CSSF Annual Report 2024 Published: Some Expected, Some Unexpected.

The following text summarizes the main themes and most important ideas or facts from the CSSF Annual Report 2024, highlighting Luxembourg’s financial sector in a rapidly evolving global landscape.

For more detailed information, please refer to the full report at https://www.cssf.lu/en/Document/annual-report-2024/.

I. Global Economic and Geopolitical Landscape

The CSSF acknowledges a significant shift in the global environment, moving away from traditional globalization towards increased fragmentation and the emergence of new trade blocs like the BRICS countries. This context of “unreliability, uncertainty and unpredictability” presents a “wake-up call for Europe.”

• Geopolitical Instability: The report explicitly mentions the “revolution we are witnessing in US economic policy and the questioning of multilateralism” as key drivers of fragmentation. Ongoing conflicts in Ukraine and between Israel and Hamas, as well as tensions between China and the United States, contribute to growing economic uncertainties.
• Financing Challenges for Europe: Europe faces immense financing needs “in excess of EUR 1,000 billion a year” for strengthening defense capacity (including cyber defense), sustainable transition, and digital transition. Public money alone will be insufficient, underscoring the need to “boost capital markets in the EU” and “reverse the decline in Europe’s competitiveness.”
• Luxembourg’s Stability: In this uncertain environment, Luxembourg’s “political stability and predictability, combined with its AAA rating, are undoubtedly a strength.”

II. Deepening European Integration and Capital Markets

Luxembourg is a strong advocate for deeper European integration, particularly through the Savings and Investment Union (SIU) and Capital Markets Union (CMU) initiatives, to enhance market efficiency and attractiveness.

• Support for SIU: As a founding member of the EU, Luxembourg “is resolutely supporting the Savings and Investment Union (SIU)… the most important EU initiative to boost the EU economy.” This involves “enhancing the efficiency and attractiveness of European markets for businesses and investors and removing existing barriers.”
• Addressing Barriers: The report references “excellent Letta, Noyer, Draghi reports published in 2024” which identified barriers and proposed solutions for capital market development. While some are “low hanging fruits,” others, like harmonizing taxation, social security, or bankruptcy laws, are “not feasible, at least not in a foreseeable future.” The CSSF stresses, “We cannot wait another 33 years to improve Europe’s competitiveness and capital markets.”
• Key Focus Areas for Capital Markets:Securitisation: “Revitalising the securitisation market is crucial to channelling long-term savings into productive assets.” A further update to the securitisation law is deemed necessary to “transform illiquid assets into investable securities, it frees capital and stimulates lending, it supports non-bank finance and capital markets growth.”
• Savings Products and Occupational Pensions: Europeans hold a significant portion of their savings in cash and deposits (over EUR 11 trillion), compared to a much lower percentage in the US. The report highlights a potential redirection of “up to EUR 8 trillion” to long-term investments if Europeans adopted similar investment habits to Americans. Simple, tax-advantaged investment products, accompanied by “important awareness campaigns,” are crucial for this shift, drawing lessons from Sweden’s successful Investment Savings Account (ISK). Occupational pensions are also seen as a significant boost, with examples like Sweden where they represent “50% of the GDP” in capital market investments.
• “Finance Europe” Initiative: Luxembourg is supporting this initiative for investment wrapper products meeting certain criteria, including investing at least 70% in European (EU and EEA) assets. Tax benefits are considered “crucial” and will be defined at the national level.

III. Sustainable Finance: Regulation and Greenwashing

Sustainable finance is a key priority, driven by the urgency of climate change, but faces challenges due to complex and sometimes conflicting regulations.

• Urgency and Private Capital Mobilization: The IPCC reports demonstrate “the urgency to act against climate change.” Private capital mobilization is essential, as public money alone is insufficient.
• Regulatory Complexity and Loss of Trust: “Unfortunately, current regulation is complex and difficult to understand for both professionals and investors, sometimes with unclear or conflicting definitions, and this has led to a loss of trust.” This confusion “has also favoured greenwashing.”
• SFDR Reform: The CSSF “would strongly support turning the SFDR from a disclosure regime into a labelling regime.” This would simplify it, especially for retail investors, and remove confusion, requiring “clear communication” of sustainability strategies.
• Combatting Greenwashing: The CSSF increased vigilance against greenwashing, publishing a call for vigilance and a press release to warn investors. ESMA’s Guidelines on funds’ names using ESG or sustainability-related terms have been implemented in Luxembourg via Circular CSSF 24/863.
• Supervisory Priorities: The CSSF’s sustainable finance supervisory priorities for 2024 include “transparency and disclosure, ongoing integration of sustainability risks in the investment processes as well as consideration of sustainability preferences under MiFID II.” The CSSF is conducting on-site inspections concerning climate-related and environmental risk management at credit institutions.

IV. Digital Finance and Innovation

Digital finance technologies, like blockchain and DLT, are seen as vital for market efficiency and new opportunities, with Luxembourg positioned as a pilot for the EU.

• Embracing Digital Technologies: “Digital finance technologies such as blockchain and distributed ledger technology (DLT) can improve market efficiency and create new opportunities for asset classes.”
• Luxembourg’s Role: “With its four blockchain laws, to be complemented if necessary, Luxembourg has a robust regulatory framework and should serve as a pilot for the EU in this area.”
• MiCAR Implementation: The Markets in Crypto-Assets Regulation (MiCAR) came into force in stages in 2024, defining an authorization and prudential supervision framework. The CSSF has worked on its implementation, including participating in developing regulatory technical standards (RTS) and implementing technical standards (ITS).
• Tokenisation: Several asset managers are “looking at tokenising fund units,” with some initiatives already in production or near launch. The “Blockchain IV Law” further supports this by expanding options for issuing and holding DLT securities.
• Artificial Intelligence (AI): The AI Act, a horizontal legislation, will be a top priority for 2025. The CSSF, along with the BCL, launched a survey to assess AI use in the Luxembourg financial sector. The focus is on “increasing human capabilities” while ensuring strict risk management and governance.
• RegTech: The Innovation Hub continues to engage with RegTech entities, which provide tools to “enable an entity supervised by the CSSF to meet regulatory, compliance and reporting requirements.”

V. Regulatory Framework and Supervision

The CSSF emphasizes simplification, burden reduction, and strengthened cooperation to achieve efficient and resilient markets.

• Simplification and Burden Reduction: Deepening capital markets requires Europe to “quickly moves forward with the European Commission’s ambitious simplification and burden reduction agenda.” This includes reducing “the number of level one and level two instruments,” moving “from a rule-based to a more principle-based regulation,” and eliminating “confusing or conflicting regulation.” Simplification, however, “does not mean de-regulation.”
• Regulatory Convergence: The CSSF welcomes the use of “regulations directly applicable in all EU Member States rather than directives” and supports the work of European Supervisory Authorities “on regulatory convergence and creating a single rulebook.”
• Cooperation: EU regulators “should cooperate closely, e.g. through colleges of regulators for larger firms operating in several jurisdictions.” The Single Supervisory Mechanism (SSM) “has resulted in a much more resilient European banking supervision.”
• Macroprudential Supervision: The CSSF actively monitors macroprudential risks, particularly those related to the real estate market. Measures include minimum thresholds on risk weights for banks and differentiated loan-to-value limits. The countercyclical capital buffer remains at 0.5%.

VI. Financial Consumer Protection and Education

Addressing low levels of financial literacy is crucial for consumer protection and the success of initiatives like the SIU.

• Low Financial Literacy: “The OECD and national surveys have consistently shown low levels of financial literacy, even in sophisticated financial centres like Luxembourg.”
• Protection Against Fraud: Financial literacy is “the best way to protect consumers against ever more sophisticated frauds, that are often carried out through social media and with the help of influencers, using new asset classes like crypto-assets.”
• Boosting Investment: The SIU “will only be successful if consumers have a minimum level of financial education, incentivising them to invest part of their savings into the real economy.”
• CSSF Initiatives: The CSSF has “drafted a revised national strategy including a number of specific proposals” and advocates for a “systematic roll-out of existing and new initiatives, e.g. at primary and high schools.” The Lëtzfin information portal and awareness campaigns on topics like greenwashing and crypto-asset fraud are key components.

VII. Financial Sector Performance and Supervision Details

Banking Sector:

• Stability and Profitability: The Luxembourg banking sector remains stable, with aggregate balance sheet total increasing slightly to EUR 937.5 billion (+0.9%). Net profit for 2024 increased by 10.0% to EUR 7,239 million, with 89% of banks reporting positive results.
• High Prudential Ratios: Average capital ratio total decreased slightly to 23.0% but remains “largely above the regulatory threshold (exclusive of variable buffers) set at 10.5%.” Liquidity Coverage Requirement (LCR) averaged 244% (minimum 100%).
• Real Estate Market: The housing market in Luxembourg began a recovery in 2024, with increased transactions in existing housing and a gradual easing of price declines. New mortgage loans increased by 22% compared to 2023, totaling EUR 5.7 billion. Non-performing residential mortgage loans remained low at 1.9%. The commercial real estate market, however, continued to face challenges.
• Key Supervisory Priorities: AML/CFT risks, credit risk (especially real estate), ICT risks (with DORA implementation looming), and climate-related and environmental risks.

Investment Fund Managers (IFMs) and UCIs:

• Growth in Assets: 298 authorized IFMs manage EUR 7,206.3 billion in assets, with UCITS accounting for 64.3% (EUR 3,768.3 billion).
• Real Estate Funds: Net assets of real estate funds managed by Luxembourg AIFMs rose by 7% to EUR 314 billion. Liquidity risk remains relatively low due to closed-ended structures and the availability of liquidity management tools.
• Asset Reallocation: Money market funds saw a 20% increase to EUR 593 billion, and bond funds experienced significant capital inflows (EUR 75 billion) due to monetary policy stabilization.
• Supervisory Actions: The CSSF conducted 53 on-site inspections at IFMs and 15 AML/CFT on-site inspections. Key observations related to valuation function, ESG risk management, due diligence obligations, and supervision of delegated activities.
• Circular CSSF 24/856: This new circular, effective January 1, 2025, covers “the protection of investors in case of an NAV calculation error, an instance of non-compliance with the investment rules and other errors at UCI level.”

Professionals of the Financial Sector (PFS):

• Decreased Number of Firms: The number of investment firms decreased to 90, specialized PFS to 95, and support PFS to 61.
• Positive Net Results: Investment firms reported a 95.3% increase in net results to EUR 103.8 million. Specialized PFS also saw a 48.9% increase to EUR 199.93 million.
• New Prudential Rules: Circular CSSF 24/850 significantly changed prudential supervision tools for support PFS, introducing a risk-based self-assessment questionnaire.
• DORA Impact: While support PFS are not directly subject to DORA, they are indirectly affected as ICT third-party service providers to financial entities and must comply with related requirements.

Payment Institutions, Electronic Money Institutions, and Virtual Asset Service Providers (VASPs):

• Growth in Staff and Transactions: Staff numbers increased by 4.5% to 869 positions. Payment institutions and electronic money institutions processed EUR 348 billion in transactions, an 18% increase.
• VASP Registration: 15 providers were registered as VASPs by year-end, with approximately EUR 50 billion in virtual asset exchange transactions executed.
• AML/CFT Supervision: The CSSF’s role for VASPs is limited to AML/CFT registration, supervision, and enforcement.

VIII. Financial Crime Prevention (AML/CFT)

Combatting money laundering and terrorist financing remains a core supervisory function, with significant legislative developments at the European level.

• EU Legislative Package 2024: The “EU legislative package” adopted on May 31, 2024, is a “new stage in Europe’s AML/CFT framework.” It consists of four legislative instruments, including a regulation establishing a new EU AML/CFT authority (AMLA) and a regulation establishing uniform AML/CFT requirements directly applicable in all Member States from July 10, 2027 (AMLR). This package aims for “maximum harmonisation of AML/CFT rules within the EU.”
• AMLA’s Role: AMLA will be competent for direct supervision of selected obliged entities in the financial sector and indirect oversight of national supervisors for non-selected entities and the non-financial sector.
• Key AMLR Elements: Broadened scope of obliged entities (including CASPs), stricter due diligence measures with increased transparency for beneficial ownership, extended scope for politically exposed persons, and detailed outsourcing rules.
• FATF Standards: The CSSF actively participates in FATF plenary meetings and monitors the evolution of FATF standards, including guidance on beneficial ownership and transparency of legal arrangements.
• On-site AML/CFT Inspections: 32 AML/CFT on-site inspections were carried out, focusing on high-risk sectors. Recurring weaknesses included deficiencies in name screening tools, processing of alerts, consideration of ML/TF risk factors, ongoing due diligence, customer file completeness, and supervision of outsourced AML/CFT controls.
• Counter Proliferation Financing (CPF): A thematic review on CPF controls was conducted for investment fund managers, highlighting the need for specific risk assessments and controls against proliferation financing risks.

IX. CSSF Operations and Governance

• Staffing and Training: The CSSF increased its headcount to 983 agents in 2024. It emphasizes continuous training, including sustainable finance, generative AI, and Lean Management, to adapt to evolving regulatory and technological landscapes.
• Digital Transformation: The “CSSF 5.0” strategy focuses on digital innovation, technological resilience, and operational performance. Efforts include improving user experience on the eDesk exchange portal and developing a data-driven supervisory authority model.
• Budget: The 2024 budget included a EUR 17.5 million operating subsidy to support digitalization efforts.
• Whistleblowing: The number of whistleblowing reports received significantly increased in 2024, confirming an upward trend and trust in the CSSF’s confidential reporting channels. Governance issues and AML/CFT-related concerns remain the most frequent types of reported failures.
• Audit Profession Oversight: The CSSF oversees the quality assurance of approved statutory auditors and audit firms, with reviews covering quality management systems and audit files. The audit of accounting estimates and sufficient/appropriate audit evidence were key areas of identified deficiencies.

This briefing provides a high-level overview of the CSSF’s Annual Report 2024. For more detailed information, please refer to the full report at https://www.cssf.lu/en/Document/annual-report-2024/.