Luxembourg regulators urged to increase supervision of fund industry

Luxembourg regulators must increase their monitoring of risks in the investment fund industry, the International Monetary Fund (IMF) has warned.

In a series of reports on Luxembourg's finance industry, the IMF said the extensive use of delegation by fund managers and the concentration of fund directorships required more attention from regulators.

"The typical model adopted by Luxembourg fund managers involves significant delegation of activities, often including portfolio and risk management," the report stated.

"Although this structure has not given rise to problems in the past, given the rapid growth in the industry in recent years and the extent to which funds in Luxembourg avail of delegated activities, additional supervisory scrutiny is warranted."

Luxembourg's investment fund industry is the world's second largest by assets under management, standing at €3.35trn in November 2016 -- equivalent to around 62 times Luxembourgish GDP.

The IMF suggested that the Commission du Surveillance de Secteur Financier (CSSF) should issue formal guidance on the substance threshold required in Luxembourg for investment managers - the amount of manpower and resources required to be based in the country - and on an appropriate threshold, in terms of a time commitment, for directorships.

Investor runs and issues surrounding illiquidity in funds should also be examined and the CSSF should increase on-site inspections, the report urged.

In a note on banking supervision, the IMF warned there was still potential for government or industry interference in the "operational independence" of the CSSF.

It also highlighted potential vulnerabilities for Luxembourg banks facing high levels of intra-group exposure to foreign parents and funding risks from investment fund industry deposits should there be a shock to that industry.

(Hannah Brenton, hannah.brenton@wort.lu, +352 49 93 728)