3 minute read 16 Jun 2022
ey-luxembourg-asset-servicng-article-agefi-june-22

Asset Servicing – how governance framework is adapting to the evolution of tax and regulatory changes

Authors
Pierre-Marie Boul

EY Luxembourg Partner, Asset Servicing Leader

EY Luxembourg Asset Servicing Leader. Passionate about helping people envision the future faster. Driver of growth and innovation. Keen traveler and scuba-diver.

Marie-Sophie Dervieu

EY Luxembourg ITTS Banking and Insurance Partner

Tax professional for more than 10 years. Expertise on tax regulations. Deputy leader of Family Office initiative. Passionate about dancing and ballet. Creativity is my mojo.

3 minute read 16 Jun 2022

Asset Servicing in Luxembourg is mainly driven by Professionals of the Financial Sector (PFSs), a continuously growing market. 

Although for the past couple of years the number of PFSs has remained relatively unchanged, at the end of January 2022 there was a 41% increase in their provisional net profits (reaching 49 million euros) and an 8 million euro increase in their total balance sheet1 (in comparison to January 2021). This is a clear indication that the market demand for such service providers has not gone down.

This continuous growth can be attributed to the dynamism of the market. The sector has had to continuously and rapidly evolved and adapted to multiple stimuli: intense capital market activities and acquisitions by Private Equity players, as well as the digitalization of IT and operating models to improve data collection and meet client and investors’ demand and comply with the complex regulatory changes and other reporting obligations.

Controls are increasing – governance is key

In this fast changing and demanding environment, Assets Servicers must demonstrate transparency and a strong governance to remain best-in-class actors and competitive.

On 16 May 2022, Luxembourg’s supervisory authority for the financial sector, the Commission de Surveillance du Secteur Financier (CSSF), published Circular 22/811 (‘the Circular’) on administrators of undertakings for collective investment (UCIs), modernizing the old Circular IML 91/75. This update aims to adapt the regulatory framework and governance requirements to the current reality of Asset Servicers in Luxembourg.

A crucial element of governance that asset servicers may now be prompted to delegate more attention to is that of tax. While not covered in the Circular, this is  certainly an area that has gone through significant evolutions over the past years and which will continue to evolve and influence the operating and digital models of Asset Servicers. As tax regulations are evolving, PFSs have added to their agenda the implementation of new tax obligations imposed on their activities, and their clients. As a matter of fact, the need for effective tax governance is undisputed considering the actions taken by authorities in the recent years. For 2021, the CSSF has carried out 181 checks to verify compliance with reporting and due diligence obligations under Foreign Account Tax Compliance (FATCA) and the Common reporting Standards (CRS) rules. 2,630 reminders (concerning fiscal years 2019 and 2020) have been sent to financial institutions that have failed to communicate their reporting under FATCA and/or CRS.

A lack of governance may result in high fines imposed by the regulator or tax administration with amounts reaching up to more than 40,000 euros. The authorities also set 177 fines totaling 440,650 euros and 38 penalty payments for a total amount of 215,000 euros2. In comparison to 20203, there was an increase in all of these indicators: 22% more checks have been performed, 753% more reminders have been sent, 52% more fines issued and the fines’ amounts increased by 123%. These statistics show the importance of the topic for the authorities and it is indicative of the increased supervisory scrutiny.

 

Avoid reputation damage: four tax government rules to be implemented

More important than the financial setback that the company would suffer as a result of the fine, is the damage to its reputation. For the past decade a zero-tolerance policy towards breaches of anti-money laundering and anti-tax avoidance legislation has been making its way across the globe. A penalty for breach of tax compliance could easily put a substantial strain on the company’s relationship with its clients.

In order to avoid any potential adverse consequences, PFSs should put in place efficient tax governance rules around four main items:

1.     Implementation: During the implementation phase, PFSs should assess the impact of the regulations on its operations and clients. Such exercise should highlight and map the area of risk exposure. A process should be designed for the continuity of the business activities.

2.     Documentation: Based on this assessment, procedures and policies should be written down to clearly reflect the compliance program in place and all steps that need to be taken to ensure the effectiveness of the procedure and processes. At this stage the roles and responsibilities of the staff according to their seniority and the result that is expected should be defined.

3.     Training: To guarantee effective use of these policies the company should provide the personnel with ongoing training covering technical as well as practical issues.

4.     IT system: Lastly, the information and the procedures to be followed should be organized in a/the proper IT system that would facilitate the application of the internal rules especially on a large scale.

What defines your operating model?

The experience with our clients has shown a change in the way PFSs treat the issue of tax governance. Some companies still have a fragmented operating model, i.e. with one team engaged exclusively with client onboarding and another dealing with the tax reporting matters. As a result of this separation of functions, it is often observed that the purpose of the tasks is lost.

Opposingly, an “one in all” operating model with one compliance team covering all tax aspects of client onboarding with dedicated tax reporting teams proved its efficiency. More and more operators elect this “one team- one process” approach reflecting a strong governance process.

Well-established internal procedures could not only help the performance of the company’s day-to-day operations, but they could also have a long-lasting positive effect by turning into a valuable asset. In case of potential M&A deals, the existence of working internal procedures and tested escalation processes would give the purchaser the certainty that the company is not at risk of being fined.

On the contrary, non-existent or deficient tax governance rules expose the company to potential penalty procedures and loss of clients which could consequently become an issue preventing the completion of or even putting an end to any ongoing negotiations.

Become a game changer with the ISAE 3000 certification

Developing efficient governance and operating models for tax, as well as to line with the latest regulatory framework set out in the Circular, are must haves to address this need for strong governance. But even more so, being able to demonstrate this and create trust with stakeholders in this market is a game changer

One means of demonstrating compliance, creating trust and showing transparency on matters such as Tax but also Anti-Money Laundering (AML), Environmental Social Governance (ESG), General Data Protection Regulation (GDPR) or also the Circular is the issuance of ISAE 3000 Assurance Reports for Asset Servicers. Such reports provide assurance certification from external auditors on these specific matters and is distinct to audits or reviews of historical financial information.

Undergoing an independent ISAE assessment can help bring comfort to clients and counterparties on the effectiveness of an asset servicer’s internal controls. Further, the assessment can act as a base for asset servicers to framing ongoing governance procedures.

Through a multidisciplinary mindset and specialized teams, EY supports asset servicers in navigating the complex landscape of the industry. The right amount of agility and a strong partner is indeed what will help companies to adapt and pivot in the face of fast change.

1 Main updated figures regarding the financial centre, CSSF, 2022

2 Rapport d’activité de l’administration des contributions directes, 2021

3 Rapport d’activité de l’administration des contributions directes, 2020

Summary

Asset Servicing in Luxembourg is mainly driven by Professionals of the Financial Sector (PFSs), a continuously growing market. Although for the past couple of years the number of PFSs has remained relatively unchanged, at the end of January 2022 there was a 41% increase in their provisional net profits (reaching 49 million euros) and an 8 million euro increase in their total balance sheet (in comparison to January 2021). This is a clear indication that the market demand for such service providers has not gone down.

About this article

Authors
Pierre-Marie Boul

EY Luxembourg Partner, Asset Servicing Leader

EY Luxembourg Asset Servicing Leader. Passionate about helping people envision the future faster. Driver of growth and innovation. Keen traveler and scuba-diver.

Marie-Sophie Dervieu

EY Luxembourg ITTS Banking and Insurance Partner

Tax professional for more than 10 years. Expertise on tax regulations. Deputy leader of Family Office initiative. Passionate about dancing and ballet. Creativity is my mojo.