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Luxembourg Financial Institutions Face Growing Compliance Risks Amidst Turbulent Market Conditions
In the aftermath of the global financial crisis, regulatory bodies worldwide implemented stringent measures to bolster corporate governance and accounting standards. However, despite these efforts, financial institutions continue to face an increasingly complex risk landscape.
Emerging Compliance Risks in Luxembourg’s AWM Industry
A recent report highlights the emerging compliance risks in Luxembourg’s asset and wealth management (AWM) industry, which are compounded by traditional market, credit, and liquidity risks. Novel risks, such as:
- Cybersecurity threats
- Environmental, social, and governance (ESG) failures
- Supply chain disruptions
- Talent acquisition and retention challenges
require financial institutions to adopt a proactive approach to risk management.
Traditional Risks Resurge Amid Macroeconomic Uncertainty
Traditional risks, including market, credit, and liquidity risks, are resurging in the current macroeconomic context of higher-for-longer interest rates. Cybersecurity incidents have become increasingly frequent, with PwC’s CEO surveys regularly ranking cyber-related risks as top threats. ESG failures, meanwhile, pose significant legal and reputational risks to financial institutions.
Risk Managers Must Adapt
The report emphasizes that risk managers must be ever-vigilant in the face of these emerging risks. In addition to traditional tools such as Value-at-Risk (VaR) and stress tests, reverse stress testing can provide a more comprehensive understanding of potential losses.
Principles-Based Approach for Asset Managers
In this fractured world, asset managers must rethink their risk management processes and adopt a principles-based approach rooted in ALFI’s best practices for investment funds’ senior management and board members. This includes:
- Optimizing growth without exposing the organization to undue risk
- Demonstrating due diligence
- Promoting proactive management
- Increasing accountability
- Providing independent input
Reframing Risk as a Value Creation Opportunity
The report concludes that financial institutions should reframe risk as a value creation opportunity by embracing a “Risk Pioneers” approach. To achieve this, they must reflect on the current times and ask themselves pertinent questions about potential shocks, their likelihood, and potential triggers. By adopting this mindset, Luxembourg’s AWM industry can not only survive but thrive in the face of adversity.
The Report’s Findings and Recommendations
The report provides stakeholders with an overview of emerging novel risks alongside the risk management tools needed to navigate these challenges. It serves as a starting point for financial institutions to assess their current approach to risk management and identify areas for improvement.