Survey on the cost of regulations and its impacts on the ......Survey on the cost of regulations and...

Survey on the cost of regulations and its impacts on the Luxembourg financial marketplace2016 Edition

Contents

1 Introduction 3

2 Key messages from the survey 4

3 Managing the regulation: general overview 6

4 Market regulation: EMIR, MiFID II, PRIIPs, MAD/MAR, SFTR 13

5 Prudential regulation: CRD IV, AQR, SRM, DGSD 22

6 Tax regulation: FATCA, Automatic Exchange of Information 27

7 Fund regulation: AIFMD and UCITS V 32

8 Payment regulation: PSD II 35

9 Governance: CSSF 12/552, AML IV, GoAML, GDPR, e-Archiving 36

10 Approach and sample 41

11 Thank you 44

12 Contacts 45

Survey on the cost of regulations and its impacts on the Luxembourg financial marketplace


3


Introduction 1Dear reader,

This is the second time that EY and ABBL team up to conduct a survey on the cost of regulation in Luxembourg. It must be recognized that a lot has happened in two years. New regulations have been introduced such as the Automatic Exchange of Information or the new Deposit Guarantee Scheme, while others have continued to be the object of significant investments such as CRD IV or FATCA.

We have to say that fewer institutions have responded to this edition of our survey than two years ago. Is it a sign of a reporting fatigue affecting the industry as a whole? Nevertheless we are of the opinion that with respondents representing 45% of banking employment, 40% of net banking revenues and 29% of balance sheet total, this survey still presents interesting findings and insights on the financial marketplace regulatory landscape.

We would like to warmly thank all participants for their contributions. The exchanges we had with some respondents demonstrate that this exercise was not taken lightly by those who invested the time to fill in the eight tabs of the spreadsheet we used for the questionnaire!

This survey clearly shows the weight of regulation in the overall investment budgets of banks. About 35% of all investments are dedicated to pure compliance, much more for smaller institutions, and a tenth of net banking revenues is spent on regulation. Since our last survey, respondent banks have spent 20% more, on average, for regulatory compliance. Our forecasts of 2014 seem to have materialized.

For the future, it looks like regulatory spending will plateau in 2018. This is, of course, based on the current portfolio of regulatory driven projects launched by survey participants.

You will find more data in the next pages, both on overall investment levels as well as on discrete regulatory initiatives.

We hope you will find this report informative and useful and look forward to continuing the dialogue with the industry on how regulation can be better implemented in a cost effective manner.

Best regards,

For ABBL For EY

Serge de Cillia Olivier Maréchal

3


4


2 Key messages from the survey

2017 marks the second edition of the Cost of Regulation Survey in which EY and the ABBL assess the financial burden of regulation for the banking sector at a moment when stakeholders are seeing the end of the implementation tunnel. The goal is both to measure where we stand today in terms of costs, benefits and impacts on employment, and assess whether forecasts made in 2014 actually materialised.

Interestingly, the two initial conclusions to be drawn from this survey are the fact that regulatory compliance costs for banks have indeed increased in line with the forecasted 20% and that they still represent about 1% of GDP.

However, compared with data from the previous survey, we saw some differences in the response profile, which made extrapolation of the results to the wider market by using a simple and unique metric more difficult. Results therefore need to be taken for what they are: extrapolations based on reasonable and fair assumptions which are directionally reliable but but do not present accounting precision.

Based on the data provided by participating institutions and extrapolated to the Luxembourg marketplace, the banks would have spent in 2015 up to €458m to cope with the various regulatory evolutions. This figure reflects an increase of 20%, compared to 2013 figures, both in investments and in recurring costs, demonstrating the continuous investments made to implement new regulations and to operate existing ones. If aggregated, this total regulatory compliance budget would still represent close to 1% of the Luxembourg GDP. On average, regulatory investments would generally represent 35% of the Luxembourg banks’ investments and up to 51% of the investment capacity of the smaller banks. These budgets have reached record levels and, based on our estimates, are still expected to grow until 2018, marking the end of the implementation of the post 2007-2009 regulatory agenda before a potential slowdown, which tends to confirm our previsions made in 2013. High on the

regulatory agenda for the next years are topics such as AML, MiFID II, GDPR and for some PSD II, in addition to PRIIPs, which topics will concentrate most of the efforts until the end of 2017 and beyond.

These cost figures do not include the additional equity capital requirements entailed by certain regulations such as EMIR and CRD IV. The study neither incorporates the Banking Union regulations nor the Resolution Fund nor the Deposit Guarantee Fund which would have led to massive budgets.

Several indicators in the structure of the regulatory compliance budgets lead us to think that after affecting the tier one entities we may be witnessing a second wave of regulatory evolutions, currently hitting proportionally more the mid-sized banks segment, a transition that may impact in a third wave the smaller entities. If confirmed, this could entail in the future an increase of the running costs for mid-sized banks and an increase of the overall budgets for the smaller institutions, when hit by the wave in turn.

The portion in the workforce having to deal with regulatory issues has also increased to reach 13% of banking employment, with up to 3,300 FTE after extrapolation. A large portion of these FTEs are located in the largest banks but their relative share can be rather significant in smaller banks. Regulation definitely creates qualified employment, without counting the indirect effects on the firms providing expertise and capacity to the banks.

The most costly regulations for the banks remain CRD IV, where investments have doubled compared to the last survey, as well as FATCA and EMIR. Although, if we consider forthcoming regulations, we see that MiFID II is well on course to become the most expensive regulation for those financial institutions required to implement it and that the tax transparency (automatic exchange of information) will complete this top five.

5


In terms of perception, FATCA and EMIR still lie at the bottom for the same reasons as those identified in 2013, namely complexity and purpose (pay tax to a non-EU authority). The positive opinions remain on governance regulations, like e-Archiving, MAD-MAR, AML, GDPR, and to some extent MiFID II and UCITS V. Interestingly and contrary to FATCA, the European (EU) tax transparency is much better perceived.

While the banking community recognizes the objectives of these regulations, we often see that financial institutions are far more critical concerning the way they are designed, developed, brought to the market and articulated with one another. Ultimately the lack of coordination puts the banks under tremendous pressure since their operating models or their IT systems may not always be adapted to these constant evolutions. Data management for instance becomes a real topic and a key challenge for banks and it is often the same staff who are involved in all change management projects. Even tier one institutions’ resourcesare stretchedThe combination of market trends, new entrants and regulations presents a complex challenge for banks and for the financial place. A key takeaway of this study is that the bar to comply with all regulatory requirements is now at its highest, which may in itself constitute both a barrier for new entrants and create opportunities for new banking models, provided regulations are embraced with more agility.

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

6


3 Managing the regulation: general overview

3.1 Total budget in 2015

After extrapolation of the data to all banks in Luxembourg, the banks in Luxembourg would have spent in 2015 a total regulatory budget ranging from €395m to €458m depending on the extrapolation metric used, of which €164m to €205m for investments and €232m to €252m for recurring costs. The 13% range in the figures depends on the type of extrapolation: a simple mathematical extrapolation leads to the lower range but if we take into account the variations of the budgets observed at the level of the banks, we would reach the higher range, which per nature could be considered as a reliable reflection of the market. This total budget must be compared to the total €382m observed in 2013, showing an increase up to 20% of the total regulatory budget borne by the banks in the market. Just as in 2013, this budget would represent close to 1% of the Luxembourg gross domestic product (GDP).

In 2015, the regulatory budget of the banks in our survey amounts on average to €6m per institution, which includes €2.3m of investments whilst recurring costs are estimated at €3.7m. As already observed in 2013, the recurring costs are an important component of the regulatory budgets as they account for most of the annual average budget and are 60% higher than the investments made over the year. The regulatory budgets are 20% higher than in the last survey: average investments for the year have increased by 21% (€1.9m in 2013) and average recurring costs by 19% (€3.1m in 2013).

These regulatory budgets vary according to the size of the banks, as shown in the chart. In the Top 10 banks segment grouping the largest institutions, the average budget reaches €14m in 2015, of which nearly €10m for recurring costs. This is very much in line with 2013 (€14.7m) although we observe a slight decrease of initial regulatory investments balanced by an increase of recurring costs.

The regulatory budget is still important within smaller institutions, reaching a total of €700,000 on average per institution in 2015, of which €275,000 for investments and €424,000 for recurring costs. This is 15% less than in 2013, thanks to a reduction of both investments and particularly on recurring costs. On the contrary however, mid-sized institutions have experienced a sharp increase (42%) in their budgets, with an average total budget of €2.7m per institution in 2015 compared to €1.9m in 2013. Investments have nearly doubled compared to 2013, reaching €1.8m on average (€905,000 in 2013), with stable recurring costs at €905,000 (more or less comparable to the €995,000 in 2013). This could potentially be the result of a second wave in the regulatory evolution, hitting now more the mid-sized banks segment after having impacted the largest institutions first. If this is the case, we could then expect an increase of recurring costs of mid-sized banks in the future and later a third wave on the smaller banks. In general, we also notice that economies of scale remain limited due to the increased number of regulations, still pushing up the level of recurring costs for banks in more mature phases.

Average budget per institution in 2015 (K EUR):

€

458millions euros in 2015

2 333

4 365

1 842

275

3 671

9 684

905424

0

2 000

4 000

6 000

8 000

10 000

12 000

Total Top 10 Mid Small

Investment costs Recurring costs

7


On the basis of the indications provided by the banks in our survey, the investments have been in constant growth over the last years and are still expected to grow until the end of 2017, at €2.8m to €3m on average, before slowing down in 2018. This would confirm the anticipations that were envisaged in the previous survey, where we expected a slowdown of the regulatory investments from 2017 onwards on the basis of the regulatory agenda. However, this trend must be taken with due care, since after 2018 surveyed banks will face a certain degree of uncertainty and have not yet been able to fully plan their regulatory budget. This said, what could be inferred from the regulatory agenda is that after a potential slow down between 2018 and 2020, the review clauses inserted in many European regulations could trigger another wave. We also note that the progression has been more pronounced in the mid-sized banks, to potentially reach a level of €1.5m in 2017 to 2018.

According to the banks in our survey, these investment levels (only considering the investments) would represent on average 35% of their total investments in 2015, ranging from 27% to 51% in the smaller firms. These levels are a bit lower than in 2013 (41%) while investments have increased, indicating that the banks have increased their overall levels of investments in 2015 compared to 2013. The investment capacities are still strongly reduced by regulatory topics, but banks have been able to progressively free up some capacity to invest in other projects, related to their business and operations. These regulatory investments, according to the banks, can still represent 6% of their net banking income on average in 2015 and up to 10% in the mid-sized banks.

Although this statement could be considered as somewhat bold, it could be said that 0.8% of GDP growth has been allocated to compliance by banks only with, despite everything, some positive effects on the economy in the form of more jobs and transfers towards support sectors such as, inter alia, real estate, catering, consultancy and IT. Like in 2013, it is interesting to note that the respondents approve the measures that they consider or perceive to be useful or beneficial for their bank or for Luxembourg, but they have much greater difficulty with the less clear rules or those where the return on investment seems debatable.

When reading the results, one must keep in mind that these budgets are direct budgets for implementing and maintaining compliance with the regulations for banks only. To the budgets estimated, one must add the costs resulting from the content of the regulations themselves, such as the cost of capital for instance in CRD IV or EMIR margins. These indirect costs have however a direct impact on the capacity of banking institutions to mobilize funds to the benefits of the economy in general.

35%% of their total investments in 2015, ranging from 27% to 51% in the smaller firms

8


3.2 Global budget all years In the next sections of the survey, we analyzed the main regulatory topics, one by one, focusing on the overall costs, all years combined (not just 2015). For the six regulations already implemented, we measured the level of investments and recurring costs. Like in 2013, we added together these measures to enrich the results.

With a total of €372m for only these six main measures mentioned in the graph above, the costs already nearly reach the budget levels mentioned in the first section above. This is explained by the fact that costs are not only limited to 2015, but the graph tries to capture the total cost of each of the six regulatory measures since the start of their implementation phase.

The implementation of these six key regulatory measures over the last years would have cost the Luxembourg banking market some €372m, far above the previously measured levels, but in a universe which has changed (i.e., SEPA is no longer included, to the benefit of the tax transparency obligations). In addition, the budget structure is also different as recurring costs (€86.4m) remain lower than investments, unlike observations made in section 1. Similar to the analysis in 2013, 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 generated recurring costs which are not captured by the per measure figures. It is important to stress that these per measure figures should be seen as specific costs additional to be added to the existing regulatory governance and supervision structure.

We expanded the view to all measures by taking into account the average budgets per institution (and recurring costs when relevant) reported by the banks for each of the regulations, including the prospective ones as illustrated in the chart below. In this chart, we see that, while CRD IV, FATCA and EMIR remain prominent, MiFID II is well on course to become the most expensive regulation today with the highest average total investment per institution all years combined. Tax transparency (automatic exchange of information) will complete this top five with comparable figures to FATCA for those implementing it. It should be noted that the Banking Union package could have been shown among the most expensive measures on average, if we had taken into consideration the contributions made to the Resolution Fund or to the Deposit Guarantee Fund.

Total Budget extrapolated (M EUR, all years):

Average budgets (K EUR, all years):

372

114,2

84,1 81,4

43,831,2

17,3

86,4

28,5

7,8 11,1 720,9

11,1

0

50

100

150

200

250

300

350

400

TOTAL CRD IV FATCA EMIR AEOI AIFMD 12/552

Total Investments Annual Running Costs

0

22

1000

215

950

70

100240

247

276

503

525

584

600

893

900

955

1257

1862

190

458

153

123

173

372

0 200 400 600 800 1000 1200 1400 1600 1800 2000

GDPR*

GoAML*

eArchiving*

AML IV*

PSDII*

SRM

SFTR

12/552

MAD/MAR

PRIIPs

UCITS V

DGSD

AIFMD

AQR

AEOI

FATCA

EMIR

CRD IV

MiFID II

Annual Running Costs Total Investments

* indicative figures: indications given by a few banks only

9


3.3 Budget management: poor visibility

For 67% of the banks in this survey, regulatory investments are managed like any other project, with dedicated budgets. The related recurring costs are spread in overall recurring costs (i.e., salaries, systems). Interestingly enough, only a few banks have a specific budget item for regulation, identified as such in all budgets, and including all related costs (i.e., projects, recurring costs, staff) and anecdotal evidence suggests that the picture might be different in 2017. Finally, we noted that almost 15 % of the surveyed banks simply do not have a regulatory budget and these evolutions are charged to the current expenditure of the respective departments.

While they are so important for them, overall, there is only poor visibility on the real costs of the regulatory topics in the banks, a factor which we had already observed in 2013.

“There is only poor visibility on the real costs of the regulatory

topics in the banks.”

10


3.4 Impacts on employment in 2015 The banks included in the survey were asked about their staff employed principally and permanently on regulatory activities, apart from those fully involved in project teams. On average, these institutions employ 29 FTE (full-time equivalent) on these activities. This represents on average a 38% increase with eight more FTE than in 2013, which number varies from 66 FTE in the largest banks to 3.6 FTE in the smaller ones (where the roles can be easily delineated). On average, this represents almost 6% of the workforce, and may exceed 9% in the smaller institutions covering the mandatory independent key control functions of audit, compliance and risk management.

After extrapolation, employment created by regulatory requirements in 2015 would range from 2,715 FTE to 3,300 FTE depending on the extrapolation criterion (against 2,390 in 2013), i.e., from 10% to 13% of banking employees in total (9% in 2013), with a large concentration in the largest institutions (80%). According to our survey, this figure has continued to grow in recent years at an average rate of 8% each year since 2012. This significantly growing figure demonstrates the importance of regulatory issues for banks as well as it evidences the increased costs needed to produce equivalent outputs.

In the detailed analysis, we also measured the impact on employment of each measure for all years combined. The six principal measures examined led to the allocation of between 51 FTE and 447 FTE on a permanent basis. The perspective is different from the previous measure: the scope is limited to these six regulatory measures for all years combined. Any structural employment relating to regulatory measures is not directly included here.

Average “regulatory” employment in 2015 by institution (FTE):

Total employment extrapolated (FTE, all years):

66

10

3

29

0

10

20

30

40

50

60

70


447

274

111 10285

51

0

50

100

150

200

250

300

350

400

450

500

CRD IV AIFMD CSSF 12/552 AEOI FATCA EMIR

13%of banking employee

11


Average Ranked priorities

3.5 Priorities for the banks Just as in 2013, we looked at the banks’ priorities meaning those regulatory measures to be considered the most significant and relevant, classified in descending order. We see below that measures can represent two types of priorities for banks: a first set of fundamental measures such as CRD IV which impact on capital, AML which is central in managing banking relationships, the CSSF Circular 12/552 on bank governance, and those measures perceived to have been imposed but which are unavoidably to exercise any banking activity, such as FATCA or tax transparency. The real newcomer is MiFID II, which regulation is at the core of banking relationships, especially in private and retail banking, and to that extent probably now part of the fundamental measures too.

It is however surprising to see the lower priority level given to such important measures as MAD/MAR and PRIIPs, impacting most banks, or GDPR, impacting all financial institutions.

Similarly to 2013, we noticed that the priorities are slightly different depending on the type of institution. The smaller institutions assign higher priority to immediate and fundamental issues such as the CSSF 12/552, MiFID II, CRD IV, AML and, to a certain extent, tax transparency. Conversely, the larger institutions, in addition to their top priorities like CRD IV, the Banking Union, FATCA or tax transparency, have the capacity to embrace more regulations, such as MiFID II, AIFMD, PRIIPS, PSD II, or e-Archiving to name just a few. Mid-sized institutions tend to be more selective than the large ones, depending on their business models and operational organisation.

As expected and already observed in 2013, differences per banking sector also appear: banks active in private banking assign higher priority to CSSF Circular 12/552, MiFID II and tax transparency matters in general, whilst universal banks tend to focus on MiFID II, CRD IV and tax transparency matters, and banks specialised in investment funds prioritise UCITS V, MiFID II, AML, tax matters and CSSF Circular 12/552 in particular.

When we match the priorities reflecting the banks’ interests with the budget items (investment expenditure, shown above), we find that many top priorities, besides CRD IV, consume lower budgets. Most investments are captured by MiFID II, EMIR, FATCA and tax transparency, which are among the important measures too.

11,911,3

10,410109,9

9,69,29,1

7,56,5

6,35,85,8

54,9

4,4

0 2 4 6 8 10 12 14

MAD/MARe-Archiving

GDPRPSD IIPRIIPs

UCITS V & VISEPA

AIFMDAQR

EMIRIT Security

FATCATax Transparency

MiFID IICSSF 12/552

AML IVCRD IV

12


3.6 General view of perceptions and intentions

There are different observations to make from these opinions and more details will be presented later in the analysis.

First and as already observed in 2013, FATCA and EMIR are ranked at the bottom as the least appreciated regulations, perceived as pure cost measures, with a difference however concerning EMIR. While pursuing an objective beneficial to the financial sector, the latter regulation suffers from the chaotic way it was developed and implemented. FATCA triggers the highest degree of frustration since it neither contributes anything to the sector nor to the clients and, probably, nor to the tax authorities either. This is however not the case of the tax transparency measures, which are considered more positively.

Second, it is surprising to see how positive e-Archiving and MAD/MAR regulations are perceived, although their application (in particular e-Archiving) is extremely uneven. That is different from AML topics which are welcomed and a priority for banks. Third, some negative opinions are illustrated in the chart below towards AIFMD, to some extent CRD IV, SRM and AQR, MiFID II and PRIIPs and especially EMIR and FATCA.

As in 2013, the survey also raises questions about measures being implemented now or about those to come in the future. These questions seek to assess the banks’ intentions to implement, in order to draw up some type of regulatory agenda for banks in the years to come and to list the regulatory activities likely to occupy them. Among these measures, AML IV (and GoAML) and MiFID II are at the top of the agenda and will be widely implemented, as already noticed in the 2013 survey. At the bottom of the ranking, it is not surprising to find measures such as e-Archiving, perceived as an opportunity rather than an obligation. However, the low adoption score is surprising for a measure that offers real opportunities and a better communication could be useful. Measures such as SFTR, UCITS V and, to some extent, PRIIPs are applicable to banks depending on their type of business activity, which may explain the lower scores.

Overall Opinion

Intent to Implement

6%

12%

4%

5%

9%

13%

16%

15%

39%

33%

30%

22%

44%

39%

4%

8%

11%

13%

20%

12%

21%

21%

18%

19%

20%

30%

6%

22%

26%

35%

13%

30%

56%

38%

67%

75%

73%

53%

42%

47%

59%

18%

48%

45%

33%

33%

39%

35%

37%

31%

33%

54%

11% 11%

6%

7%

17%

33%

26%

5% 9%

7%

44% 6%

6%

8% 8%

5%5%

11% 11%

11%

4%

9%

6%

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

FATCA

EMIR

AQR

SFTR

DGSD

PRIIPs

CRD IV

SRM

PSD II

AIFMD

Tax transparency

UCITSV

MiFID II

GDPR

GoAML

AML IV

MAD-MAR

eArchiving

Very postive Rather positive Neutral Rather negative Very negative

29%

37%

57%

67%

68%

73%

73%

81%

81%

92%

46%

37%

43%

38%

24%

12%

8%

8%

19%

4%

25%

11%

8%

15%

19%

12%

4%

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

E-archiving

STFR

PRIPS

UCITS V

MAD II / MAR II

PSD II

GDPR

Go-AML reporting

MIFID II

AML IV

Yes No Do not know

13


Market Regulation: EMIR, MiFID II, PRIIPs, MAD/MAR, SFTR44.1 EMIR 1. Overall management The EU market infrastructure regulation (EMIR) is an important regulation since it impacts nearly all banks in our survey and nearly all of them have had to implement it. Analyses started in 2011 with a peak in 2013/2014, while some analyses were still ongoing in 2016. Likewise, implementations mainly were conducted in 2013/2014, with some more work in 2015 and 2016, which can be explained by the phased approach of EMIR requiring to have ongoing enhancement of the arrangements.

As already reported in the 2013 survey, EMIR is a topic driven by or shared with the group for many banks (68%), whilst only 32% of banks manage it locally. It is true that the perceived complexity of the measures and its overlaps with MIFIR or CRD/CRR IV or the intra-group impacts have gradually gained importance. Nevertheless, the financing is mainly local (65% of banks, even 84% for larger banks, comparable to 2013).

Average budget per institution (K EUR , all years):

€2. Budget: EUR 81.4 M + EUR 11,1 M recurring costs According to our survey, the average total budget for EMIR implementation, all years combined, amounts to €955,000 per institution (€700,000 in 2013) or €1.3m for mid-sized banks. This represents 10.4% of the total regulatory budget of the institutions on average.

The figures mentioned above show an increase of 36% of investments compared to the budget estimated in 2013, reflecting repeated investments on EMIR since 2013. Budgets are still foreseen for the future, with €214,000 still planned for 2016 on average. The banks considered that the budget was more or less in line with their planned budget (75%), even if the lack of clarity about the phasing in of the different parts of EMIR has made this measure difficult to predict. Unfortunately, EMIR is not yet finished meaning other investments will be required to continue implementation in the future, notwithstanding the arrival of EMIR II. We could expect the overall investment budget to increase.

954 887 966 347

1 292 500

31 667172 706

321 571

90 00018 333

0

500 000

1 000 000

1 500 000

Average Top 10 Mid Small

Total Budget Annual recurring costs

Recurring costs are estimated at €173 000 per institution on average, varying according to size from €322,000 to €18,000 for the smaller banks. These costs have continued to grow, even compared to 2013 (€123,000), in the same proportion as investments, and account for 18% of the investments. This was expected in 2013 as we warned that all recurring costs had not yet materialised. Larger entities also foresee an increase in recurring costs for 2016, up to €428 000, where smaller and mid-size entities expect them to be stable. This may reflect the difference in the way EMIR is applied and the options retained by the financial institutions (more extended in larger banks).

Once extrapolated to cover the Luxembourg marketplace, the total budget for EMIR would range from €56.9m to €81.4m depending on the extrapolation method, and annual recurring costs would range from €10.3m to €11.1m. As in 2013, these figures make EMIR one of the costliest regulations for Luxembourg banks, with however a larger share of recurring costs. This may reflect that EMIR introduced new practices in daily aspects for banks in terms of trade confirmations or central clearing obligations and for an increasing number of products. EMIR did not require new costly organisation and can rely on high degree of industrialisation.

14


These budgets represent the direct budgets for the implementation and compliance to EMIR. Inferred costs of regulation, such as capital consumption costs for example for collateral aspects under EMIR, should be added in order to have the full cost picture. In addition, these costs are still in a low range as they will continue to increase because of the acceleration of remaining implementation steps, but which costs are for now difficult to estimate.

Distribution of total implementation budget:

Percentage (%) of opinions (basis: banks concerned):

As for the main regulations, the implementation phase is the most intense from a budget perspective (72%). Investments have been shared equally between IT and functional issues (53% and 47% respectively), which is reasonable for EMIR. These projects are principally led by the bank staff (60% on average, up to 80% for larger institutions). It is interesting to note that mid-size institutions, have proportionally the highest recourse to external consultants (58%).

As already outlined in 2013, EMIR is not generating any new employment: on average, less than one FTE is dedicated and usually employed on EMIR in the banks participating in the survey (excluding project teams). This figure does not vary between institutions. EMIR led to the recruitment of one to two persons in 15% of cases (stable compared to 2013) in mid-sized banks. On the basis of our sample, the extrapolated employment inferred by EMIR would be even less than in 2013 with 51 FTE (93 FTE in 2013), among which 16 FTE would be new employment.

3. Perception Since the last survey, the perception of EMIR remained stable and still negative, even worsened among mid-sized banks, gathering a rate of negative opinion on the regulation and its impacts for banks of 54% (like in 2013) and only 8% more positive opinions. We fear that the future will not be brighter for EMIR as it will be applicable to more entities and the demanding margin requirements will be fully in force starting early 2017.

Even more than in 2013, the two main criticisms concerning its excessive costs compared to expected benefits and the lack of clarity of EMIR have led to implementation issues. Most banks fail to recognize the benefits of EMIR, except fortunately on the capacity to increase market transparency and to reduce risks where opinions are slightly more positive. While the largest institutions may be more nuanced and positive on the benefits of EMIR, mid to small-sized banks are definitely negative towards EMIR. Interestingly, the perceived capacity of EMIR to prevent future financial crisis is down to 25% from 40%. In short, EMIR is perceived as a costly measure, difficult to apprehend, with benefits still elusive.

28%

72%

47%

53%

60%

40%

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

Gap analysis

Implementationand follow-up

IT / systems amendments/ new systems

Functional analysis / business / non-IT

Internal staff

External (consultants, advisors, etc.)

12%

24%

25%

36%

44%

84%

88%

54%

38%

8%

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

EMIR will allow a better capital optimization

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

EMIR will help to avoid a new financial crisis

With EMIR, the Bank can better manage risks

EMIR will bring more transparency and reduce risk

EMIR is unclear or difficult to implement

It is too expensive to implement compared to advantages I see

Negative

Neutral

Positive

15


Since 2013, we cannot observe significant improvement concerning the EMIR perception. 82% of respondents indicate having difficulties to understand the regulation, which is even more than in 2013 (65%). Larger institutions have more difficulties with regard to this matter, which could be explained by the size and number of activities impacted as well as by the larger scope of obligations being applied. The following concerns for banks are more technical: collateral management, central clearing, portfolio reconciliations, reporting, in a different order compared to 2013 which reflects the evolution of priorities. As observed previously, the challenges vary also with the size of the banks and the applicability of EMIR: the risk mitigation techniques are seen as more challenging in small-sized entities, while the challenge will be more on such topics as the exchange of collateral or the central clearing for the large banks.

EMIR definitely stays among the least well-perceived regulations in the Luxembourg marketplace. The chaotic development of this regulation as well as its implementation and the technical difficulties has completely overshadowed the targeted benefits. This observation was already made in 2013 when we hoped for a positive evolution but we are forced to conclude that the situation has not improved.

Percentage of banks describing difficulties (basis: banks concerned):

22%

30%

48%

52%

52%

57%

82%

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

Timely confirmation

Daily valuation

Reporting to a TradeRepository

Portfolio reconciliationand dispute resolution

Clearing with a CCP

Collateral management

Understanding the regulation

“82% of respondents express difficulties in understanding the regulation.”

16


4.2 MiFID II 1. Overall perspective The Markets in financial instruments directive (MiFID II) is a regulation currently in the implementation phase, with a due date in January 2018, after having been postponed for one year. It is part of the prospective measures of the survey.

Nearly all banks (96%) know at least the main MiFID II principles and half of them claim to have a perfect knowledge of the regulation. Most banks (81%) plan to implement MiFID II, with the exception of some firms active in the funds industry (asset management and asset servicing). The analysis started in 2014, especially for the largest banks, but most banks actually started in 2015. Most of the implementation started in 2016 (62%), which is also the year when most level 2 texts were released in their definitive version.

2. Budget indications Unlike in 2013 where equivalent budgets to MiFID I were expected for half of the banks, 82% of banks expect now higher budgets than with MiFID I, especially among the Top 10 firms of our sample but also among the smaller firms. We can assume that since the firms are now going into the details of the regulation, they are in a better to apprehend the extent of the impacts and the required budgets.

Despite the proximity of the implementation date, half of the respondents were not able to provide an overall budget for the implementation of MiFID II at the time of the survey, of which smaller firms. For

the others respondents, budgets varied from €2.5m to €627,000, with an average figure of €1.8m, illustrating a sharp increase compared to the first estimates provided by some banks in 2013 (€1.2m to €30 000). MiFID II represents 16.5% of the total regulatory investments of these banks (and up to 24% in mid-size institutions have to recoup the delays accumulated vis-à-vis their larger counterparts), so that MiFID II may become the most expensive measure in the survey.

This budget will be used essentially during the implementation phase (72%) and internally (68%). MiFID II was anticipated with important technology impacts, which is confirmed as IT has a prominent place compared to the functional analysis mobilizing up to 61% of the budget. We evidenced important impacts in the reporting chains as well as in the transactional systems.

Opinions are still mixed as to the need for recruitment: 40% of respondents plan to hire new staff, on average 3.4 FTE (from one to six FTEs, depending on the size of the entity), while the others have not yet decided or have not yet planned any recruitment, which may translate into markert pressure to find experts late 2017. Interestingly, mid-sized companies tend to show a greater need for recruitment, potentially as the result of a broader scope and impact of MiFID II on them compared to smaller firms but without having the same capacity as the larger firms. They are the only ones more eager to call for external support.

“MiFID II may become the most expensive measure in the survey.”

17


3. Perception Compared to 2013, we witness a complete shift in marketplace perception of MiFID II, now seen as a regulation more complex than MiFID I by 73% of banks compared to 43% in 2013. The benefits in terms of customer protection are down from 61% in 2013 to 35% in 2015. Banks now perceive it as a disruptive measure for business models and for interactions with clients. Generally, banks expect a profound impact on their services, products and revenues in addition to the increased governance and administrative burden. These inconveniences come in addition to all anticipated implementation issues. Strategic impact and the level of complexity are even more highlighted in the larger institutions. This also illustrates the level of maturity in the analysis, since the larger institutions started the project earlier.

When questioned about their attitude with regards to the delay in the implementation deadline of MiFID II, banks are positive, given the fact that implementation is difficult (79%) or because they were already late (44%). In general and save a few exceptions, the new one-year delay regarding the MiFID II implementation was a true relief for the marketplace. The final regulatory texts (level 2 measures) came very late, rendering the implementation process de facto virtually impossible, or at the very least very complex, to complete within the initial timeline in 2017. This further reinforced the perception that MiFID II is an increasingly heavy measure.


6%

6%

13%

32%

44%

79%

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

I am really negative about itbecause my implementation

project was completed

I am negative because itforces me to freeze some

allocated resources

I am negative becausemy implementation was

close to be completed

I am rather neutral

I am very positive becauseI was late

I am positive because theimplementation was heavy


21%

35%

45%

57%

62%

67%

70%

70%

73%

0% 20% 40% 60% 80%

I'm rather positive about this new regulation

Investors will be better protected

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

MiFID II is the opportunity todevelop new products and services

My business model will be significantly impacted(e.g. open architecture, distribution strategy, etc)

Total ban of most inducements willhave significant impact on my revenues

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

It will be difficult to implement

Impacts will be more important than MiFID I

18


4.3 PRIIPs

1. Overall perspective

The Packaged retail and insurance-based investment products (PRIIPs) regulation is also part of the prospective measures of the survey. The PRIIPs regulation was published during the previous survey, in 2013, and is currently still being challenged with the rejection of the RTS (regulatory technical standards, level 2 measures) by the European Parliament at the beginning of September 2016. As a consequence, the implementation of the regulation has also been delayed by one year, to end of December 2017, to match with MiFID II.

Oddly enough, PRIIPs is not better known since 2013, despite the tight deadlines: 50% of the respondents only know the main aspects of it and 23% only know it by name. This may be explained by the fact that many banks until recently believed that they were not highly impacted by PRIIPs, an attitude that changed with the publication of the draft RTS in June 2016 (later rejected). Without surprise, this low level of understanding is even more present among the mid-sized and smaller institutions, essentially expecting that PRIIPS would be supplied by their parent companies, as opposed to larger institutions, especially in the retail industry.

Only 57% of banks in our survey have communicated their intention to implement PRIIPs, mainly larger and mid-sized institutions active in retail and private banking, as opposed to the banks in the funds industry (UCITS KIDS benefit from a temporary exemption).

To our surprise, with the exception of a few large firms having already started in 2014, most of the market participants started their analysis in the course of the second quarter of 2016 only. The implementation was planned to start in the third or fourth quarters of 2016 in the best cases.

2. Budget indications

Only half of the impacted banks in our survey had already defined an overall budget for the implementation of PRIIPs, which would amount to €276 000 per institution on average, or 10% of their total regulatory investments. This budget can amount up to €435,000 in mid-sized banks, as opposed to €50,000 in the smaller entities, but representing 20% of their regulatory investments. Given the relatively low level of budget and considering that the measure was carried out on the 2015 figures, we can anticipate that it is probably largely below the real figure and other budgets will be mobilized until 2018.

Considering the lack of visibility regarding this measure, still not finalised in 2017, the future allocation of budgets remains traditional, mainly dedicated to the implementation (65%), the IT analysis (56%) and through internal initiatives (73%).

The majority of respondents (79%) do not have the intention to recruit staff dedicated to PRIIPs. The general perception is that important obligations, like the production of the documents, could largely be outsourced.

19


3. Perception Generally, PRIIPs is rather badly perceived with only 24% positive opinions, down from 29% in 2013. The perception has shifted since the previous survey for similar reasons as for MiFID II: the difficulty to implement it combined with the administrative burden have by far outweighed the expected benefits of informing investors. That perception is particularly present within the larger institutions and the fund industry. Among the selected parameters, customer protection goes down from 67% in 2013 to 41% in 2015 and what was perceived as a regulation similar to UCITS KIIDs in 2013 (52%) is no longer the case now (29%), obviously due to the approach retained in the level 2 measures. Whereas the difficulty to implement PRIIPs was the last item quoted in 2013 (29%), it now becomes the first one (50% of respondents).


24%

29%

29%

41%

47%

50%

0% 20% 40% 60%

I'm rather positive about thisnew regulation

It is just similar to UCITS KIID(Key Investor Information Document)

It will not be a major regulationwith important impacts

Investors will be better informedand hence protected

PRIIPS II will add another layer ofpaper, and administration, that’s all


“The difficulty to implement it combined with the administrative burden have by far outweighed the expected benefits of

informing investors.”

20


4.4 MAD / MAR 1. Overall perspective The market abuse regulation and directive (MAR/MAD) were still prospective measures at the time of the survey given that the directive was applicable starting 3 July 2016 (during the deployment of the survey). As a result, the knowledge is still limited: only 32% of the responding banks declared having a perfect knowledge of the regulation and only 60% declared being aware of the major principles.

Nevertheless, 68% of interviewed banks plan to implement the measures in the near future, which shows their importance for the marketplace. This figure should be taken with caution since this regulation will apply to various degrees to all listed corporates or intermediaries active in trading. The firms not planning to implement are mainly small institutions in other sectors than universal or private banking.

2. Budget indications As a consequence, 65% of banks surveyed had not defined a dedicated budget at the moment of the survey. Actually it is mainly the Top 10 firms in our sample which already had a budget planned. Those that already have some elements are still conservative, with an average budget of €247,000 among the mid-sized or large institutions. Outside of the banking remit, the major impact of this regulation will be felt by the trading platforms.

Without any budgetary visibility, little recruitment is planned. Only 16% of concerned entities have the intention to recruit, in an average of one FTE per institution.

3. Perception Despite being a new regulation, MAR/MAD is generally well perceived (56% of respondents declare being positive), especially among the largest firms (86%). However the benefits of MAD/MAR on the improvement of the financial industry behaviour have not yet been convincing, reaching only 27% of respondents, 31% of respondents stating that they are unclear about the changes it will bring and 42% seeing it just as a few more procedures in new instruments or markets. Let us note that the smaller firms tend to consider that they are not impacted or that it will just be a matter of some new policies or procedures.

This second iteration of the regulation is still new and not well mastered: it is reflected in the opinions below which we believe also display some wrong beliefs.


27%

31%

44%

42%

56%

0% 20% 40% 60%

It will improve the behavioursin the financial industry

I don't see what it will change

We are not really impacted,like others in Luxembourg

I see it just as a matter of a few procedures or policies

I'm rather positiveabout this new regulation

21



17%

19%

20%

20%

25%

33%

40%

0% 20% 40% 60%

It will reduce the business opportunities for the Bank


SFTR is unclear and will be difficult to implement

It is too expensive compared to the advantages I see

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

It will reduce the risks for the Bank

SFTR will bring more market transparency and reduce risk

4.5 SFTR 1. Overall perspective

Securities financing transactions regulation (SFTR) is another prospective measure of this survey and appears also for the first time within our scope. Despite being discussed since 2014 and replicating the Trade Repository sections of EMIR, the text was finalized by the end of 2016 for an entry into force in the first quarter of 2018. It is thus not surprising that only 13% of respondents consider possessing a good knowledge of the text and that more than 50% of mid-sized to small institutions simply do not know what it is or only know it by name.

The impact will vary with the size of the institution and, implicitly, their activities: 78% of the Top 10 institutions and 43% of the mid-sized banks plan to implement the regulation, while most (86%) of the small firms do not plan to implement it. This is explained by the specific nature of the regulation and its particular scope. Hence, the banks concerned planned an analysis and implementation phase starting in 2016. 2. Budget indications Most of the banks were not yet able to indicate an overall budget planned for implementation of SFTR. Only three banks, mainly large ones, were able to provide us with first estimates amounting to €100,000 on average for the SFTR implementation. The reduced size of the allocated budget probably reflects the relative importance and low prioritisation of this measure at present time. However given the similarities with EMIR reporting, we expect an increase of the budgets closer to the live date. This measure is in fact the third pillar of financial transactions reporting with EMIR and MIFIR so that it could lead to potential synergies in data processing.

The budget allocation so far seems rather traditional: highly concentrated on the implementation phase, equally shared between IT and functional analysis with however a quasi-exclusive internal delivery (90%), an approach that should not obliviate the fees paid to the Trade Repositories. Presently, we can assume that

many institutions will try to find a third-party provider for at least part of the reporting service, which should however not reduce the consideration for data internal management such as timely access to structured data which will nevertheless be needed.

This type of regulation is not expected to lead to an increase in staff: on the basis of our survey, no recruitment is planned on the Luxembourg marketplace yet for this regulation. 3. Perception Opinions on SFTR are rather neutral (75%), even if the measure is positively welcomed by 19% of the banks probably because of the increased transparency it will bring. The opinions are not yet evidenced for positive elements such as risk reduction (33%) and/or transparency improvement (40%) or even the negative elements such as the effect on costs, the difficulty of implementation or the perception of its content.

22


Prudential regulation: CRD IV, AQR, SRM, DGSD55.1 CRD IV

1. Overall management

Without surprise, all banks in our survey are concerned by CRD IV and have started their implementation work (62% have finished it and 35% are still in process). Even if some started already in 2011, most of the analysis started in 2012 (18%) and 2013 (55%). Most of the implementation projects started in 2013 and early 2014 (65%), with the first projects launched in 2012 among the top tier banks in Luxembourg. In comparable proportions compared to 2013, this regulation is managed from Luxembourg (58%) while the others and notably the largest institutions shared initiatives with the group (35%) or had them directly managed by the group (8%). The financing of the projects (not taking into account potential additional funding) remains principally local in 80% of cases, like most of the regulations.

2. Budget: EUR 114.2 M + EUR 28.5 M recurring costs According to our survey, the total budget for implementing CRD IV (all years combined) and excluding capital add-ons would amount to an average of €1,257,000 per institution, varying from €2,675,000 to €77,000 depending on the size of the institution. This budget more than doubled compared to the average €588,000 recorded in 2013, which suggests that continuous investments have been made since the last survey. This budget represents 22% of the total regulatory investments of firms, and up to one third in the smaller firms. This level of investment was more important than planned for 43% of the largest firms in our sample, which is also by far the highest budget. In general however, the budget was aligned with expectations for 74% of respondents.

Annual recurring costs have without surprise sharply increased since 2013, going from €190,000 to €372,000 on average per institution, and varying from €565,000 to €110,000 depending on the size of the institution. Recurring costs reach very high proportions in mid-sized and small-sized organizations, where they account for 80% or even more compared to the level of investments.

Once extrapolated to the Luxembourg marketplace, the total budget for CRD IV would range from €83.7m to €114.2m depending on the extrapolation (excluding new capital funding). The annual recurring costs range from €24.8m to €28.5m, which represents 22% of total investment expenditure.

It should be noted that these budgets are direct budgets for meeting and maintaining compliance. The costs caused by the actual content of the requirements such as the additional equity capital should be added to obtain a complete picture.

The global budget is mostly consumed during the implementation phase (64%), with a high proportion of IT analysis (59%) compared to the functional analysis, even more present in mid and small-sized entities. If they are conducted mainly with internal resources (66%), we observe a higher need for assistance in the mid and small-sized firms (up to 59%).

€



36%

64%

59%

41%

66%

34%

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

Gap analysis



Functional analysis/ business / non-IT

Internal staff


It is too expensive to implementcompared to advantages I can benefit from

CRD IV requirements will strenghtenthe resilience of banks in case of crisis

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

1 256 571

2 675 256

402 000

77 133

371 974565 438

331 667110 800

0

500 000

1 000 000

1 500 000

2 000 000

2 500 000

3 000 000


Total Budget Annual recurring costs

23


On average, six FTE are dedicated and usually employed for CRD IV (against 2.5 FTE in 2013) and 40% of banks, mainly the largest firms, recruited an average of 1.7 FTE to work on this subject. Once extrapolated to the Luxembourg marketplace, employment inferred by CRD IV would amount up to 447 FTE, among which 60 FTE would be net new recruitments, which is more than in 2013 (216 FTE) as investments have accrued since the last survey. However, it remains difficult to precisely measure as the CRD IV magnitude as its impacts are spreading across all of the banks’ functions and impacts all employees (from commercials to back-office).

3. Perception The overall perception towards CRD IV and its impacts remains, despite its costs, rather neutral (42%), if not negative (33%), exactly as in 2013.

Interestingly the benefits of CRD IV are still recognized, such as the better resilience to market fluctuations in case of crisis (64%) and the enhancement in risk management (45%). We see that the large institutions put more focus on the market impacts, while the smaller ones focus more on the impacts on the risk management within the firm.

The main differences compared to the previous study relate to the cost of implementation perceived as even more excessive compared to the expected benefits (68% up from 54% in 2013) and the impacts on the activities, finally lower than originally expected (9% new activities, 14% stop activities, compared to 22% and 30% in 2013). The largest firms are the only ones contemplating to start new activities as a result of CRD IV. The impact on the financing model is still important (45%), especially for the largest entities (67%) as opposed to the smaller (17%), which can be explained by the way the obligations are implemented.

The overall perceived level of implementation difficulty has increased compared to 2013. If the measures related to liquidity and, for the largest mainly, strategic planning are still among the most challenging aspects, the reporting obligations have become a key concern for 80% of firms, up from 54% in 2013. Coping with credit risk requirements still is a concern (52% of firms), particularly for mid-sized banks (71%).



68%think it’s too expensive to implement

9%

14%

45%

45%

64%

68%

33%

42%

25%

0% 20% 40% 60% 80%

Negative

Neutral

Positive


CRD IV requirements will strenghtenthe resilience of banks in case of crisis

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

CRD IV will change our funding model

Some of our activities willstop because of CRD IV

CRD IV will lead to new activities in my entity

14%

39%

52%

64%

77%

78%

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

Tier 1 Capital requirements

Redefining risk appetite

Credit risk requirements

Strategic planning

Liquidity measures

Reporting

24


5.2 AQR 1. Overall perspective

The issue concerning AQR (asset quality review) is very specific, since only a small number of banks fall within its scope. In Luxembourg, only two banks were reviewed in 2015 and none in 2016.

Nevertheless, it emerges from our survey that more banks (nine respondents from our sample) feel concerned by this measure. We suspect it can be justified by the effects of the participation of certain banks to group efforts as well as the broader issue of the Banking Union, which is of interest for banks to present internationally.

If we limit to the banks that stated they were affected by AQR, we observe that the matter is managed for half of them locally and for the others by the group or in a mixed responsibility. As for most of the regulations, the funding remains mostly local.


For these banks, the average budget for all years combined amounts to €600,000 per institution, but with a high dispersion depending on the size of the institution. These levels are more or less in line with the indications provided in 2013. These figures are illustrative only: indeed AQR is a long resource-intensive process, which implies a long preparatory work by many employees on top of their assigned attribution. Should this workload was be taken into account in this survey, it would increase the real costs of the measure.

Based on the banks surveyed, the budget tends to be proportionally divided between the preparation work and the review itself, with half of the budget paid for the assistance of external experts and a logical predominance of the analysis workload compared to IT interventions. In most cases, banks did not plan to recruit for this purpose.

3. Perception To examine perceptions, just as in 2013, we chose to open the field to the nine banks declaring being affected by AQR, or the Banking Union according to the interpretations, and which responded to all the questions. We will consequently limit our analysis to some qualitative insights given the reduced number of respondents.

The general neutral opinion did not change much since 2013, nor the perceived impacts on the banks, whereas only one firm expressed a rather positive attitude. However we note some important evolutions in the viewpoints the banks have on AQR. The benefits of AQR, such as the evidence of the recapitalization needs of banks, the restauration of investors’ confidence, the reduction of the systemic risks or (at the exception of the large firms) a better internal risk management, are no longer as prominent as in the past. Opinions are now rather dominated by the feeling that AQR leads to excessive costs for the expected benefits, even if large firms are more nuanced. Another positive element identified is the focus on the benefits to the Luxembourg marketplace, i.e., the capacity of AQR to identify failure in our market, especially for the larger firms.

These few banks in our sample are principally preoccupied by technical difficulties, as in 2013, such as the inclusion of the large number of credit risk indicators, respecting the data standards and, still, the understanding of all requirements. This is all the more true for smaller banks, which perceive comparatively more technical problems with the analysis itself (e.g., the number of factors, scenarios). Across the board, we observe that the data standard formats for communication are becoming increasingly challenging since 2013.

“AQR leads to excessive costs for the expected benefits.”

25


5.3 Single Resolution Mechanism 1. Overall perspective The Single Resolution Mechanism (SRM) is the third pillar of the Banking Union. It is the first time we address the matter in our survey as it entered into force in 2014. The SRM is directly responsible for the resolution of the entities and groups directly supervised by the European Central Bank as well as other cross-border groups.

Most of the banks (90%) surveyed are concerned by the SRM set up at the EU level and most of them (86%) already prepared the implementation of this measure. The implementation of this obligation is mainly driven from Luxembourg (in 65% of cases) or with joint responsibilities with the group (30%).


The total budget for the implementation is significant, estimated in our sample to reach €4.7m on average per institution and representing 21% of regulatory investment of the concerned banks these last years (up to 31% for mid-sized institutions). This budget significantly varies with the size of the banks, from €299,000 to €7.8m. These figures must however be further detailed: most of this budget represents the contributions to the resolution fund. Once removed, the sole implementation budgets would limit to €70,000 on average per institution, varying from €93,000 to €17,000. As a whole, the budget is in line with the expectations for 77% of surveyed banks, the remainder considering higher than anticipated.

Most of these budgets (73%) have been spent on the resolution itself (contribution and resolution plans), compared to the preparation. It is important to note the large proportion (91%) devoted to the functional analysis. This illustrates the importance of the mechanism on the banks’ activities. Consequently, this implementation is mainly led internally for 86% of respondents notwithstanding the size of the institution, even if SRM requires a lot of expertise.

This implementation did not necessitate any particular recruitment, banks having recourse mainly to internal employees. Only one bank in our survey has further consolidated its teams, with four FTE.

3. Perception The banks in our sample are rather neutral regarding the SRM (47%), except the smaller institutions which look more negative. However, respondents are rather convinced by the benefits or the purpose of SRM, i.e., that the resolution will help to identify potential failures in the Luxembourg banking system or to reduce the systematic risks in the European market (79% and 68%), as well as the increased confidence it can bring for investors (58%). In a way, respondents recognize the benefits for SRM that they fail to identify for AQR.

The main challenges concern the understanding of the requirements and the resolution plans (61% and 50%). The magnitude of resolution and its political aspects certainly contribute to these challenges.

.


16%

39%

58%

68%

79%

26%

47%

26%

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

The resolution mechanism helpsmy risk management

It is too expensive to implement compared to advantages I can benefit from

Investors are more confident after the implementation of the resolution

mechanism regarding the European market

The resolution mechanism will help to reduce systemic risks

The resolution mechanism will help to handlefailures in the banking system in Luxembourg

Negative

Neutral

Positive

“Respondents recognize the benefits for SRM that they fail to

recognize for AQR.”

26


5.4 Deposit Guarantee Scheme Directive

1. Overall perspective

The deposit guarantee scheme directive (DGSD) is another pillar of the Banking Union. It is also the first time that we address the matter in our survey as it entered into force in 2015. The measure is oriented towards retail customers, individual and companies, to ensure a quick and harmonized compensation of bank account holders in case of a bank failure.

Most of the firms in our sample (89%) are concerned by this directive and are prepared for its implementation in the same proportion. The project is mainly led by Luxembourg (82%) or in the other cases in partnership with the mother companies.

2. Budget indications As for the SRM, the average implementation budget (all years combined) is important, reaching €2.4m per institution, varying from €177,000 to €3.1m according to the size of the firms and representing from 2% to 18% of the total regulatory investments. Most of this budget however is made of the contributions to the deposit guarantee fund. Once removed, the actual implementation budget amounts to €525 000 on average per institution, varying from €35,000 in the small firms to €420,000 for the larger firms, in line with expectations.

Most of the budget was spent on the deposit guarantee scheme itself, i.e., the contribution and the compliance with the new requirements. Mainly the banks’ staff is leading the implementation (92% of the budget), with a reasonably high level of analysis (79% of the budget) compared to IT spending. As for the SRM, the implementation of this directive did not imply any specific recruitment.

3. Perception As a whole, banks tend to be neutral concerning the consequences and the impacts on their entities (for 73% of them). However they acknowledge and unanimously accept the benefits of the new scheme in terms of investor protection (87%), and especially to handle any potential bank failure in Luxembourg (69%), as well as to increase investor confidence towards the EU markets in general (53%) or even in terms of reduction of the systemic risk (47%).

Based on our sample, the main challenge with this directive,seems to be the complexity of regulatory requirements, making it difficult to understand (63% difficult). To some extent, communicating all requirements to the new deposit guarantee scheme in Luxembourg and understanding the plasing of the application are also a concern (87% difficult to somehow difficult).


87%think the Deposit Guarantee Scheme participates in the Investor / Client protection

40%

47%

53%

69%

87%

7%

73%

20%

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

It is too expensive to implement comparedto advantages I can benefit from

The Deposit Guarantee Scheme willhelp to reduce systemic risk

Investors are more confident after theimplementation of the Deposit GuaranteeScheme regarding the European market

The Deposit Guarantee Scheme willhelp to handle failures in the banking

system in Luxembourg

The Deposit Guarantee Scheme participatesin the Investor / Client Protection

Negative

Neutral

Positive

27


6 Tax regulation: FATCA, Automatic Exchange of Information

6.1 FATCA 1. Overall management All banks in the survey declare to be impacted by the foreign account tax compliance act (FATCA), which makes it an important regulation. The first analysis dates back to 2011, whereas most of them were conducted in 2013 and early 2014, with implementation starting from 2014. For half of the respondent banks (48%), the topic is managed in a joint approach with the group, especially for mid-sized banks and larger banks (67% and 56% respectively). For the smaller banks, FATCA is either driven by the group or locally. As already observed in 2013, financing the adaptations to FATCA remains local in 78% of cases, especially for the smaller firms.

2. Budget: EUR 84,1 + EUR 7.8 M recurring costs

According to our survey, the total budget for implementing FATCA, all years combined, would amount to an average of €900,000 per institution, representing an increase of 14% compared to €792,000 in 2013 and illustrating the continuous investments made since then, especially in the mid-sized banks which started later. It varies from €1.7m to €52,000 depending on the size of the bank. This budget represents around 16% of the regulatory investments of the respondent banks, a level that can increase to 19% in mid-sized banks. This may reflect also the difficulties to operate economies of scale in light of the complexity of this regulation. In 68% of cases, this budget was in line with the banks’ expectations, but in 21% of cases it exceeded initial budget calculation by approximately 44%, especially in the mid-sized institutions. Some of the respondents were surprised by the magnitude of the regulation, which is now in a mature phase. The average budget mobilized for 2015 is €138,000, which is much lower and would confirm that the peak of investments are behind.

Annual recurring costs are valued at €123,000 per institution on average, varying widely between €212,000 and €24,000 depending on the size of the institution. Recurring costs represent 14% of the total investments, climbing up to 44% in smaller firms indicating a different type of solution. As opposed to investments, these recurring costs have decreased compared to 2013 (€164,000).

Once extrapolated to the Luxembourg marketplace, the global FATCA budget would range from €56.8m to €84.1m depending on the extrapolation. The annual recurring costs are relatively well contained and would range from €7.5m to €7.8m, i.e., around 9% to 14% of the total investment implementation expenditure of all years combined.

The global implementation budget is principally dedicated to the implementation phase (66%), with a mix of business and IT (53% and 47%) and spent by the staff of the bank mainly (56%), with however a significant support from external experts. The smaller institutions form an exception: they have spent more of their budget on the gap analysis and on the business analysis, less on IT, and have used more external expertise than the others. This indicates another approach to the topic, as reflected also in the investments and costs figures below and as already observed in 2013.



34%

66%

47%

53%

56%

44%

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

Gap analysis

Implementation and follow-up



Internal staff

External (consultants,advisors, etc.)

899 906

1 662 000

850 000

52 000123 428211 743

119 50023 667

0

500 000

1 000 000

1 500 000

2 000 000


Total budget Annual recurring costs

€

28


FATCA, which is now up and running, requires fewer dedicated employees than in 2013 with an average of 1.2 FTE (against 1.7 FTE), increasing up to 1.8 FTE in the largest banks (against 2.9 FTE). Following this path, FATCA did not necessitate any recruitment in 71% of banks. However 29% of the banks (11% in 2013), mainly large and mid-sized banks, recruited about one FTE for FATCA. Once extrapolated, inferred employment for FATCA would amount to 85 FTE, among which 30 FTE would be net newly created assignments.

3. Perception As already shown in the previous survey, few measures encounter as little adhesion as FATCA, with only 4% positive opinions and 40% negative opinions (and even more in the smaller firms, with up to 63% negative opinions). Mid-sized firms tend to be more neutral, when not negative. The opinions have slightly improved since 2013, but the main criticisms remain the same, starting with the disproportionate implementation costs (81%) and indirect costs (71%), against benefits that are still not identified. Likewise, 83% of banks do not see any opportunity to commercialize new services and no one expects an increase of the volume of business with the USA. In addition, 40% of banks, especially the smaller firms, fear a reduction in their customer base and 28% of banks expect some pressure on their profits. Finally, they generally agree (54%) that, one way or the other, FATCA will change the global financial markets.

The main challenges experienced in complying with FATCA relate to the onboarding and classification of clients (78%), the monitoring and the reporting (67%). Some interesting differences between institutions can be observed: monitoring and onboarding are more challenging for smaller institutions (75% and 88% respectively) whereas reporting is by far a key challenge in larger institutions (90%). This represents an evolution since 2013, where reporting was first a challenge for the smaller firms and onboarding for the larger ones. This inversion of trends reveals that larger banks have solved their classification phase and are now struggling with reporting. On the contrary, smaller institutions may have opted for less structured arrangements, with more impacts on onboarding and monitoring aspects, and may have opted for more outsourcing of their reporting.


0%

4%

25%

28%

40%

54%

71%

81%

40%

56%

4%

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

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

FATCA will allow me to commercialise additionnal services

Luxembourg will be a model regarding FATCA in Europe

Because of FATCA,my profits will go down

FATCA will lead to a reduction in customers

FATCA will change the global financial market

FATCA will increase fees

It is too expensive to implement compared to advantages I can benefit from

Negative

Neutral

Positive


35%

37%

44%

67%

67%

78%

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

Withholding system

New procedures

Employees awareness

Reporting system

Monitoring

Client classification/ onboarding

81%Think it is too expensive to implement compared to advantages they can benefit from

29


6.2 Automatic Exchange of Information

1. Overall management In this survey, tax transparency (automatic exchange of information) refers to the introduction in Luxembourg of the mandatory exchange of information under the EU savings directive (EUSD) on January 2015 and the implementation of the OECD common reporting tandards (CRS) starting from January 2016. This excludes FATCA.

Unsurprisingly, tax transparency is well mastered in the banks, meaning that all banks have a good understanding of the principles whilst even 56% of the banks state that they have a perfect knowledge of the requirements. This is an improvement compared to the 2013 survey when we first raised the topic. Small firms however still have a limited knowledge (75% only know the main principles). Nearly all banks in our sample are impacted and started their analysis work in 2014 and 2015, with implementation starting in 2015/2016, later than originally planned in 2013.

2. Budget: EUR 43.8 M + EUR 7 M recurring costs Only 61% of the firms were able to provide us with an overall budget for implementation of the tax transparency requirements. Based on the answers provided, the average budget is estimated at €893,000, varying from €1.2m in large firms to €16,000 in small firms. This budget is relatively important and the assessments represent an average of 20% of total regulatory investments, up to 42% in small firms. In 2015 only, these banks spent an average of €418,000 on tax transparency, and up to €673,000 in larger firms.

The recurring costs are estimated at an average of €153,000 per institution, varying from €251,000 to €22,000 depending on the size of the firms. These costs represent 17% of the investment costs, but can go as high as to exceed the investments in the smaller firms. This may reflect the manual approach to some of the aspects, such as reporting.

By extrapolating these figures to the Luxembourg marketplace, total implementation budget would amount to €43.8m and annual recurring costs would amount to €7.0m, or 16% of the total investments. This figure is probably underestimated since some banks surveyed were unable to provide us with a budget.


892 700

1 187 000

411 500

16 000152 900

250 500105 000

21 7000

500 000

1 000 000

1 500 000



30



The budget consumption for tax transparency implementation is rather common, with 64% of the budget spent on the implementation itself and shared equally between IT and business analysis, with a high stake of internal staff (59%). As observed for FATCA, the small institutions spent more budget on the gap analysis and on the business analysis, less on IT, and used more external expertise than the others. This potentially indicates a more manual approach.

On average, 1.7 FTE per institution is dedicated to the tax transparency issues. However the situation is different in larger compared to smaller companies: one third of the largest have recruited, on average one FTE, while the smaller firms have not. Once extrapolated to the Luxembourg marketplace, employment inferred by tax transparency would amount to 102 FTE, of which 43 FTE newly recruited.

The firms in our survey were asked whether they were able to develop synergies between FATCA and tax transparency obligations. This is effectively the case for 83% of them, across all types of firms, and notably regarding issues linked to client onboarding and regulatory reporting.

36%

64%

50%

50%

59%

41%

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

Gap analysis




Internal staff

External (consultants,advisors, etc.)

31



Percentage (%) of opinions (basis: banks concerned): 3. Perception

We notice a paradox concerning the perception of this topic by the banks surveyed. Indeed, 64% of surveyed banks think that it is positive for the development of Luxembourg, much more than in 2013 (33%), but 58% also think that their institution could leave the country following these changes (whereas 77% did not envisage this possibility in 2013) and that the private banking industry could be considerably reduced in Luxembourg in the future (stable compared to 2013). Mid-sized and small entities and the private banking industry are the most worried about the future of the Luxembourg marketplace. Interesting to note as well is the fact that the intention to transform the bank’s model has dropped from 73% to 20%, which may be interpreted as a sign that transformation has already been completed in the industry, as observed in the market.

The main challenge of tax transparency remains, just as in 2013, the management of a multi-country tax environment (57%). Especially for the larger firms, the other major challenge is the industrialization of tax reporting (57%), which has grown in importance since 2013 (44%). Interestingly, the education of CRMs to serve the more sophisticated clients is now much more a priority (50%), especially for mid to small-sized banks, as compared to 2013 (26%). The evolution of the challenges reflect the evolution of the topic in the banks, going towards more maturity.64%

it will help Luxembourg to develop

For

20%

36%

40%

58%

58%

64%

0% 20% 40% 60% 80%

We will transform our organizationand activities to respond to

this new environment

I'm rather positive aboutthese new obligations

We will increase our businessin Private Banking

In the long term, the Private Bankingindustry will be considerably

reduced in Luxembourg

My bank could leave Luxembourgas a result of these changes

It will help Luxembourg to develop

11%

22%

22%

44%

45%

50%

57%

57%

0% 20% 40% 60%

Help clients to relocate theirassets in their country of residence

Calculate performance net of tax

Help clients to "regularise" their assets

Manage the reduction inassets in the short term

Develop new products and servicesfor new segments of clients

Educate CRM to deal withmore sophisticated clients

Industrialize tax reporting to clients

Manage multi-country tax environment

32


7 Fund Regulation: AIFMD and UCITS V

7.1 AIFMD 1. Overall management 67% of surveyed banks are impacted by the alternative investment fund managers directive (AIFMD). These banks are mostly large to mid-sized institutions active in the fund industry and in private banking.

For 70% of them, AIFMD projects are managed from Luxembourg as a competence center. In the larger institutions, we observe however a majority of mixed responsibilities between the group and the Luxembourg entity, which was less the case in 2013. The budget is however mostly financed locally, just as in 2013.

2. Budget: EUR 31.2 M + EUR 20.9 M recurring costs Based on our survey, the total budget for the banks’ implementation of AIFMD, all years combined, amounts to €584 000 on average per institution, varying from €747 000 to €10 800. According to our respondents, this budget is in line with their forecasts in most cases. We see however that these amounts are lower than the ones estimated by the banks in the previous study (estimated at €885,000 on average), which could lead to consider that AIFMD costs less than anticipated in terms of investments. This budget would represent 12% of the total regulatory investments of these banks, down from the 18% planned.

Annual recurring costs are valued at €458,000 per institution, in line with the costs reported in 2013 (€450,000). Variations between institutions are important, ranging from €711 000 to €65 000 depending on the size of the institution, which probably reflects also the types of service delivered internally versus those delegated to third parties.

Once extrapolated to the Luxembourg marketplace, the total budget for AIFMD would range from €26.6m to €31.2m, depending on the extrapolation. Recurring costs would amount to €20.9m, or 65% to 75% of the investments. If investments are lower than previously reported, the high proportion of recurring costs would confirm that AIFMD has led to structural changes in the firms, more than mere adaptation of existing situations.

Similarly to many regulations analysed in this survey, the budget for AIFMD is mainly invested during the implementation stage, with a predominant share of functional and business analysis. In general, projects are conducted with internal staff, although we note some exceptions in the mid-sized banks in 2015.

On average, 5.2 FTE are dedicated to and normally employed for AIFMD at the banks covered in our survey (against 3.9 FTE in 2013), this figure rising to eight FTE in the largest entities. Interestingly, 80% of the surveyed banks have recruited for AIFMD, for half of their resource needs. Once extrapolated, employment generated by the AIFMD would total 274 FTEs, including newly recruited 144 FTE, more than in 2013 (218 FTE), which makes it one of the measures generating the most employment.

€Average budget per institution in 2015 (K EUR):


584

748

585

11

458

711

211

65

0

200

400

600

800



23%

5%

72%

34%

66%

65%

35%

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

Gap analysis

License preparation


IT / systems amendments / new systems


Internal staff


33


3. Perception

Global perception of AIFMD has evolved, with 50% of surveyed banks generally positive compared to 29% in 2013. However the larger institutions are less positive (25%), understandably so because such banks are also significantly impacted by the regulation due to their depositary functions without being able to benefit from all the opportunities captured by the asset management companies.

The banks in our sample are however very optimistic about the success of alternative investment funds (AIFs) in Luxembourg, a majority of them seeing Luxembourg developing as a competence center in Europe and thinking that the number of AIFs will increase in Luxembourg. This is even more true among small-sized institutions, seeing opportunities to develop new products and services, in much higher proportions than in 2013. Nevertheless, the costs incurred by its implementation and the impact on fees are still a concern.

The main challenges experienced in compliance with the AIFMD are the introduction of oversight duties, the monitoring of cash flows, and the custody of assets, particularly non-financial assets. Interestingly, cash flow monitoring has become much more challenging than anticipated in 2013. There is no significant difference between institutions.

88%Luxembourg is emerging as the leading competence center for AIF management in Europe

For



7%

38%

50%

50%

56%

63%

88%

31%

19%

50%

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

AIFMD is a threat to thedevelopment of UCITS

AIFMD allowed my organizationto gain market shares

It has allowed me to developadditionnal products / services


AIFMD will increase fees levels

The number of AIF will significantlyincrease in Luxembourg

Luxembourg is emerging as theleading competence center for

AIF management in Europe

Negative

Neutral

Positive

13%

19%

25%

38%

69%

81%

88%

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

Protectingexisting businesses

Reporting

Client onboarding

Safekeepingof financial assets

Cashflow monitoring

Safekeepingof other assets

Oversight duties

34



7.2 UCITS V 1. Overall perspective UCITS V is part of the most recent measures of the survey since it entered into force on 18 March 2016, a few months prior to launching the survey. It nevertheless made sense to include this measure in the study following the AIFMD, as in the context of banks, this text mainly introduces new rules for depositaries (UCITS V remuneration policies where already addressed via the CRD/CRR IV).

Generally, 86% of respondents declared at least having knowledge of the main principles and 67% of banks plan to implement it or have done so, especially in the largest institutions. The majority of banks started the analysis end of 2014 or early 2015 and went for a progressive implementation throughout 2015 in order to be ready by the required live date. That is aligned with the perception we had in 2013.


In comparison with AIFMD (i.e., €584 000 average per institution), surveyed banks generally expect comparable budget expenditure. This can be explained by the similarity or the continuity of the two regulations, with however different scales. As an illustration, our Top 10 institutions are expecting lower budgets in some cases, while leveraging on prior AIFMD investments. 81% of banks have already an estimated budget for the implementation of UCITS V, which obviously cannot be compared with the situation prevailing in 2013. Based on our survey, the average budget would amount to €503,000 per institution, very close indeed to the budget measured for AIFMD. It varies from €50,000 to €594 000 for the largest banks, generally consuming 14% of the total regulatory investments of the institutions, and up to 23% for the smaller institutions.

This budget is essentially spent on internal staff (68%) during the implementation phase (72%) for functional issues more than for IT (79%).

As for AIFMD, UCITS V is also a measure generating employment since 63% of respondents declare wanting to recruit staff for this purpose, representing an average of 5.5 FTEs. Recruitment needs are more present in larger institutions, where firms plan to recruit up to 10 FTEs.

3. Perception Overall, surveyed banks are rather positive about UCITS V considering it as a logical evolution of AIFMD. However, more than in 2013, the UCITS V regulation is seen as difficult to implement (55%) and with more substantial impact than AIFMD (50%). This might reflect that the surveyed institutions have experienced more challenges than initially anticipated, largely due to the higher scale of investment vehicles impacted. Also, even if perception is improving, there is still less consensus on the ability of UCITS V, compared to AIFMD,y to help the development of the Luxembourg marketplace.

Since the implementation phase started less than a year ago respondents still need to assess the results.

26%

45%

45%

50%

55%

71%

0% 20% 40% 60% 80%

I consider it as a pure cost in my entity andI don't see specific or significant benefit of it



Impacts will be more important than AIFMD


It's a logical evolution following AIFMD

35


87.1 PSD II 1. Overall perspective The directive on payment services II (PSD II) entered into force in January 2016 to be applied throughout the Europe Union by 13 January 2018. This is another prospective measure of our survey.

This measure is slightly less known even if it has considerably improved since 2013: 62% of the banks surveyed know its main principles, whilst only 19% have a perfect knowledge of PSD II. Small firms are less familiar with PSD II, 38% knowing it only by name. This should not hide the fact that PSD II may have tremendous disruptive implications for banks, such as the fact that banks may be mandated to grant access to client accounts to external third parties (notably to Fintech firms in account management or payment). Nevertheless, banks are rather aware that they will be impacted and 73% of them plan to implement PSD II, whilst only 15% are unsure. For most banks the first analysis started in the course of 2016 and continued still in 2017, with implementation planned to start in 2017, whereas others banks have not yet planned the implementation.


Only two firms (one universal bank and one private bank) in our survey had already planned a budget at the time of the research, indicating ranges varying from €700,000 to €1.2m and representing between 5% and 14% of their total regulatory investments.

Unsurprisingly, the budget will mainly be focused on the implementation phase, shared equally between IT and functional analysis and will be led internally in 69% of cases. Smaller institutions intend to invest less on IT.

For the time being, little recruitment is foreseen in the near future. There is only one institution that plans to recruit two new FTEs. Most of the others do not plan to recruit, whereas 21% of our respondents are still unsure.

3. Perception

As for new regulations like MAD/MAR or SFTR, surveyed banks face difficulties to anticipate the consequences of this new directive.

Opinions are mixed, between those thinking that it will be a pure cost (52%), especially in retail banking, and those who anticipate the impacts that PSD II can have on the market and on innovation (32%). General opinions however are rather neutral (59%) and even 27% not positive. PSD II is perceived as being a logical follow-up of PSD I (29%, much less than the 60% of 2013), and respondents are aware in general that the consequences will be more important (45%), especially among the mid-sized firms. It will be difficult to implement for 36% of them, and up to 63% of large banks generally tend to be more negative. We can clearly observe changes in the perception of PSD II since 2013.

Similarly to other prospective measures of this survey, we can expect evolutions in the coming months when approaching the implementation date.


€

Payment regulation: PSD II

19%

27%

29%

32%

36%

45%

52%

0% 20% 40% 60%


I'm rather positive about these new obligations

It is a logical evolution following PSD I

PSD II will promote more competition,efficiency and innovation


Impacts will be more important than PSD I

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

“Retail banks seem rather conventional while PSDII may be a disruptive regulation.”

36


Governance: CSSF 12/552, AML IV, GoAML, GDPR, e-Archiving99.1 CSSF 12/552

The CSSF 12/552 circular was already measured in 2013 and is no longer in any implementation phase. Therefore, we limited the questions for this topic and just focused on the budget in order to monitor the evolution of this fundamental circular for the financial sector in Luxembourg. This regulation is also regularly revisited as a result of the evolution of the regulatory environment having indirect impact on the banks’ organisation and governance.

The average budget for implementing the CSSF Circular 12/552 is €240,000 (in comparison to €169,000 in 2013, or 40% higher), illustrating the additional work performed since then. This figure varies from €128,000 to €366,000 depending on the size of the entities. In general, it accounts for 10% of the firms’ total regulatory investments. It is relatively limited for large banks (2% of the regulatory budget) whereas it can reach 20% in the smaller firms.

CSSF Circular 12/552 plays an important role in the compliance activities. Recurring costs are quite important, reaching an average of €190,000 per institution, varying from €290,000 to €65,000. Like the investments, these costs are 48% higher than in 2013, which was expected since all costs were not factored in yet. As noted in 2013, recurring costs are relatively high, on average accounting for 79% of the investment, given the structural nature of these obligations impacting the organisation on a day-to-day basis rather than on a one-off change. The level is particular high for smaller banks and may even exceed the investment level, probably reflecting a more manual work intensive approach to governance, organisation and monitoring.

Once extrapolated to the Luxembourg marketplace, the total investment for CSSF Circular 12/552 would range from €14.3m to €17.3m, depending on the extrapolation, with additional recurring costs estimated from €10.7m to €11.1m, or from 64% to 71% of the initial investments.

On average, 1.9 FTE per institution are dedicated to the management of this regulation, which is higher than the level measured in 2013 (1.1 FTE). Unsurprisingly, it is in the smaller institutions that the CSSF Circular 12/552 mobilizes the most resources with an average of 2.9 FTEs dedicated, against 0.8 FTE for the mid-sized institutions, which could mean that larger institutions have been able to set up procedures and automatise processes or spread the burden of regulation across a larger spectrum of employees. Once extrapolated, employment would represent a total of 111 FTEs for the Luxembourg marketplace.

Average budget per institution in 2015 (K EUR):

239 800

366 500

222 000

128 000

190 200

290 000

65 000

172 500

0

500 000



37


9.2 AML IV1. Overall perspective

The fourth Anti-money laundering directive (AML IV) is also a recent measure, which was still under negotiation during the previous survey and was published in June 2015.

This subject is important for all banks and it is not a surprise that the topic is well monitored by the firms and that all of them declare they are aware of at least the main principles. Half of them even claim to have a perfect knowledge which is an improvement since 2013. Logically, all banks plan to implement the regulation, which also reflects its importance. Besides a few early adopters, most of the banks started the analysis during 2016 and some plan to start in 2017, while implementation started during 2016 or is planned to start by early 2017. As compared to plans stated in 2013, the work has started later.


About 60% of banks expect facing a budget similar to the one dedicated to the previous regulation, or little variation for the remaining (i.e., increase by 14% on average). Based on their experience, the large and mid-sized institutions and the private banking industry are the most confident in their budgetary estimates.

Respondents however have not yet been able to mention a budget for this regulation, except two large banks who indicated an average budget of €215,000, representing 3% of their regulatory investments. These results may illustrate the fact it is a recent regulation and, in continuity of the previous regulation, it will most probably allow for some degree of cost synergies.

As other regulations in the survey, banks anticipate to spend their budget during the implementation phase (70%) equally distributed between the functional and technical parts (52% and 48% respectively), with however a large portion of internalisation since the topic is well mastered (85%).

There is still some uncertainty on recruitment needs: 62% of banks do not plan to recruit, just as in 2013, and 24% have not decided yet. For those planning to recruit, they would limit themselves to 1 FTE on average.

3. Perception AML IV was a rather popular measure among the participants in 2013 and this is still the case globally, with 57% positive opinions (a slight decrease compared to 65% in 2013). Banks first point out that it will help them to further strengthen the image of Luxembourg in the area of AML and fraud prevention (65%, just as in 2013). This feeling is obviously particularly high in the private banking industry as the banks in this segment are particularly impacted by this regulation. However, compared to our previous survey, some concerns are more obvious in particular about the implementation challenges (48%, 35% in 2013), recognising also that impact will be more important than the CSSF regulation 12/02 (46%, 32% in 2013). This reflects also a better understanding of the regulation and its impact, following the first analysis.

Logically, banks still consider that AML IV will help them to reduce risks in their entities (43% in favour). As for 2013, the consensus aiming to reject the idea that it will reduce business opportunities for banks is still present, for all institutions.


17%

29%

43%

46%

48%

57%

65%

0% 20% 40% 60% 80%

It will reduce the business opportunities for the Bank

AML IV will add another layer of paper and administration, that's all

It will reduce the risks for the Bank

Impacts will be more important than with previous AML (CSSF 12-02)



It will help strenghten theimage of Luxembourg in the

field of AML / FATF and fraud

Pourcentage d’opinion (base: banques concernées)

38


Percentage (%) of opinions (basis: banks concerned): 3. Perception

GoAML is rather well perceived with 57% of positive opinions. 50% of respondents think it will help Luxembourg to develop and to position itself as a leader in Europe in this matter (33%). Nevertheless, as for new regulations, respondents are worried about the additional costs linked to it (30%) and about the difficulties to implement it (30%).

Unsurprisingly, these results are close to those of AML IV and it reaches the best scores in the private banking and large-sized institutions.

57%are rather positive about this new regulation

9.3 GoAML 1. Overall perspective This measure differs somewhat from the other regulations in our survey since it only concerns Luxembourg. Starting 1 January 2017, concerned entities have to send their suspicious activity and suspicious transaction reports (“déclarations de soupçon”, SARs and STRs) to the Luxembourg Financial Intelligence Unit (FIU), the Cellule de Renseignement Financier. In this context, GoAML will be dealt with as a prospective measure.

Hence, at the time of the survey, 36% of respondents declared having a perfect knowledge of the requirements linked to reporting SARs and STRs, whereas 52% respondents stated knowing at least the main principles. Just as for AML IV, GoAML benefits from a strong support with an implementation rate close to 100%. For all concerned banks, the analysis work started around the second/third quarter of 2016 and implementation started in the third/fourth quarter of 2016, which constitutes a short timeframe as opposed to other regulations observed here.

2. Budget indications Despite a high level of implementation, 79% of banks were not able to communicate any figures on the budget planned for GoAML, nor on possible recruitments in the near future. This can be explained by possible synergies with the AML IV and the likely inclusion of this project into other change-the-bank budgets. The few budget indications provided by participants indicated a range from €2,500 to €41,500 (big universal bank), hence more likely to be limited.

Costs to comply with this measure would in principle be deployed in the implementation phase (73%) and would be managed by the banks’ internal staff (67%). Considering GoAML is mainly a reporting measure, IT is therefore an important item (63%) in the budget.

0%

0%

30%

30%

33%

50%

57%

0% 20% 40% 60%

It will allow my businessto generate cost savings

It will enhance the attractiveness of Luxembourg for new players

I consider it as a cost and I don't see specific or significant benefit of it


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

as an “Information Trust Center”



39


63%GDPR will enhance customer confidence

For

9.4 GDPR 1. Overall perspective

The General data protection regulation (GDPR) was published in the official legal gazette of Luxembourg (the Mémorial) in May 2016 and is due to enter into force in May 2018. This regulation is a very recent part of the prospective measures in our survey. As a result, only 69% declare being aware of the main principles and 23% have no knowledge of it or only know it by name. For the time being, it is best known in the largest institutions. 73% of banks (and all banks from our Top 10) plan to implement the GDPR but there is still some uncertainty for 20% of the surveyed banks. 50% of the smaller firms are still uncertain about their course of action. We observe that analysis started from mid-2016, for implementation planned to start in 2017 or even 2018, which seems a bit late. Given the broad reach of this regulation, we expect big changes in the situation in the coming months, once all firms realize the scope and impact of GDPR.


At the time of the survey, none of the banks in our sample had determined a specific budget for GDPR yet. Likewise, none of them had any plans to recruit new resources for this purpose. However 33% of them are still unsure, and up to 71% of mid-sized banks.

Nevertheless, implementation of GDPR should be well absorbed with budgets concentrated on the implementation phase and equally distributed between IT and functional analysis. The project would essentially be executed by internal resources for 80% of surveyed entities, especially in the larger and the smaller institutions, while the mid-sized banks are keener to look for external support.

3. Perception

With 56% of positive opinions, GDPR is relatively well received among the surveyed banks. On one side, 63% of banks may fear that reinforced accountability principles would have a major impact on their organisations, operations and technologies. On the other side, the same proportion of banks look positively upon the enhanced customer confidence thanks to reinforced client data protection and collection of their preliminary consent. Banks nonetheless have mixed feelings about the administrative burden of GDPR and the way to implement harmonization of user rights in the EU area. In general, small-sized institutions are more neutral, not negative, regarding GDPR.

As for MAD/MAR, these are normal results for a regulation that has not yet entered into force.

26%

33%

39%

56%

63%

63%

0% 20% 40% 60% 80%

Harmonized User rights will be a hassle

Cross-border data transfer willbe easier to set in place

GDPR will add another layer of paperand administration, that's all


Data Breach notification, as well as consent,will provide trust towards customer

Reinforced accountability principle willhave significant impacts on my organisation,

my operations and my technologies


40


9.5 E-Archiving 1. Overall perspective

Similarly to GoAML, E-Archiving is also a measure which is solely for Luxembourg-based entities and which is not an EU measure. Whilst under discussion during our previous survey, the law on electronic archiving was adopted only in July 2015. However, the banks still know very little about this regulation as only 75% of them have some knowledge of the main principles. However, 18% of banks are confident with the different E-Archiving requirements, which nevertheless shows some progress compared to the 7% in 2013.

As it is not a mandatory requirement but rather an opportunity to evolve with archiving, so far only 29% of respondents plan to implement it, mostly large firms. This figure is somewhat better than in 2013 (18%) but still rather low. Among the remaining banks, 46% of them do not plan to implement it and 25% have not yet decided. The few banks concerned were nevertheless reactive and started their analysis during the third quarter of 2015, so just after the entry into force of this regulation in Luxembourg.

2. Budget indications Budgets are not yet known: only one firm was able to indicate an overall budget for the implementation of their E-Archiving project. As an indication, the budget mentioned by this large institution reaches €1m, which although substantial does not necessarily constitute a representation of future budget. The budget allocation remains quite traditional at this stage, with most of it being focused on the implementation itself, with a predominant IT component.

In general, there is no recruitment planned at this stage. Only one firm, a small institution, indicates that it plans to hire one FTE.

3. Perception

Despite the low level of adoption of the regulation, banks concerned remain very positive about E-archiving (70%). However, adhesion to the benefits remains limited and is lower than in 2013. For instance only 29% think it will help them to achieve cost savings, and 30% to 36% consider it will further promote Luxembourg. Just as in 2013, 59% of them are of the view it will be difficult to implement.

It seems that banks believe it is a good concept, but not for their bank. There might be a perceived lack of commercial application that refrains banks from implementing this measure. Also, in light of other EU regulations and reporting or compliance requirements, it may seem a regulation less important, or at least, less urgent to tackle.


23%

27%

29%

30%

36%

48%

59%

70%

0% 20% 40% 60% 80%

We will be able to develop new products or services

I consider it as a cost and I don't see specific or significant benefit of it

It will allow my business to generate cost savings


It will enhance the attractiveness of Luxembourg for new players

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

as an “Information Trust Center”



“Banks remain positive about E-archiving but the adhesion remains limited.”

41


10 Approach and sample

The survey was conducted between June and September 2016. As with our previous survey, it is based on self-administered questionnaires (excel spreadsheets) sent to the management of all 125 member banks of the Luxembourg Bankers’ Association (ABBL).

The sample is made of 28 banks out of the 141 licensed banks in Luxembourg (as of 31 October 2016), therefore 20% of the population in number of banks in Luxembourg. This result, despite smaller compared to 2013, shows a good mix in the variety of banks and activities present in Luxembourg, with most of the larger institutions, allowing for a good representation in terms of size, sectors and geographical origins. Depending on the measures, the coverage ratio is between 29% and 45% of the banks.

Generally speaking, considering that the questionnaire was complex and comprehensive, banks have invested a lot of time and attention to the survey, which demonstrates real interest in the issues and results here within, something we are extremely thankful for.

Description of the sample 1. By key figures: The table below represents the principal figures from the survey put in perspective with the banking environment in Luxembourg.

When we extrapolated the figures, we based the extrapolation on the total balance sheet, considering it as a good indicator of the size and the weight of an institution, similarly to our previous survey. Extrapolated figures were also compared to the effect of the variations observed in the present survey on the figures measured in 2013, in order to calculate a range as representative as possible of the actual figures.

2. By size:

The banks in the sample were classified by size, first on the basis of the total balance sheet and then the number of employees if the ranking was equal. This ranking allows to identify three segments, which are distributed as follows:

Sample Luxembourg market Coverage ratio

Employment (FTE - 32/12/15) 11 561 25 942 45%

Revenues / PNB (M EUR - 31/12/15) 4 314 10 895 40%

Total Balance Sheet (M EUR - 31/12/15) 212 059 743 197 29%

Clusters Number of banks % Total Balance Sheet (average) FTE (average)

Top 10 10 36 17 695 958 898 937

Mid 10 36 2 637 414 650 405

Small 8 28 1 090 650 887 34,5

Total 28

42


3. By sector:

This year again, the private banking sector is highly represented (61% of respondents). The category others refers to specialized institutions, in payments, treasury or lending.

As a reminder, the classification is carried out on a declaration basis and relies on the bank’s own judgement (main activity, i.e., generating the highest revenues).

4. By country of origin:

The participating banks in 2016 originate from 13 different countries. Luxembourg and its neighboring countries (Germany, France, and Belgium) are the most represented. Luxembourg can seem to be overweighed but it corresponds to our goal to include the large institutions of the marketplace in the study.

It is to be noted that this time, none of the Asian banks participated.

Main activites Number of banks %

Private Banking 17 61

Universal Banking / Retail 4 14

Others 4 14

Funds Services / Asset Management 3 11

Total 28

Area Number of banks %

Other Europe 8 29

Luxembourg 6 21

Neighbouring countries 5 18

Switzerland 5 18

North America 4 14

Grand Total 28

43


5. By function (main person in charge of the survey:

As for 2013, the survey mobilized the highest level in the banks: it is a member of the executive committee who is taking responsibility in half the cases. In 2013, the participation of the finance function was important given the need for figures. This year, the compliance function was the most involved in the survey given the general knowledge of the different topics.

*Project, Strategy, Communication, etc.

Function of the respondent Count %

Member of the Executive Comittee 15 54

Compliance 5 18

Finance 3 11

Opérations 3 11

Others* 2 7

Total 28

44


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 mobilizing the ABBL and its members to enable us to achieve this response rate.

We also want to thank Denis Costermans of EY Luxembourg who designed, managed and drafted most of the study. His experience in industry studies and his analytical skills have led to the success of it.

Special mention also to Clément Robert and Adel Lajreb at EY Luxembourg who, under Denis’ supervision, devoted time 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.

44


45

Survey on the cost of regulations and its impacts on the Luxembourg financial marketplaceEtude sur le coût de la réglementation et son impact sur la place financière à Luxembourg

12Contacts

If you would like more information about this study, please do not hesitate to contact any of the authors below:

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 42 124 894

Denis CostermansDirecteur AssociéEY [email protected]+352 42 124 894


EY | Assurance | Tax | Transactions | Advisory

About EY

EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

© 2017 Ernst & Young S.A.

All Rights Reserved.

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

ey.com/luxembourg

Survey on the cost of regulations and its impacts on the ......Survey on the cost of regulations and...

Documents

Transcript of Survey on the cost of regulations and its impacts on the ......Survey on the cost of regulations and...