Survey on the cost of regulation and its impact on …...4 Survey on the cost of regulation and its impact on the Luxembourg financial marketplace 2 Key messages from the survey Regulation

Survey on the cost of regulation and its impact on the Luxembourg financial marketplace

Content

1. Introduction 3

2. Key messages from the survey 4

3. General overview of the introduction of regulatory measures 5

4. Fund Regulation: AIFMD and UCITS V 10

5. Market Regulation: EMIR, MiFID II, PRIIPs, AML IV 13

6. Prudential Regulation: CRD IV and AQR 18

7. Tax Regulation: FATCA and Tax Transparency 21

8. Payment Regulation: SEPA and PSD II 24

9. Local Regulation: CSSF Circular 12/552 and e-Archiving 27

10. Approach and sample 30

11. Thank you 32


3


Introduction1Dear Reader,

In early 2014, the Luxembourg Bankers’ Association (ABBL) and EY decided to conduct a survey to assess the investment expenditure and the recurring costs generated by the regulations originating from the Barroso II Commission and other international organisations.

We considered the timing to be opportune. A certain number of these measures were already in place while others were about to come into force. The benefits of taking the pulse of the financial marketplace before a new European Commission takes up office were obvious.

The data were collected until the spring of 2014 and we are particularly grateful to the contributors for the high standard of information supplied. We extend our sincere thanks to everyone who made considerable efforts to provide us with high quality data.

We are now in a position to share the results of this survey - which were revealing in more ways than one - with all the players in the Luxembourg financial world. As is always the case for this type of exercise, despite the extreme care taken, inaccuracies and errors may occur, for which we apologise in advance. We are, nevertheless, convinced that the orders of magnitude presented are realistic for Luxembourg banks.

The objective here is not to question the relevance or benefit of regulating the banking sector in one way or another but to make all players aware of the financial impacts of the decisions taken. For example, a single line in a regulatory text may result in additional investments costing millions.

We hope you will enjoy reading this survey as much as we enjoyed producing it and we hope we have made a modest contribution to clarifying the debate on the impact of regulation.

Best regards,

For ABBL For EY

Serge de Cillia Olivier Maréchal

3


4


2 Key messages from the survey

Regulation is a major area of concern and investment for the financial sector. The success of our survey speaks for itself. 46 out of 150 banks of the Luxembourg financial market took the time to fill in our detailed questionnaire on the costs and investments entailed by the 14 regulatory measures affecting the banking sector. The sample was particularly representative. Irrespective of the scale: type of activity, size, balance sheet total, net banking income or number of employees, coverage ranges between 37% and 50%.

This strong response is a message in itself. Banks are clearly concerned by the scale of the regulatory burden on their activities and are keen to make this known.

When extrapolating the figures received for the whole market based on balance sheet totals, EUR 382 million was spent by the banks in 2013 to meet the various regulations. To put this figure into perspective, it represents slightly less than 1% of Luxembourg’s GDP (Gross Domestic Product) and 3.6% of the net banking income of the whole market. On average, regulation accounts for 41% of the investment expenditure of the banks. The proportion reaches as much a 67% of expenditure for smaller institutions, which leaves little room for investment in business expansion or service improvements.

In terms of the trend, regulatory costs have grown by 20% per year over the past 4 years. It should be noted that these figures do not include the equity capital requirements entailed by certain regulations such as EMIR (European Market Infrastructure Regulation) and CRD IV (Capital Requirements Directive). In terms of the future, the participating institutions do not envisage a decrease in regulatory costs before 2017. The sector will concentrate its efforts over the next few years on AML IV (Anti Money Laundering) and MiFID II (Markets in Financial Instruments Directive) in particular.

The regulatory portion in the workforce is also considerable. 9% of human resources in the banking sector are fully dedicated to regulatory compliance. For the small banks segment, this proportion rises to 20% of staff.

We can see that the cost required to operate a full-service bank has significantly increased. It is legitimate to ask what is the minimum critical size required to operate as a bank. The smallest entities are also those which incur the most costs locally of the various regulatory measures.

The 6 most costly regulatory measures for the banks in descending order are: FATCA (Foreign Account Tax Compliance Act), EMIR, CRD IV, AIFMD (Alternative Investment Fund Managers’ Directive), SEPA (Single Euro Payments Area) and CSSF Circular 12/552.

It is striking to note that the most costly initiative for the marketplace is the result of a US fiscal measure with no positive impact on the European financial sector

Lastly, this survey has enabled us to gather the opinions of the banks on the benefits derived from regulatory measures. Regulation does not only mean costs and constraints.

Ultimately, CSSF Circular 12/552 receives the most positive opinions. The banks value the efforts made by the CSSF (Commission de Surveillance du Secteur Financier) to summarise and simplify the regulatory framework. At the other extreme, FATCA and EMIR are ranked in bottom place. EMIR’s position is surprising as its prime objective is to strengthen the security of transactions. This measure undoubtedly pays the price of a definite lack of clarity in certain aspects.

The survey also includes other interesting lessons about the methods and resources used to implement regulatory measures. We will leave you to discover these in the rest of the document.

5


3 General overview of the introduction of regulatory measures

1. 2013 total budgets

Extrapolation to all Luxembourg banks of the total cost of the new regulatory wave in 2013 alone amounts to EUR 382 million, with EUR 170 million on investment plus recurring costs of EUR 212 million. This sum represents almost 1% of Luxembourg’s GDP.

On average, the regulatory budget for banks amounted to EUR 5 million per institution in 2013, with EUR 1.9 million on investment plus a recurring cost of EUR 3.1 million. The recurring cost is a significant component of the regulatory budget because overall it is 25% higher than the investment for the year.

Logically, this figure varies depending on the size of the institutions, as illustrated below, but reaches EUR 14.7 million per institution in the Top 10. It should be noted that the regulatory budget is also a significant amount for small institutions, totalling EUR 819,000 in 2013, of which EUR 300,000 was investment expenditure and EUR 519,000 recurring costs. Such differences between institutions seem to be explained by the staffing levels (due to a higher level of specialisation) involved in the sometimes redundant control systems, despite the more advanced levels of standardisation at large banks.

Based on the indications provided by the banks in our survey, the investment amounts have constantly increased in recent years at an approximate average of 20% per annum which is likely to continue in 2014. Beyond this year, the respondents are not able to establish a sufficiently accurate budget. Based on our observations of the market and the regulatory calendar, we estimate that after a continuous growth phase until 2008-2009 and acceleration in recent years, the growth of regulatory budgets is likely to gradually slow down towards 2017.

According to the banks interviewed, spending on compliance with the new rules accounted for 41% of total investment in 2013, varying from 23% in large institutions to 67% in the smallest. According to these figures, the regulatory aspects have therefore significantly reduced the investment capacity of banks in other areas of their activities, particularly in small and medium-sized institutions. In the future, this could pose a problem for the sustainability of businesses in a market which is being completely transformed.

It should be noted that these budgets are the direct budgets for meeting and maintaining compliance. In addition, there are also the costs arising from the actual content of the regulations such as capital consumption costs, for example, for CRD IV measures or certain aspects of EMIR, which themselves have had a direct impact on the ability of institutions to mobilise funds to benefit the economy.

Although this image is somewhat bold, it could be said that 0.9% of GDP growth has been allocated to compliance with, despite everything, positive effects on the economy in the form of more jobs and transfers towards support sectors such as real estate, catering and consultancy etc. It is interesting to note that the respondents approve of the measures that they consider or perceive to be useful or beneficial, but they have much greater difficulty with the less clear rules or those where the return on investment seems debatable.

0

50,000

100,000

150,000

200,000

250,000

Total

Investment costsRecurring costs

Top 10 Mid Small

212,332

119,716

169,471

38,683 34,544

11,659 8,318

170,058

Total extrapolated budget in 2013 (K EUR)

Average budget per institution in 2013 (K EUR)

0

2,000

4,000

6,000

8,000

10,000

3,059

5,605

9,067

905 995

302 519

1,930

Investment costsRecurring costs

Total Top 10 Mid Small

€

382million

In 2013, EUR

6


2. Global budgets

In the next part of the survey, we analyse the principal measures one by one, focusing also on the costs of the major regulatory aspects for all years combined. These measures have been added together below to enhance the overview of 2013.

With a total of EUR 281 million for the 6 leading measures, the budget exceeds the above-mentioned budget. This may be explained by the fact that it is not limited to 2013 and tries to capture the total cost of each regulatory measure since its implementation. The implementation of these 6 regulatory measures over recent years has cost the Luxembourg market EUR 281 million. In addition the budget structure is also different as the recurring cost remains lower. This is probably the effect of regulatory costs other than those relating to specific measures, such as permanent functions (internal audit, compliance etc.) or existing technical developments that generate recurring costs that are not captured by the per measure figures. These per measure figures should be seen as specific costs additional to the existing oversight structure.

3. Management of budgets - lack of visibility

For 70% of the banks in our survey, regulatory investments are managed like any other project with dedicated budgets. The related recurring costs are absorbed in other costs such as salaries, IT etc. Only a few of the banks, mainly small institutions, have a clearly defined budget item which includes and measures the entire regulatory expense (investment expenditure and recurring costs). It should be also noticed that almost 20% of the banks contacted simply do not have a regulatory budget and these developments are charged to the current expenditure of the respective departments.

4. Impacts on employment in 2013

The banks included in the survey were asked about their staff employed principally and permanently on regulatory activities apart from project teams. On average, these institutions employ 21 FTE (Full-time equivalent) on these activities. This figure varies from 62 FTE at the biggest banks to 3.7 FTE at the smallest (where the roles can be easily delimited). On average, this represents almost 10% of the workforce, and may exceed 20% in the smaller institutions if only to cover the mandatory independent supervision functions of audit, compliance and risk management.

0

50

100

150

200

250

300

6874

10

60

8

53

15

47

2334

5 812

281

InvestmentRecurring

Total FATCA EMIR CRD IV AIFMD SEPA 12/552

0

10

20

30

40

50

60

70

80

62

12

4

21

Total Top 10 Mid Small

Total extrapolated budget (M EUR, all years combined)

Average regulatory employment in 2013 per institution (FTE)

€

7


After extrapolation, employment in posts responding to regulatory requirements amounts to 2,390 FTE in Luxembourg i.e., 9% of all banking employees, heavily concentrated in the biggest institutions. According to our survey, this figure has continued to grow in recent years at an average rate of 10% each year since 2010.

0

500

1,000

1,500

2,000

2,500

1,976

2,390

2,136

1,800

1,463

1,5741,655

385 413

598 587

101 100 112105

1,312

2010 2011 2012 2013

Total Top 10 Mid Small 0

50

100

150

200

250

216

125121

9387

218

AIFMD CRD IV FATCA SEPA EMIR CSSF Circular12/552

Evolution of regulatory employment in 2013 – extrapolated total (FTE)

Total extrapolated employment (FTE-all years combined)

In the detailed analyses, we also measured the impact on employment of each measure for all years combined. The 6 principal measures examined led to the usage of between 93 FTE and 218 FTE on a permanent basis. The perspective is different from the previous measure: the scope is limited to these 6 regulatory measures for all years combined. Any structural employment relating to regulatory measures is not directly included here.9%

of all banking employees

“The regulatory aspects have significantly reduced the investment capacity of banks in

other areas of their activities.”

8


5. Priorities for the banks

We were interested in the priorities for the banks included in the survey - those which they considered to be the most significant and relevant measures, classified in descending order from 1 to 15. The priority regulatory measures for the banks are of 2 types: founding measures such as the CSSF Circular 12/552 which completely revisits the organisation of banks, the CRD IV which impacts on capital, the AML, and those which are perceived to have been imposed but which are essential, such as FATCA or Tax Transparency. The exception at the top of the classification is a regulation such as AIFMD, which imposes new constraints but is positioned differently because it also includes market opportunities.

0 2 4 6 8 10

Circulaire 12/552

CRD IV

FATCA

AIFMDTax

Transparency

AML IV

EMIR

MiFID II

UCITS V & VI

SEPA

IT SecurityAQR &

Banking Union

PSD II

PRIIPS

e-Archiving

3.8

4.2

4.3

4.8

4.9

5.2

5.6

5.9

6.0

6.4

6.8

7.5

9.0

9.3

9.3

FATCA27%

EMIR21%CRD IV

19%

AIFMD17%

SEPA12%

12/5524%

Priorities averages (ranking from 1 to 15) Distribution of total investments (all years combined)

The priorities are, however, slightly different depending on the type of institution. The smallest institutions therefore assign higher priority to immediate and fundamental issues such as the CSSF Circular 12/552, IT Security, CRD IV and, to a certain extent, AML and Tax Transparency. Conversely, the largest institutions, apart from the priorities of the moment, such as Tax Transparency or CRD IV, assign higher priority to the other new regulations - MiFID II, EMIR, UCITS V&VI (Undertakings for Collective Investment in Transferable Securities), AIFMD.

Sectoral differences, which are to a certain extent to be expected, also appear: Private Banking assigns high priority to CSSF Circular 12/552, CRD IV, MiFID and SEPA; Universal Banking to CRD IV, SEPA and Tax Transparency; funds to AIFMD CSSF Circular 12/552 and EMIR in particular.

When the priorities that reflect the banks’ interests are matched with the budget items (investment expenditure) measured in the rest of the survey, we find that the priority - CSSF Circular 12/552 - consumes the lowest budget, whereas lower priority and less valued measures, such as FATCA or EMIR, account for the principal investments.

9


0 20 40 60 80 100

Circulaire12/552

SEPA

AIFMD

CRD IV

EMIR

FATCA

5% 44% 35% 16%

3%

0%

36% 52% 9%

29% 25% 38% 8%

24% 42% 32% 3%

10% 34% 49% 5%

7% 39% 44% 10%

Very positiveRather positiveNeutralRather negativeVery negative

2%

0%

0%

0%

0 20 40 60 80 100

AML IV

MiFID II

PRIPS

UCITS V

PSD II

e-Archiving

94%

80% 15% 5%

60% 29% 11%

58% 33% 8%

32% 37% 37%

18% 28% 54%

6%

0%

YesNoI don’t know

General opinion Implementation intention

6. General view of perceptions and intentions

Among the measures in progress, CSSF Circular 12/552 is the most favourably perceived. It attracts fairly positive responses, which demonstrates the highly pragmatic vision of this circular, which was well received in the market. Conversely, the perceptions of FATCA and EMIR are very poor.

FATCA is seen as a pure cost measure, which does not contribute anything to the sector or to clients and probably not to the tax authorities either. However the cost of its implementation has been colossal. The position of EMIR, which is also at the bottom of the table, is very different. Like FATCA, the regulation is perceived as a pure cost measure, although fundamentally EMIR pursues objectives which are beneficial to the financial sector. It provides greater transparency and less counterparty risk, two objectives which have the full support of the sector. It is more probable that the chaotic way the regulation was developed and implemented has completely obscured the intended beneficial effects. It is only a year and a half later that the first concrete effects are being felt via transaction reporting, but not without difficulty.

The survey also posed questions about future measures. These included questions seeking to assess the implementation intentions, in order to draw up some type of regulatory agenda for the banks in the coming years and to list the regulatory activities which will occupy them. Among these prospective measures, AML IV and MiFID II are at the top of the agenda and will be widely implemented. At the bottom of the table, it is logical to find measures such as e-Archiving, which is an opportunity rather than an obligation. However, it is surprising to see that more than half of the banks in the survey still do not know what position to adopt on this measure which does, nevertheless, offer real opportunities. Better communication and a clearer agenda would definitely be useful.

“As opposed to CSSF Circular 12/552, the perception of FATCA and EMIR remains very poor.”

10


Fund Regulation: AIFMD and UCITS V44.1. AIFMD

1. Management

Half of the banks in our survey are involved in the AIFMD but 80% of them were still in the process of implementing it at the time of the survey (spring 2014). These banks are mostly large institutions which are active in the fund industry but not exclusively. The analysis work started in late 2012/early 2013 and the implementation process during 2013.

For 70% of the banks, the subject is managed from Luxembourg, while the rest, principally the smaller banks, share the responsibilities with the group in another country. The same is true for the funding source - principally borne by the Luxembourg entity.

0

300,000

600,000

900,000

1,200,000

1,500,000

449,111

1,445,720

494,388447,778

476,875

700,587

254,333

884,876

Total budgetAnnual recurring costs

0 Total average Top 10 Mid Small

Total average budget per institution (K EUR, all years combined)

€2. Budget: EUR 47.3 million + EUR 22 million recurring costs

According to the survey, the total budget for implementing the AIFMD, for all years combined, averages EUR 885,000 per institution, varying from EUR 1.4 million to EUR 450,000. This budget accounts for around 80% of the regulatory investments of the contributing banks, a proportion which rises among the smaller institutions and the fund sector. Overall, this budget is in line with expectations and the budgets planned by these banks. Out of this budget, around EUR 315,000 was spent on average during 2013.

The recurring costs are valued at EUR 450,000 per institution, but with less variation. This suggests different forms of implementation depending on the size of the banks, with varying degrees of automation or use of external service providers. It should be noted that the estimated cost for 2013 is lower, which indicates that not all the anticipated recurring costs have materialised.

Once extrapolated to the Luxembourg market, the total budget for AIFMD amounts to EUR 47.3 million, including EUR 16 million in 2013. Annual recurring costs amount to EUR 22.8 million, i.e., almost 50% of total investment expenditure.

11


The overall compliance budget is mainly spent on implementation itself with a dominant activity-specific component. It is principally in-house employees who carry out the initiative, apart from in small institutions.

On average, 3.9 FTE were dedicated to and normally employed on AIFMD at the banks included in our survey, this figure rising to 5.9 FTE in the investment funds sector. Unlike other measures, these resources are principally newly-recruited resources at two-thirds of the banks. Once extrapolated, employment generated by the AIFMD amounts to 218 FTE, including 130 jobs created.

3. Perception

The overall perception of the AIFMD remains mixed. 46 of the banks affected have an entirely negative opinion of the AIFMD and its impacts on the bank (it should be noted that banks act as custodians), one of the principal cost centres of this directive, while 25% remain neutral.

However, unlike certain regulatory measures, the AIFMD is perceived as providing opportunities for Luxembourg and for the commercial development of the banks involved. The principal criticism is probably the implementation of the directive in comparison with the expected benefits.

The principal challenges experienced in compliance with the AIFMD are the introduction of “oversight duties”, the custody of non-financial assets and, to a certain extent, client onboarding. Reporting and cashflow monitoring come afterwards.

0% 10% 20% 30% 40% 50% 60% 70% 80%

Gap Analysis

Licence preparation

Implementation and Follow-up

IT/system amendments/new systems

Functional analysis/business/Non-IT

Internal staff

External staff (Consultant, advisors, etc.)

27%

12%

61%

39%

61%

61%

39%

0% 10% 20% 30% 40% 50% 60% 70% 80%

29%

46%

57%

77%

57%

55%

46%

41%

9%

Positive general opinion

Negative general opinion

AIFMD will increase fees levels

The number of AIF will significantly increase in Luxembourg

Luxembourg will emerge as the leading competence center for AIF

management in Europe

It will allow me to develop additionnal products/services

AIFMD will allow my organization to gain market shares

It is too expensive to implement compared to advantages I can

benefit from

AIFMD is a threat to the development of UCITS

Average composition of total implementation budget

Percentage of opinion (base: banks concerned)

0% 10% 20% 30% 40% 50% 60% 70% 80%

73%

64%

43%

36%

36%

23%

19%

Oversight duties

Safekeeping ofother assets

Client onboarding

Reporting

Cashflow monitoring

Safekeeping of financial assets

Protecting existing businesses

Percentage of banks characterizing a difficulty the following (base: banks concernetd)

12


4.2. UCITS V

1. Prediction

UCITS V is one of the prospective measures of the survey because the Directive has not yet been applied. It was logical to address it after the AIFMD since the text principally consists of the introduction of rules concerning custodians. Overall 80% of the banks which responded said they were aware of at least the major principles and 60% of the banks are planning to introduce it. The majority have, however, not yet set a date for starting their analysis work and even fewer for implementation. Only 20% had already begun and 20% plan to begin in 2014.

Compared with the AIFMD (EUR 885,000 per institution), the banks in question expect budgets of 50% less or equivalent at the very most, despite significantly higher volumes, which is a sign of greater automation or the presence of strong synergies with the AIFMD. Only a few banks are planning higher budgets. 90% of these banks have not yet budgeted for UCITS V and only 2 of the banks informed us of an average budget of around EUR 650,000. Not surprisingly, this budget would be used mainly during the implementation phases (68%), for mainly activity-specific aspects (61%) and not so much IT, using in-house employees (74%).

In the same way, visibility is still limited with regards to the recruitment needs. 55% of the respondents stated that they did not have plans for additional recruitment, while the rest did not yet comment.

0% 10% 20% 30% 40% 50% 60% 70% 80%

80%

38%

38%

38%

35%

29%

It is a logical evolution following AIFMD

It will help Luxembourg to

develop

It will be difficult to implement

I consider it as a pure cost in my entity and I

don't see specific or significant benefit of it

Impacts will be more important

than AIFMD

I'm rather positive about this new

regulation

Percentage of opinion (base: banks concerned) 2. Perception

Generally speaking, opinions about UCITS V remain quite neutral. The banks concerned actually found that UCITS V represents a continuation of the AIFMD but are still lukewarm, without actually being negative, in their global perception of the perceived cost-benefit, the implementation difficulties, the general impact or about Luxembourg. Although this is seen as a logical conclusion, the directive has either not been convincing or is not yet sufficiently well understood. It should also be noted that the CSSF “is preparing the ground” with its custodian circular, an intermediary stage between the UCITS IV and UCITS V worlds.

13


Market Regulation: EMIR, MiFID II, PRIIPs, AML IV55.1. EMIR

1. Management

Practically all the banks in our survey are affected by EMIR and 78% of them are still at the implementation stage. The majority of the work started at the end of 2012 and during 2013 with the implementation stage, principally at the end of 2013 and during 2014. EMIR is clearly shared between Luxembourg and the group, 41% of the projects having been carried out at the initiative of Luxembourg and the remainder under joint or group initiatives. Finance, however, is principally local (69% of banks and even as much as 80% among large and medium-sized banks).

2. Budget: EUR 59.7 million + EUR 7.9 million recurring costs

According to the survey, the total budget for implementing the EMIR, for all years combined, amounts to an average of EUR 700,000 per institution, varying from EUR 1.5 million to EUR 272,000. This budget represents around 20% of the regulatory investments of the respondent banks. Overall, this budget is in line with the banks’ expectations and their budgets for 68% of the banks, and only 20% experienced significant differences. Out of this budget, around EUR 269,000 (38%) was spent on average during 2013 alone. It should be noted that EMIR has not yet been completed, far from it, and centralised clearing is only likely to start next year.

Recurring costs are valued at EUR 123,000 per institution and practically zero for the smaller institutions according to our survey. They are also particularly low, representing around 17% of the total investment expenditure. As with the AIFM, the estimated cost for 2013 is also lower, which means that not all the expected recurring costs have materialised. This is quite logical as reporting commenced in February 2014 and the principal centralised and bilateral clearing phases will only begin later.

Once extrapolated to the Luxembourg market, the total budget for EMIR amounts to EUR 59.7 million, with EUR 18 million in 2013. The annual recurring costs amount to EUR 7.9 million, i.e., only 13% of the total investment expenditure These figures make EMIR the most costly regulatory measure on the market in terms of initial investment, although its future costs will be more limited (excluding margin deposits). This is easily understood given the reporting problems and the redrafting of agreements and arrangements with counterparties.

These budgets are direct budgets for meeting and maintaining compliance. In addition, there are also the costs resulting from the actual content of the regulations such as capital consumption costs, for example, for the collateral aspects of EMIR. Furthermore, these are in the low range in that the costs will continue at the pace of the remaining implementation but which are difficult to budget for due to their lack of visibility.

0

300,000

600,000

900,000

1,200,000

1,500,000

123,233

1,465,711

195,649

466,000

114,283

271,567

5,250

698,561


0 Total average Top 10 Mid Small

Average total budget per institution (K EUR, all years combined)

€

14


The overall implementation budget is principally (66%) invested in implementation itself with a certain balance between the IT and functional aspects (45% and 55%, respectively), which properly reflects the EMIR aspects. It is principally in-house employees who are carrying out the initiative (63%), a figure which fluctuates according to the size of the institutions.

On average, 1.1 FTE were dedicated to and normally employed on EMIR at the banks included in our survey, (excluding project staff) and this figure does not vary enormously between institutions. EMIR only resulted in the recruitment of 1 to 2 people in 15% of cases. Once extrapolated, employment created by EMIR and the associated costs is limited to 93 FTE, including 21 newly-created FTE.

3. Perception

EMIR does not appear to garner support, with a negative opinion of the measure and its impacts among the banks of 54% compared with a positive opinion of just 12%.

The principal criticisms expressed about EMIR are its complexity and difficulty of implementation. Its costs are also perceived to be too high in relation to the benefits, particularly among large banks. Although there is a certain consensus about the ability of EMIR to reduce risk and increase transparency at market level, opinions are divided about effectiveness in avoiding a future financial crisis. Lastly, the banks are still particularly negative about any benefit to them in relation to risk management, optimisation of capital or the development of new services. Therefore it is a costly and unappreciated measure.

It is therefore no surprise that actually understanding the regulation is a major challenge in complying with EMIR for 65% of the banks contacted and even more among the large institutions. Then come the technical implementations and specific provisions, with of course central clearing (CCP). The difficulties experienced will vary here according to the size of the bank. For example, large institutions see more difficulties with timely confirmations whereas the small banks see more with the daily valuations, reconciliations or collateral management.

This regulation is therefore currently perceived as a pure cost measure, although fundamentally EMIR pursues beneficial objectives for the financial sector by providing more transparency and less counterparty risk. The rather chaotic manner in which the regulatory measure was developed and implemented along with the technical difficulties experienced have completely obscured the intended benefits but perhaps the image may be quite different in a year’s time.

0% 10% 20% 30% 40% 50% 60% 70% 80%

Gap Analysis




Internal staff


34%

66%

45%

55%

63%

37%

0% 10% 20% 30% 40% 50% 60% 70% 80%

12%

54%

68%

70%

50%

40%

28%

15%

8%



EMIR is unclear or difficult to implement

It is too expensive to implement compared to advantages I see

EMIR will bring more market transparency and reduce risk

EMIR will help to avoid a new financial crisis

With EMIR, the bank can better manage risks

We develop business opportunities with EMIR in new services to our clients

EMIR will allow for a better capital optimization

0% 10% 20% 30% 40% 50% 60% 70% 80%

65%

64%

47%

47%

44%

32%

29%

Understandingthe regulation

Clearing with a CCP

Reporting to a Trade Repository

Collateral management

Daily valuation

Timely confirmation

Portfolio reconciliation and dispute resolution

Average composition of the total implementation budget


Percentage of banks characterizing a difficulty the following (base: banks concerned)

54%of negative opinion

15


5.2. MiFID II

1. Prediction

MiFID II is a prospective measure in the survey given that the directive is currently being finalised and implementation is scheduled for the end of 2016. Overall, 85% of the banks which responded said they were aware of the major principles and 10% even said they understood these new texts. 80% of the banks intend to implement MiFID II, with this ratio rising to 100% among large institutions. Even though some began their thinking as early as 2013, half have not yet set any dates for starting their analyses and even less so for implementation.

More than half the banks which responded expect budgets to be more or less the same as for MiFID I, so this is no minor upgrade. The others are divided between higher or lower budgets than for MiFID I with margins of between 20% and 30%. Nonetheless, like other regulations of this type, 90% of these banks have still not budgeted for MiFID II and only three banks advised us of budgets varying between EUR 1.2 million and EUR 30,000, which were just given as a guide. Not surprisingly, this budget would be used mainly during the implementation phases (64%), predominantly using bank employees (66%). On the other hand, the banks envisage a significant technological component which could account for 54% of the budget.

Visibility is still limited in relation to recruitment needs: 53% of the respondents stated that they were not planning to recruit while the rest will wait and see.

2. Perception

It is interesting to note that the respondents stress the main benefit of MiFID II, investor protection. However, the regulation is not particularly well received, with a positive opinion of just 29% and few perceived benefits. Generally speaking, the banks seem to expect impacts on their profession, for example, those arising from inducements, the distribution of products or new procedures in interactions with clients and also the administrative consequences of certain procedures. The balance of the scores in the table below is mainly in the range of neutral opinions whereas a very limited number support MiFID II.

0% 10% 20% 30% 40% 50% 60% 70% 80%

61%

57%

52%

52%

50%

43%

41%

32%

29%

Investors will be better protected


MiFID II will cause a major change in the way we interact with our clients

Total ban of most inducements will have significant impact on

my revenues

MiFID II will add another layer of paper and administration, that's all

Impacts will be more important than MiFID I

My business model will be significantly impacted (e.g., open architecture,

distribution strategy, etc)

MiFID II is the opportunity to developp new products and services

I'm rather positive about this new regulation


61%of banks, investors will effectively be better protected

For

16


5.3. PRIIPs

1. Prediction

PRIIPs (Packaged Retail and Insurance-based Investment Products) is also one of the prospective measures in the survey. The PRIIPs regulation was published during this survey in spring 2014 and is currently being finalised and scheduled for implementation by the end of 2016 in the wake of MiFID II.

PRIIPs is slightly less well known: 69% of the banks which responded are aware of the major principles and 20% only know its name. This is particularly the case in smaller institutions. 60% of banks intend to implement PRIIPs, including all the large banks, while 11% have not yet decided. It is interesting to note that around 30% do not intend to implement the regulation, for all sectors combined. This figure should reduce over time as PRIIPs affects the key sectors in Luxembourg (collective asset management). Overall, there is not yet any clearly established schedule for the start of analyses, apart from at some banks in which discussions have begun.

In the same way, the banks - unfortunately - have not yet budgeted and none are planning to recruit at this stage, although half the big banks are leaving the door open. Given the lack of visibility in relation to the measure, future budget allocation remains quite traditional at present with implementation predominating at 62%, a dominant activity-related proportion of 57% for IT, principally conducted by bank’s employees in 73% of cases.

2. Perception

Like MiFID II, consumer information is the first benefit quoted and recognised (67%), this is particularly the case among the big players and for retail banking. Half of respondents also make a connection, quite rightly, with the UCITS’ KIID (Key Investor Information Document), particularly in the fund sector, which is already obviously broadly impacted. Efforts here will address all the collective management products as a document needs to be created for each product. Then opinions are quite mixed. Perceived to be yet another administrative burden by 52%, the banks remain neutral about PRIIPs in general, except for the smallest players, which are more negative, either about the possible impacts or the difficulty of implementation.

0% 10% 20% 30% 40% 50% 60% 70% 80%

67%

52%

52%

29%

29%

29%

Investors will be better informed and hence protected

It is just similar to UCITS KIID

PRIIPS II will add another layer of paper and

administration, that's all


It will not be a major regulation with important

impacts



67%of banks recognize that investors will be better informed and hence protected

17


5.4. AML IV

1. Prediction

AML IV is also a prospective measure for which a second agreement was reached in June 2014 during the course of this survey and which should still be the subject of discussion at European Union level (trilogue). We know this subject is very important to the banks so it is no surprise that it is closely monitored by them. AML IV is the best-understood prospective measure at present, with 94% of banks being familiar with the principles and 25% saying they understand it. Quite logically, they all intend to implement it, which further reflects the importance of the subject matter. A third of the banks started to do so in 2013 or plan to start some work in 2014 or 2015. The majority, however, have not yet made any specific plans.

Around 60% of the banks expect the budget to be similar to previous regulatory measures, including CSSF Circular 12/02. The others are divided between higher budgets (30%) or lower budgets (25% on average). It is the biggest institutions and private and retail banking which mostly anticipate budgets in line with earlier ones. The other institutions have different expectations - both higher and lower. These budgets would be principally used for implementation (63%), with more functional components (57%) than technical components and little external expertise (18%), this last figure varying naturally with the size and therefore the resources of the institutions. However, it should be stressed that at present, apart from one bank, none has created a budget.

Visibility is still limited in relation to recruitment needs: 62% of respondents have not planned any recruitment, only 9% are thinking about recruiting an average of one FTE, while plan to wait and see.

2. Perception

AML IV is generally quite well received in general with 65% of the banks quite positive and only 10% negative. The advantage for the image of the Luxembourg market is the most important point mentioned (65%) - even more so among small institutions and by private banks where, naturally, this aspect is particularly critical. Then comes the benefit for the bank in terms of risk reduction (47% positive). However, opinions are not divided about its impact compared with the existing battery, although the banks tend to perceive more significant impacts. AML IV is not generally seen as an administrative measure (42% are against this perception and 33% are neutral) and the banks remain neutral about its difficulty of implementation. Conversely, there is consensus on rejecting the idea that it could be an obstacle to any commercial development. This point is stressed even more by the smaller institutions.

0% 10% 20% 30% 40% 50% 60% 70% 80%

67%

47%

65%

35%

32%

6%

26%

It will help to further strenghten the image of

Luxembourg in the field of AML/FATF* and fraud

It will reduce the risks for the Bank



Impacts will be more important than with

previous AML (CSSF 12-02)

AML IV will add another layer of paper and

administration, that's all

It will reduce the business opportunities for the Bank

Percentage % of opinion (base: banks concerned)

65%of banks are rather positive towards new AML requirements

* FATF: Financial Action Task Force

18


6 Prudential Regulation: CRD IV and AQR

6.1. CRD IV

1. Management

In our survey, 86% of the banks are involved in CRD IV and all are in the implementation process. The analyses started in 2011 but the core analyses has already started in 2012 for 42% and 2013 for 45%. Most of the implementation projects started in 2013 (52%) and 2014 (21%) with the first projects as early as 2012, principally among the bigger institutions. For 52% of the banks, this aspect is managed from Luxembourg. For the rest, the initiative is shared (37%) or managed by the group (11%). Here we see that the big banks are more subject to group constraints than the smaller ones, unlike other regulations where the small banks directly rely on their parent companies. Meanwhile, project funding remains principally local in 80% of cases, even for the bigger institutions (71% to 83% for big and medium-sized banks).


According to our survey, the total implementation budget for CRD IV, for all years combined, amounts to an average of EUR 588,000 per institution, varying from EUR 1.4 million to EUR 100,000 depending on size. This budget represents an average of 23% of the total regulatory investments by the banks in our survey and 11% for the biggest banks. For almost 80% of the respondents, the budget meets expectations, the remaining 20% having incurred unexpected costs which even doubled the initial budget in some cases. Out of this budget, EUR 311,000 was spent on average during 2013.

Recurring costs are estimated at EUR 190,000 on average per institution and vary between EUR 60,000 for the smaller banks (i.e., 59% of investments) and EUR 407,000 for the bigger banks (i.e., 29% of investments). It should be noted that the recurring cost incurred for 2013 is more or less in line with these expectations.

Once extrapolated to the Luxembourg market, the total budget for CRD IV amounts to EUR 53.4 million, including EUR 21.6 million for 2013. The annual recurring costs amount to EUR 14.6 million, that is 27% of the total investment expenditure.

It should be noted that these budgets are the direct budgets for meeting and maintaining compliance. In addition, there are also the costs caused by the actual content of the requirements such as the equity capital costs.

0

300,000

600,000

900,000

1,200,000

1,500,000

188,008

1,380,225

407,104436,768

105,253 101,10060,000

587,781


Total average Top 10 Mid Small

Average total budget per institution (EUR, all years combined)

€

19


The overall implementation budget is mainly spent on implementation itself. Compared with some other regulations, CRD IV requires more expenditure on IT (59%). It is principally in-house employees who conduct the initiative, apart from at small institutions.

On average, 2.5 FTE were dedicated to and normally employed on CRD IV at the banks included in our survey, this figure varying between 1.9 and 3.9 FTE. Only 22% of the banks expressed a need to recruit on average one FTE. Once extrapolated, employment generated by the CRD IV amounts to 216 FTE, of which only 21 (10%) are new jobs. But once again, like other measures such as EMIR, all employees are impacted by the new working methods from sales to risk management and including treasury and back office.

3. Perception

The overall perception of CRD IV and its impacts on the bank is quite neutral (42%) or even slightly negative (34%).

The benefits of CRD IV are widely acknowledged (resilience – 70%, risk management – 49%), but it seems that it is the cost of implementation of the regulation which is criticised, particularly amongst the biggest institutions. In the case of 43% of the banks, CRD IV may have an impact on the financing model, less so among the smallest. However, 60% do not plan to stop certain activities as a consequence. 22% could initiate new activities, principally among the biggest banks.

The principal challenges experienced in complying with CRD IV are measures relating to liquidity, more so for the big banks, strategic planning, reporting aspects and requirements to do with credit risk.

0% 10% 20% 30% 40% 50% 60% 70% 80%

Gap Analysis



Functional analysis/

business/Non-IT

Internal staff

External staff (Consultant,

advisors, etc.)

35%

65%

59%

41%

65%

35%

0% 10% 20% 30% 40% 50% 60% 70% 80%

24%

34%

54%

70%

49%

43%

30%

22%



CRD IV requirements will strengthen the resilience

of banksIt is too expensive to

implement compared to advantages I can benefit from

CRD IV will help to avoid excessive risk-taking in my entity

CRD IV will change our funding model

Some of our ativities will stop because of CRD IV

CRD IV will lead to new activities in my entity

0% 10% 20% 30% 40% 50% 60% 70% 80%

70%

58%

54%

46%

38%

27%

Liquidity measures

Strategic planning

Reporting

Credit risk requirement

Redefinig risk appetite

Tier 1 Capital requirements




54%the implementation cost is too high

For

20


6.2. Banking Union/AQR

1. Management

The position concerning AQR (Asset Quality Review) is very specific in that only certain “systemic” banks directly fall within its scope. In Luxembourg, 7 banks are directly affected by AQR of which 3 responded to our survey.

It is interesting to see on this subject that the reality is not as simple for this measure. It emerges from our survey that 18 banks say they are affected by AQR of which 5 were in the process of exercising it. Here we can see the effect of the participation of certain banks to group efforts as well as the broader issue of Banking Union, which of course is likely to affect more banks than expected on first analysis.

If we restrict ourselves to the banks actually affected by AQR, we see that the matter is principally managed by the group in whole or in part but using local finance. The work was either in progress at the time of the survey or about to be completed, logically using external service providers to conduct the assessment and a principally non-IT budget (63%) spent on the review itself (75%). There was no recruitment specifically for this purpose.

The budgets mentioned are around EUR 500,000 on average but this information should be treated with much caution as it varies so much from one institution to the next. Based on other sources of information, external budgets for AQR could vary between EUR 200,000 and almost EUR 3 million. AQR also entails a significant internal workload to prepare and research data which is not quantified here. Due to these effects, the real cost for the marketplace is more likely to amount to EUR 8 million.

2. Perception

To examine perceptions, we chose to open the field to all the 18 banks which said they were affected by AQR, or Banking Union according to the interpretations, and which responded to all the questions.

General opinion remains neutral at 76% about AQR and the impact on the bank, or slightly negative at 18%. The respondents recognise the potential benefits of AQR such as greater trust in the European financial market and better management of the bank’s risks. This feeling is particularly present among small and medium-sized banks, whereas the bigger banks, which are also more affected, remain more neutral. Meanwhile half the banks are of the opinion that AQR will draw attention to the requirements for recapitalisation, the proportion rising to 80% among the smaller banks. Overall there is a consensus about one point, this exercise forces improvement of the understanding of risks and their funding. Opinions are however divided about identifying weaknesses on the Luxembourg market.

The difficulties experienced or perceived by the banks are mainly of a technical nature, such as the inclusion of the large number of credit risk indicators, the understanding of all the requirements and the compliance with scenarios. Here we need to make a distinction between large and other institutions. The bigger banks are more faced with practical problems such as meeting deadlines, communication standards or even the understanding of the overall requirements. The smaller ones perceive more technical problems to do with the analysis itself (e.g., the number of factors, scenarios etc).

0% 10% 20% 30% 40% 50% 60%

6%

18%

50%

56%

50%

39%

28%

22%

22%



AQR will improve my risk management (e.g., internal audit)

Investors will be more confident after the AQR process regarding

the European market

AQR will show needs of recapitalization

AQR will reduce systemic risks

AQR will identify failures in the banking system in LU

Too expensive to implement compared to advantages I

can benefit fromUseless without the

implementation of the 2nd pilar of the Banking Union

0% 10% 20% 30% 40% 50% 60%

53%

44%

40%

38%

31%

20%

Taking into account the number of indicators for credit risk

Communicate all requirements to ECB

(European Central Bank)

Meet the standard format of data to communicate

Meet the deadline

Respect the different scenarios

Understand the requirements



21


2. Perception

To examine perceptions, we chose to open the field to all the 18 banks which said they were affected by AQR, or Banking Union according to the interpretations, and which responded to all the questions.

General opinion remains neutral at 76% about AQR and the impact on the bank, or slightly negative at 18%. The respondents recognise the potential benefits of AQR such as greater trust in the European financial market and better management of the bank’s risks. This feeling is particularly present among small and medium-sized banks, whereas the bigger banks, which are also more affected, remain more neutral. Meanwhile half the banks are of the opinion that AQR will draw attention to the requirements for recapitalisation, the proportion rising to 80% among the smaller banks. Overall there is a consensus about one point, this exercise forces improvement of the understanding of risks and their funding. Opinions are however divided about identifying weaknesses on the Luxembourg market.

The difficulties experienced or perceived by the banks are mainly of a technical nature, such as the inclusion of the large number of credit risk indicators, the understanding of all the requirements and the compliance with scenarios. Here we need to make a distinction between large and other institutions. The bigger banks are more faced with practical problems such as meeting deadlines, communication standards or even the understanding of the overall requirements. The smaller ones perceive more technical problems to do with the analysis itself (e.g., the number of factors, scenarios etc).

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

163,955

2,388,942

302,660 310,567

176,000 142,746

27,857

792,262

Total budgetAnnual recuring costs



7 Tax Regulation: FATCA and Tax Transparency

7.1. FATCA

1. Management

Practically all the banks (93%) in the survey say they are affected by FATCA and that they are all aware of this tax regulation which was being implemented among the banks concerned at the time of the survey. It is not a recent topic and work initially began in 2011, particularly in early 2012 or in 2013 in some cases (27%). Most of the introductory work began in 2013 and 2014 in 39% of cases. The latest ones to start were the smaller institutions. The issue is jointly managed between Luxembourg and the parent company for 61% of the banks, even more so among the bigger banks. The initiative is conducted by the parent company in just a few cases. However, often we see that the source of finance remains local in 74% of cases, particularly for the smaller institutions.

2. Budget: EUR 74 million + EUR 10 million recurring costs

According to our survey, the total budget for implementing FATCA, for all years combined, amounts to an average of EUR 792,000 per institution, varying from EUR 2.4 million (the highest in our survey) to EUR 143,000 depending on the size of the bank. This budget represents around 16% of the regulatory investments of the respondent banks. Unlike other regulations, the proportion remains higher among large banks reflecting the high degree of complexity in bigger organisations. In 80% of cases, this budget is in line with the banks’ expectations and their budgets, with a few (sometimes significant) exceptions. Out of this budget, an average of EUR 345,000 was spent by each institution during 2013.

Recurring costs are valued at EUR 164,000 per institution varying widely between EUR 300,000 and EUR 28,000 depending on the size of the institution. As a percentage of the initial investment, these recurring costs vary from 7% to 20%. Recurring costs for 2013 alone are in line with or slightly lower than these expectations as some costs will probably appear over time.

Once extrapolated to the Luxembourg market, the global FATCA budget is EUR 74 million of which EUR 25 million in 2013 alone, the highest budget measured in our survey of the market based on the number of players affected. The annual recurring costs are relatively well contained and amount to EUR 10 million, i.e., around 13% of total investment expenditure.

€

22


Like other measures, the overall implementation budget is mainly spent on implementation itself with a dominant activity-specific component. It is principally in-house employees who are carrying out the initiative, apart from at small institutions.

On average, 1.7 FTE are dedicated and normally employed on FATCA at the banks included in our survey, this figure rising to 2.9 FTE among the biggest banks. In 89% of cases there was no need for recruitment to meet these requirements and just 11% of (particularly big) banks recruited 1 FTE in general. Once extrapolated, employment generated by the FATCA amounts to 125 FTE, including just 16 jobs created.

3. Perception

FATCA is not a particularly popular measure with 54% of opinions being negative (90% among big banks) and just 7% positive. The main criticism is the disproportionate implementation cost (83%) but also indirect costs through impacts on fees paid (67%) for benefits that are not yet defined. 72%, therefore, see no commercial advantages relating to new services or, in the same proportions, related to a rise in the volume of business with the USA. On the contrary, some suspect pressure on margins (31%) or a reduction in the number of clients (36%), particularly among the biggest institutions, where these opinions are expressed by 60-70% of banks. Lastly, FATCA will have an impact on the worldwide financial market, in the opinion of 56% of the banks.

The principal challenges experienced in complying with FATCA relate to classification, reporting and training of employees. Setting up new procedures and monitoring compliance were also mentioned as important points. There are some differences. Reporting is more of a problem for small institutions and classification and training of employees for the big institutions.

0% 10% 20% 30% 40% 50% 60% 70% 80%

Gap Analysis




Internal staff


34%

64%

41%

58%

54%

43%

0% 20% 40% 60% 80% 100%

7%

54%

67%

83%

56%

36%

31%

13%

13%

3%



It is too expensive to implement compared to

advantages I can benefit from

FATCA will increase fees

FATCA will change the global financial market

FATCA will lead to a reduction in customers

Because of FATCA my profits will go down

FATCA will allow me to commercialise additionnal services

It will allow me to do more businesses related to United States

Luxembourg will be a model regarding FATCA in Europe

0% 10% 20% 30% 40% 50% 60% 70% 80%

69%

69%

67%

57%

57%

34%

Client classification/onboarding

Reporting

Employees awareness

New procedures

Monitoring

Withholding system




83%of banks, FATCA is too expensive for what it is

For

23


0% 10% 20% 30% 40% 50% 60% 70% 80%

73%

53%

50%

33%

27%

7%My bank could leave

Luxembourg as a result of these changes

We will increase our business in Private Banking

It will help Luxembourg to

develop

I'm rather positive about these new obligations

In the long term, the Private Banking industry will be considerably reduced

in Luxembourg

We will transform our organization and activities to

respond to this new environment

0% 10% 20% 30% 40% 50% 60% 70% 80%

50%

67%

44%

37%

26%

35%

31%

23%

15%

Manage multi-country tax environment

Capture new client segments

Industrialize tax reporting to clients

Develop new products and services for new segments of clients

Manage the reduction in assets in the short term

Help clients to "regularise" their assets

Educate CRM to deal with more sophisticated clients

Calculate performance net of tax

Help clients to relocate their assets in their country of residence



7.2. Tax Transparency (exchange of information, OECD*, EUSD**)

1. Predictions

Tax transparency is a slightly different issue in the survey because it touches on different regulatory changes which do, however, contribute to the same objective.

The tax transparency aspects are often discussed at present and 32% of the banks state that they fully understand these aspects, while 61% are aware of the major principles. Two-thirds of the banks have started work in this area. The majority began to conduct analyses in early 2013 with actual implementation between 2013 and 2014. The other banks are likely to start work given that all institutions are in principle affected.

The budget aspect still remains rather unclear and none of the affected banks were able to quantify their efforts in the survey. The average budgets mentioned by some institutions were high: EUR 1.4 million (30% of regulatory investments).

In addition to the cost of implementation, there is also the cost of the possible loss of revenue. Nearly half the banks actively affected by the area have measured this cost and some agreed to disclose it. Given the number, caution is needed when considering how representative the data is and it should therefore be taken as an illustration. According to this information, the average impact per institution would be EUR 9.6 million sharply varying between EUR 300,000 and EUR 35 million among some of the participating institutions. Once extrapolated, the loss of income impact would then amount to EUR 179 million for the Luxembourg market. We believe that this figure is a clear underestimation and represents a minimum, given the small number of banks that provided estimates.

2. Perception

As is known, Private Banking is experiencing upheaval in Luxembourg and this survey confirms this with 73% of the banks stating that they are transforming their business models to adapt to this environment. Although general opinion is not negative (50% positive and 40% neutral), around half of the banks see a possible weakening of the market for Private Banking in future while others remain quite neutral. This pessimistic vision is quite marked among the smaller players and the Private Banking sector in general. In the same way, only one-third of banks believe that there is an opportunity for Luxembourg’s banks to develop, while the others also remain neutral. Some banks do, however, have a more optimistic outlook. 27% expect to develop their business, rising to 60% amongst the bigger banks and falling to 8% amongst the small banks.

Generally speaking, a mass departure of banks is not on the agenda: 77% of banks clearly confirm their intention to remain in Luxembourg and only 2 banks in the survey mentioned that they may think about reconsidering their presence in Luxembourg.

The principal challenge regarding tax transparency is still the management of an environment that comprises several tax jurisdictions in the case of 67% of the banks. Then immediately afterwards we have strategic aspects such as the acquisition of new clients (50%) and operational aspects such as tax reporting (44%). It should be noted that the sensitivities and the challenges will vary according to the size of the bank. The biggest banks are making greater efforts to deal with the standardisation of reporting and the management of performance net of tax. The smaller institutions are experiencing greater difficulty in supporting existing clients with regularisation or repatriation. However, there is a consensus that gaining new clients is an urgent matter.

* OECD: Organization for Economic Cooperation and Development** EUSD: European Union Savings Directive

24


Payment Regulation: SEPA and PSD II88.1. SEPA

1. Gestion

76% of banks in our survey are affected by SEPA. 60% have completed the work (in spring), and the rest are still implementing it. Those that are not affected are small banks, mainly in the funds industry and other sectors. Although the initial work goes back almost 10 years, analysis of the latest measures on direct debits and credit transfers has been taking place since 2010, with a significant portion in 2013. The majority of implementations also started in 2013. The matter is mainly being managed in Luxembourg (55%) or shared with the group in some cases (36%). The source of finance is still mainly local, accounting for around 74% of the budget.


According to our survey, the total budget for implementing SEPA, for all years combined, amounts to an average of EUR 459,000 per institution, varying from around EUR 300,000 for most institutions to EUR 670,000 for the bigger banks. This budget represents an average of 4% of the total regulatory investments by the big banks but up to 20% for the smaller establishments. Overall this budget is in line with the banks’ expectations and their budgets, except for 24% of the banks, which saw average increases of 42%. Out of this budget, around EUR 212,000 was spent on average during 2013.

Recurring costs are limited and valued at EUR 94,000 per institution, varying between EUR 65,000 and EUR 166,000 depending on the complexity of the IT systems. These costs account for a fairly consistent average of between 19 and 24% of the banks’ investments, which suggests that their approaches are quite similar. It should be noted that the cost incurred for 2013 is slightly higher on average due to medium-sized banks, which may have underestimated the effects.

Once extrapolated to the Luxembourg market, the total budget for SEPA amounts to EUR 34.3 million, including EUR 11.9 million in 2013. The annual recurring costs amount to approx. EUR 4.7 million, i.e., 13% of total investment.

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

93,673

670,410

166,822

360,640

112,571

318,983

64,901

459,370



Average total budget per institution (EUR, all years combined)) €

25


0% 10% 20% 30% 40% 50% 60% 70% 80%

30%

70%

67%

33%

79%

22%

Gap Analysis



Functional analysis/

business/Non-IT

Internal staff

External staff (Consultant,

advisors, etc.)

0 10 20 30 40 50 60

39%

9%

48%

53%

47%

44%

38%

34%

34%



Deadline for implementing SEPA are acceptable

It is too expensive to implement compared to the volume of cross-boarder

payments or additional services to sellSEPA will decrease the

cost of payments

Cross boarder payment will significantly increase in Europe

SEPA will stimulate innovation

SEPA will increase competition

SEPA will help develop additional services and fees

0% 20% 40% 60% 80% 100%

94%

67%

57%

45%

33%

25%

Adopt IT System

Meeting the deadline

Connect with merchants and market the services

Employee training

Storing and filling related data

Managing user rights




The implementation budget is principally invested in IT developments (67%) and the work is being carried out mainly by in-house staff, while the use of external advisers is limited (22%).

On average 2.5 FTE are dedicated to SEPA at the banks included in our survey, rising to 6.3 FTE at the biggest banks, basically due to the high proportion of their retail banking activities. No additional human resources needed to be recruited for this work. Once the figures were extrapolated, SEPA uses 121 FTE on the market according to our survey, all jobs which already exist at these banks.

3. Perception

The overall perception of SEPA remains quite positive or neutral with just 6% of negative opinions. Although the timings were quite acceptable for the financial sector, apart from some big banks which disagree, the cost is still globally perceived as too high, considering the expected benefits. The cost of payments should fall in the future, principally for the big banks, but a growth in volumes in Europe is not expected and it should also be noted that a large part of the effort relies on other economic players such as the industrial and services sectors. The banks remain quite neutral to negative on the development of new services and quite neutral on the growth of competition. However, the biggest banks see more of an effect on innovation in terms of payment.

The major challenges experienced in compliance with SEPA mainly relate to adapting existing information technology systems for practically all banks whilst still meeting deadlines. At a second stage, user training in the payment systems was identified as a source of difficulty.

67%of implementation budget is invested in IT development

26


8.2. PSD II

1. Prediction

PSD II (Payment Services Directive) is one of the prospective measures in the survey. It was proposed in 2013 and is currently being reviewed by the European authorities.

This directive is slightly less well-known - 26% of the banks have only heard its name while 13% have never heard of it at all. Among the banks in our survey, 32% intend to implement PSD II and 37% do not yet know. Lack of awareness of the issues is particularly marked in smaller banks. Overall the analysis and implementation schedule has not yet been devised.

The same uncertainty revolves around the budget: practically none of the banks have yet set a budget and 53% expect a budget similar to PSD I. Similarly no recruitment is planned. However, 43% of the banks would meet this eventuality if necessary. This should become clearer over time.

Given the lack of visibility in relation to the measure, future budget allocation remains quite traditional at present with implementation predominating (66%). The project is considered to be mainly of an IT nature (53% of the budget), principally carried out by bank employees (79%).

0 10 20 30 40 50 60

60%

40%

40%

27%

20%

13%

0%It will help Luxembourg to develop

Impacts will be more important than PSD I


I'm rather positive about this new

obligations

I consider it as a pure cost in my entity and I don't see specific or

significant benefit of it

PSD II will promote more competition, efficiency and

innovation

It is a logical evolution following PSD I


PSD II is firstly considered to be a logical consequence and continuation of the first directive. Although the result of PSD II may be more innovation, competition or efficiency, it is also perceived as a cost with vague benefits. This is more so in the biggest institutions. Only 20% claim to feel positive about the directive and the rest remain neutral. Lastly, overall the banks do not see any particular opportunities for Luxembourg.

27


Local Regulation: CSSF Circular 12/552 and e-Archiving99.1. CSSF Circular 12/552

1. Management

In principle all banks are affected by CSSF Circular 12/552 although 7% said they were not affected, probably because they had already complied. For two-thirds of these banks, the circular had been introduced and the work had been completed at the time of the survey, while 36% of the banks were still implementing it. The beginning of the analysis really started at the end of 2012 and in early 2013 for 86% of the banks, with implementation taking place mainly in mid-2013. Given the character of this regulation, CSSF Circular 12/552 is clearly an initiative which is managed locally in 91% of the banks and jointly with the group for the others. Financing is principally local and 86% of the budget is taken from Luxembourg.


According to our survey, the total budget for implementing CSSF Circular 12/552, for all years combined, amounts to an average of EUR 169,000 per institution, varying from EUR 98,000 to EUR 300,000 depending on the size of the bank. This relatively limited budget on the whole accounts for approximately 14% of the regulatory investment expenditure of the participating banks. Although this is low for the big banks, it is more structural and cumbersome for small banks representing 26% of the regulatory budget. Overall this budget is in line with the banks’ expectations and their budgets in 74% of cases, while the remainder saw average increases of 44%. The majority of this budget - 81% - was spent in 2013.

The recurring costs are valued at EUR 128,000 per institution varying little between EUR 97,000 for the smaller banks and EUR 159,000 for the medium-sized banks. These costs are all the same as the initial investment except in the biggest institutions, where investment may have been higher due to the complexity of the organisational structure and the activities. This reflects the highly structural nature of the measure, which aims for a global system of governance to be implemented and maintained without large-scale investments at the outset, given that the circular largely relied on existing and subsequently amended circulars. The estimated recurring cost for 2013 alone is, however, less high, which reflects the fact that, as with other measures, not all the costs have yet materialised.

Once extrapolated to the Luxembourg market, the total budget for CSSF Circular 12/552 amounts to EUR 12.2 million, including EUR 9.9 million in 2013. The annual recurring costs amount to EUR 7.5 million, i.e., 61% of total investment. Therefore, this circular does not really represent an investment to be made so much as a technical and human system to be implemented and maintained, a change in procedures and not necessary a revolution.

0

50,000

100,000

150,000

250,000

200,000

300,000

128,184

299,808

106,167

167,916159,778

97 ,899 97,546

168,700

Total budgetAnnual recuring costs



€

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The overall budget is mainly spent on implementation itself (57%). Quite understandably the circular required mainly non-IT resources (72%). External staff were needed, accounting for 32% of the budget, which was more marked amongst the small institutions where the figure exceeded 50%.

On average, 1.1 FTE were dedicated to and normally employed on CSSF Circular 12/552 at the banks included in our survey (excluding project staff), varying between 0.5 FTE for the bigger and 1.5 FTE for the small and medium-sized institutions. In 90% of cases internal resources were used and there were no new recruits. Once extrapolated, employment generated by CSSF Circular 12/552 amounted to 87 FTE.

0% 10% 20% 30% 40% 50% 60% 70% 80%

Gap Analysis




Internal staff


39%

57%

17%

72%

63%

32%

0% 20% 40% 60% 80% 100%

49%

16%

71%

83%

64%

43%

31%

21%

19%



It develops a more integrated risk governance at the bank's level, with

invreased awareness and better monitoringIt increases the accountability of the

Bank's managementIt makes my organization transparent and understandable with the support

of well defines key functionsIt already existed and does not really bring

anything new but administrative work

This regulation would have highly mitigated the impacts of the recent financial crisis

It is too expensive to implmeent compared to advantages I can have

All in all, risks are now lower with 12/552 than before its implementation

0% 10% 20% 30% 40% 50% 60%

52%

38%

29%

26%

26%

Risk management/governance adaptation including parent

entity role and responsibilities

Adapting the current risks management process and procedures

(whistleblowing, code of conduct, etc.)

Organisation of the risk control function to ensure proper

governance

Amending the Board of Directors to reflect the new risks

governance paradigm

Implementation of the IT function



3. Perception

CSSF Circular 12/552 provoked quite positive reactions for 44% of the banks, or neutral in the worst cases (35%). The desired strengthening of governance is clearly stressed by the banks (83%), along with the strengthening of the role of Management and the transparency of administration. Nonetheless, the banks remain divided about whether the system will be able to mitigate the impacts of severe financial crises, such as 2008, or reduce the level of global risk following implementation. This may simply be the consequence of the fact that the circular is a continuation of previous circulars and therefore strengthens certain principles without radically changing their foundations.

Given this continuity, implementation has not been too problematic. The most difficult points were adaptation of governance, integration of elements related to the parent company and adaptation of the risk management function.


“The strengthening of the governance, the role of leadership and the increased transparency

are clearly highlighted.”

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72%of Banks, e-Archiving is an opportunity for Luxembourg

For

9.2. e-Archiving

1. Prediction

The rules relating to electronic archiving are still being finalised and are among the prospective measures in the context of the survey. It should be noted that this is a national initiative and not a European regulation.

Overall, the issue is relatively familiar as 76% of the banks are aware of the major principles and 7% said that they fully understood it. Half of the banks, however, did not state whether or not they would be implementing the legislation in the future and only 18% of the banks in our survey have already made the decision to implement it in future (medium and large institutions). This may come as a surprise given the operational benefits for the banks in a climate of cost control. Maybe communications need to be better targeted.

Initial analyses began in 2014 or will start in 2015. However no budgets have been set aside as yet for this area and nor is any recruitment planned. 38% of the banks will recruit if the need arises. Future allocation of budgets understandably remains quite traditional at this stage. However, unlike other regulations, this is a subject in which external expertise may be expected, with the majority of the budget being allocated to external providers by the banks which were able to respond.

0% 10% 20% 30% 40% 50% 60% 70% 80%

72%

65%

72%

65%

59%

47%

35%

12%I consider it as a pure cost in my entity and I don't see specific or

significant benefit of it

We will be able to develop new products or services


It will enhance the attractiveness of Luxembourg for new players


It will allow my business to generate cost savings

It will help Luxembourg to develop

This new reform will place Luxembourg ahead of other countries in the matter, as

an "information Trust Center"


The e-Archiving regulatory measure has a positive image as it is considered firstly as an opportunity to develop the Luxembourg market and secondly as an opportunity to reduce banks’ internal costs or to develop new services. The implementation process will probably not be straightforward: 59% of the banks suspect that there will be implementation problems. Although implementation may be costly, the benefits for use are likely to compensate the initial efforts easily.

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10 Approach and sample

The survey was conducted between March and April 2014 by sending out electronic self-managed questionnaires (Excel tables) to the Management of all 108 member banks of the ABBL.

The sample represents 46 banks out of the 150 licensed banks in Luxembourg, therefore one third. This result can be considered a very good response that can be used to reach robust conclusions. Depending on the measure under consideration, the rate of coverage is between 37 and 50% of the banks.

Generally speaking, the banks have devoted a lot of time and attention to the survey, which demonstrates real interest in the issues and results.

Description of the sample

1. By key figures:

The table below represents the principal figures from the survey in the context of Luxembourg’s banking system.

Sample Luxembourg market Rate of coverageFTE employees 31/12/2013 12,968 26,227 49.5%Net banking income(EUR million - 31/12/2013

4,500 10,482 42.9%

Balance sheet total (EUR million – 31/12/2013)

267,194 713,378 37.4%

When they were extrapolated, we chose to base the extrapolation of the figures on the balance sheet total, given that it best represents the size or scale of the institution.

2. By size:

The banks in the sample were classified by size, firstly by balance sheet total and then by number of employees if the ranking was equal. We then created three segments which are distributed as follows:

Segments No. % Average total balance sheet

Average FTE employees

Top 10 10 22% 15,731,859,547 976Mid 19 41% 3,927,159,138 144Small 17 37% 2,074,092,416 28Grand Total 46

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3. By sector:

Nearly half the sample is active in the Private Banking sector (principal activity - the one which generates the highest revenues). The “other” category covers institutions which specialise in payments, loans or companies for example.

It should be noted that the classification is carried out on a declaration basis and relies on the bank’s own judgement.

Principal segment No. %Private Banking 22 48%Fund services/Asset Management 9 20%Universal Banking/Retail 8 17%Other 7 15%Grand Total 46

4. By country of origin:

The participating banks originate from 20 different countries. Germany, Luxembourg, France, Italy and Switzerland are at the top of the list. Luxembourg might appear to be overrepresented but this reflects the intention of the survey to include the major institutions on the market.

Generally speaking, almost half of the banks in the survey come from countries bordering on Luxembourg. One third come from the rest of Europe. All continents are represented.

Region No. %Bordering countries 18 39%Other European countries 15 33%Switzerland 4 9%Luxembourg 4 9%Asia 3 7%North America 2 4%Grand Total 46

5. By post (principal person in charge of the survey): The survey received attention at the highest level as demonstrated by the figures, with a member of the Management Board taking responsibility in half the cases. The survey was also coordinated at Finance Director level due to the need for figures.

Post No. %Management 21 46%Finance 11 24%Compliance 6 13%Other* 4 9%Operations 3 7%Risks 1 2%Grand Total 46

* Project, Strategy, Communications etc.

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11 Thank you

This survey could not have been conducted without the hard work of a number of people whom the authors particularly wish to thank.

Firstly our very sincere thanks to the participating banks and everyone who contributed to providing the information requested and to answering our questions. We are aware that these tasks, which are sometimes unappealing, add to the day-to-day workload.

Lastly, we ourselves have partly contributed to the cost of the regulation by requesting this additional reporting!

We would like to thank Benoît Sauvage of ABBL for his invaluable advice, attentive and relevant follow-up at all stages of the production of this survey. His reviewing work and comments enabled us to refine the conclusions and strengthen the value of the report. He was also successful in mobilising the ABBL and its members to enable us to achieve this record response rate.

We also thank Denis Costermans of EY who designed, managed and drafted the biggest part of the study. His experience in industry studies and his analytical skills have led to the success of it. Special mention also of Sébastien Suzini at EY who, under Denis’ supervision, devoted six months to developing the questionnaire, collecting, structuring and statistically processing the information and creating the tables and graphics from which we drew the conclusions that you see here today.

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Contacts

If you would like more information about this study, please contact the authors:

Serge de CilliaCEO and Head of the Management Board The Luxembourg Bankers’ Association (ABBL)[email protected]+352 46 36 60

Benoît SauvageSenior AdviserThe Luxembourg Bankers’ Association (ABBL)[email protected]+352 46 36 60

Olivier MaréchalPartnerEY [email protected]+352 42 124 8948

Denis CostermansDirecteur AssociéEY [email protected]+352 42 124 8949


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