Governance has long been a priority for the Luxembourg fund industry, with a focus on robust oversight and investor protection. As the world responds to the COVID-19 pandemic, governance is more important than ever. To this end, ILA and PwC have once again collaborated to publish this 10th edition of the Luxembourg Fund Governance Survey. Since 2003, the survey has grown to become a recognised tool for better understanding governance practices in the Luxembourg fund industry.
With this edition of the survey covering more subject areas and delving into new topics, such as ESG oversight and new practices in the wake of COVID-19, it becomes the most comprehensive survey to date. Additionally, the number of survey participants increased by 27% compared to 2018, with answers collected from 122 respondents between June and September 2020. We sought out responses from board chairpersons and members, conducting officers and corporate secretaries, as the primary focus of the survey was to acquire first-hand knowledge of the inner-workings of boards at Luxembourg-based investment funds and management companies.
Key findings
Increasingly important responsibility of boards to oversee ESG criteria
With the rapid development of ESG products, regulators have been giving more attention to the responsibilities of stakeholders in the fund industry, including boards of funds and management companies. The new Sustainable Finance Disclosure Regulation (SFDR), applicable from 10 March 2021, will introduce various disclosure-related requirements for financial market participants and financial advisors at the entity, service and product levels. However, boards will also play a growing role in overseeing ESG investments and ensuring that funds comply with the SFDR regulation. Indeed, both the EU Action Plan and the SFDR represent a landmark change in the industry that stands to transform sustainable finance from an optional consideration to a focal point of the European fund industry.
Rise of new governance practices in the wake of the COVID-19 crisis
While the world has been impacted profoundly by the COVID-19 crisis in 2020, the investment fund industry has fared better than other industries. The majority of funds and ManCos reacted promptly and properly in response to the COVID-19 crisis. The regulators played an important part in their transition towards stability, publishing many regulations to help the financial entities pass this difficult time. We have yet to see if the boards of Luxembourg’s funds and management companies will retain some of the new practices adopted during the pandemic - such as working from home, using VPN access to their network, or adjusting swing pricing policies.
Cybersecurity risk to be monitored
In line with our previous survey, cybersecurity risk is still the main area of risk where the boards do not yet receive sufficient reports. In the wake of the COVID pandemic, as companies adapt their systems quickly to allow remote working, cybersecurity certainly became a hot topic. Boards are being pulled into the digital wave at rapid pace, requiring them to be more vigilant and aware of security issues, reading emails in public areas, and sending confidential data in an unprotected format. More importantly, boards must set the tone on cybersecurity, and empower the Chief Investment Security Officer (CISO) to create a long-term cybersecurity strategy aligned with the business needs and requirements.
Increased performance evaluation of the board
To help ensure good levels of governance are maintained, and as institutional investors and regulators pay increased attention to board effectiveness, the number of boards undergoing performance evaluations has increased since 2018.
Those who perform a board evaluation tend to do so on a regular basis, mainly every year. Among management companies these board evaluation processes were documented, and in most cases, led to the implementation of a remedial action plan. We expect an increase in the prevalence of board evaluations over future editions of the survey.
Converging governance practices within UCITS and alternative investment entities
We note that CSSF circular 18/698 played an important role in creating a convergence of practices across UCITS and alternative investment entities, particularly regarding the oversight of risk management and due diligence of delegates. We expect to see an increased convergence of these practices in the future.
