The Grand Duchy's robust reputation was almost dented in the onslaught following the Madoff scandal, but Luxembourg's quick call to action and diplomatic efforts have restored its status, says Angele Spiteri Paris.
In January last year Luxembourg was bombarded with bad press in the aftermath of the Madoff scandal, mainly from its French neighbours. The Grand Duchy shook off the black cloud gathering above its head, but not without hard work, diplomatic skills and a great deal of discussion.
Much of the grind to pacify the critics and clarify Luxembourg’s position was carried out by the members of the Association of the Luxembourg Fund Industry (Alfi).
As the details of Madoff’s Ponzi scheme were discovered, Luxembourg came directly in the French government’s line of fire. French investors lost an estimated €500m, having invested in Madoff-related funds. In an indirect attack on the Grand Duchy, French finance minister Christine Lagarde called on the European regulators to make sure all countries had applied the investor protection rules correctly.
The Committee of European Securities Regulators (Cesr) eventually found that Luxembourg had indeed transposed the law correctly, but although the regulator confirmed all was well, there were still many bridges to be mended.
Camille Thommes, director general, Alfi says: “The French weren’t happy at all. That is clear but also understandable since French investors were especially hit by the Madoff affair.”
In its response to the French criticism and to the Madoff scandal, Thommes says Alfi found consultation to be very helpful. “We decided to consult, not only experts here in Luxembourg and abroad, but also various parties involved in public debate and who declared themselves as having an interest in the Madoff affair including representatives of investor associations.”
Thommes carried out most of these consultations himself and says he was attending numerous meetings, especially in France. He says it was done to “learn and get their views on the affair and also to collect their suggestions as well as their short- to medium-term recommendations”.
The association reacted to the situation at lightning speed, setting up a task force to analyse the Madoff affair.
The Alfi Madoff Task Force was composed of seven members of the Alfi board, as well as a member of the executive committee of the Luxembourg Bankers Association. These represented various businesses across the whole of the investment fund value chain and none had any conflicts of interest with respect to the cases under investigation.
Thommes says: “From the outset of the Madoff affair, back in December 2008, we took action at the Alfi level to monitor the consequences of the Madoff affair, to identify questions and topics related to the case that required further detailed consideration and to work on industry guidelines and potential recommendations for change in Luxembourg or in the European regulatory framework.”
In its final report, published in September last year, the task force came up with a number of recommendations. These included the creation of an Alfi investor forum, the Alfi code of conduct and guidelines on due dilgence and best practices for the depository banks.
When the Madoff scandal broke out, Alfi already had a working group in place to review the association’s existing code of conduct. Thommes says: “We then invited that working group to also take into consideration recent events when drafting and finalising that code of conduct.”
This code of conduct is nothing the industry has not heard before; it is simply the written version of the unwritten rules the industry follows anyway. Luxembourg is well regulated and experts in the industry are always quick to point out that the Madoff affair was a problem that originated in the US.
Regardless of the adequate regulation and controls in place, was there anything Luxembourg could have done to prevent investors losing as much as they did?
Thommes says: “It is deeply regrettable that this massive fraud hit investors all over the globe and no consolation to the investors who have lost money, but the impact of the loss in Luxembourg funds is limited compared to the total assets in administration in our jurisdiction, ie €1.9bn compared to the €1,700bn.”
Another question is whether Alfi would have still reviewed the duties of the depository bank and created the investor forum had the Madoff affair not come to light.
Thommes says: “That’s a difficult question for which I don’t have the answer, particularly as the fund industry as a whole never had to face such a massive fraud before.
“One of the lessons we draw from, not only the Madoff affair but from the financial crisis as a whole, is that investors’ needs and expectations require more focused attention and that we should be more investor-centric. This has also been recognised by the fund management industry as a whole.
“Over the last couple of years everything was driven by supply – funds were launched and sold at a very steady pace. Now the industry has recognised that certain products were, from an investor perspective, too complicated and lacked transparency prospectuses explaining the complex instruments that were not easily understood by the investors.”
As part of its efforts to help improve investor understanding of financial products, Alfi launched an Investor Forum whose aim it is to focus on investors and on their needs and expectations towards the asset management industry and products, to engage in an active dialogue with investors and to make recommendations on topics such as transparency, investor education and information. Thommes says: “We’re setting up what we call an ‘investor corner’. Work is being done to come up with explanations on, not only what is a fund, but also to provide some basic information on the techniques, the instruments, the structures that are available in ways that are not too complex for the general public to understand.”
©2010 funds europe