulations relating to the financial sector as well as international agreements and Community law are complied with.

The prudential supervision role fulfilled by the CSSF on the financial sector is defined in part III of the Law and the CSSF has regulatory power by means of regulations, circulars and instructions which are addressed to financial sector players.

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Scope

The following PSF fall within the scope of the CSSF’s prudential supervision:

  • PSF organised and existing under the laws of Luxembourg (Activities conducted by these entities in another EU/EEA Member State, both by establishing a branch and via the freedom to provide services, are also subject to the prudential control of the CSSF. Certain areas of prudential supervision, particularly compliance with rules of conduct for the provision of investment services to clients, fall within the scope of the supervisory authority in the host Member State.)
  • Branches of investment firms that are based outside the EU/EEA
  • Branches of PSF other than investment firms based inside or outside the EU/EEA

The supervision of branches established in Luxembourg by investment firms from another EU/EEA Member State is based on the principle of supervision by the regulatory authority in the country of origin. However, certain specific aspects of the supervision fall within the scope of the CSSF, as the regulatory authority in the host Member State, particularly aspects relating to combating money laundering and terrorist financing.

Scope

Means of supervision

The CSSF has several instruments to exercise its supervision. The key means are as follows:

  • Regular receipt of financial information used to permanently monitor the PSF’ business and related risks. In addition, there is a regular check of the capital adequacy ratio and the limitation of large exposure for investment firms (Art. 56 of the Law)
  • The report drawn up on a yearly basis by the registered company auditor. This report includes a certificate relating to combating money laundering and terrorist financing and a management letter dealing in particular with compliance with the Law and applicable CSSF circulars
  • For investment firms, a detailed analytical audit report (CSSF circular 03/113 as amended by CSSF circular 10/486) broadly covering the risk control and internal control system, including compliance with rules of conduct and a description and assessment of the Internal audit and Compliance functions (refer to part 5 Role of the réviseur d’entreprises agréé for PSF for a detailed view of the role of the registered company auditor and the scope of relevant certificates). The CSSF may also expressly ask a registered company auditor to audit one or more aspects of the PSF’s business or operations
  • The CSSF is also sent, for specialised and support PSF, the annual internal audit reports on the controls performed over the last period and the reports by the PSF’s management on the status of internal control. For investment firms, once a year, the authorised management shall confirm compliance with CSSF circular 12/552 by way of a single written sentence followed by the signatures of all the members of the authorised management to the CSSF, as well as provide the ICAAP report and the summary reports of the internal control functions
  • On-site audits. Furthermore, since 2009 the CSSF has stepped up its work in the field by conducting an increasing number of this type of audit including welcome visits for newly licensed PSF within the first months following the ministerial authorisation
  • By virtue of CSSF regulation 13-02, the CSSF is also competent to receive complaints from clients sent to PSF and to take action with them to settle these disputes amicably
  • Under the provisions of Article 57 of the Law, the CSSF must grant prior authorisation to PSF wishing to have a qualifying holding
  • Lastly, the CSSF also has powers to sanction, i.e. rights of injunction and suspension in the event that legal provisions are breached or in the absence of guarantees with respect to the management and durability of the PSF’s operations and commitments. The penalties also referred to in Article 59 of the Law, where the PSF has failed to remedy the injunctions within the allotted time, extend from suspending the persons responsible for the PSF’s governance and management, to suspending the voting rights attached to the stocks or shares held by shareholders or partners having a negative influence on the sound and prudent management of the PSF, or suspending operations or a given business line of the PSF
PSF

Supervision of investment firms on a consolidated basis

Consolidated supervision of investment firms is addressed by CSSF circular 00/22. This circular only targets investment firms (company falling within the scope of Art. 24 of the Law) holding direct or indirect interests in other investment firms, financial institutions or credit institutions. 

Supervision on a consolidated basis concerns at least the following:

  • Supervision of the solvency and capital adequacy in relation to market risks
  • Supervision of large exposures
  • Appropriate organisation of the group, particularly on administrative, accounting and internal control levels and in terms of group structure in general
Supervision of investment firms on a consolidated basis

Financial information to be regularly reported to the CSSF

CSSF circular 05/187 as amended and supplemented by CSSF circular 10/433 presents the outlines of financial information to be submitted to the CSSF.

The table below summarises all the reports to be submitted to the CSSF.

Table ref Title of the report Frequency Deadline
I. Financial situation Monthly The 20th of the next month
II. 1. Financial advisers Monthly The 20th of the next month
III. 2. A. Brokers Monthly The 20th of the next month
II. 2. B. Commission agents Monthly The 20th of the next month
II. 3. Private portfolio managers Monthly The 20th of the next month
II. 4. Professionals acting for their own account Monthly The 20th of the next month
II. 5. Professional custodians of securities or other financial instruments Monthly The 20th of the next month
II. 6. Distributors of units of investment funds Monthly The 20th of the next month
II. 7. Underwriters Monthly The 20th of the next month
II. 8. Registrar and transfer agents Monthly The 20th of the next month
II. 9. Market makers Monthly The 20th of the next month
II. 10. Professionals performing cash-exchange transactions Monthly The 20th of the next month
II. 11. Debt recovery Monthly The 20th of the next month
II. 12. Professionals performing credit offering Monthly The 20th of the next month
II.13. Professionals performing securities lending Monthly The 20th of the next month
II. 14. Professionals performing money transfer services Monthly The 20th of the next month
II. 15. Administrators of collective savings funds Monthly The 20th of the next month
II. 16. Managers of non-coordinated UCIs (REPEALED)    
II. 17. Client communication agents Monthly The 20th of the next month
II. 18. Administrative agents of the financial sector Monthly The 20th of the next month
II. 19. IT systems and communication networks operators of the financial sector Monthly The 20th of the next month
II. 20. Professionals performing services of setting-up and management of companies Monthly The 20th of the next month
II. 21. Corporate domiciliation agents Monthly The 20th of the next month
II. 22. Professionals authorised to exercise all the activities permitted by Article 28 of the law of 15 December 2000 on postal services and financial postal services Monthly The 20th of the next month
III. 1. Off-balance sheet Monthly The 20th of the next month
III. 2. P&L Monthly The 20th of the next month
PSF
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