Compliance Risks in Financial Institutions in Luxembourg: A Growing Concern

Introduction

A new report by PwC Luxembourg highlights the importance of robust risk management processes for financial institutions in the country, particularly in the asset management industry. The report emphasizes the need for proactive principles-based risk management to navigate the ever-changing landscape of macroeconomic and geopolitical stress.

Regulatory Reforms and Current Turbulent Context

The global financial crisis (GFC) led to significant regulatory reforms across the industry, but another similar meltdown has not been shielded. The current turbulent context should be seen as an opportunity for asset managers to:

• Update their risk profiles
• Thoroughly examine and revamp their risk management processes and frameworks
• Adopt a whole host of risk assessment methods, such as reverse stress testing
• Integrate risk management into all operational facets

According to Benjamin Gauthier, Partner, Regulatory, Risk and Compliance Leader at PwC Luxembourg:

“The current turbulent macroeconomic and geopolitical context should be seen as an opportunity for asset managers to update their risk profiles, thoroughly examine and revamp their risk management processes and frameworks… By enacting such policies, they would not only strengthen their own resilience and be better prepared for potential future heterodox shocks, but would also be able to capture new value creation opportunities and remain competitive in an industry facing a whole host of challenges.”

Novel Risks and Traditional Risks

The report highlights the importance of considering novel risks related to:

• Geopolitics
• ESG (Environmental, Social, and Governance)
• Technological changes

As well as traditional risks such as:

• Market risks
• Credit risks

Olivier Carré, Deputy Managing Partner, Technology & Transformation Leader at PwC Luxembourg notes that:

“Risk managers need to familiarise themselves with how such changes can impact both a portfolio’s value and the firm itself… Doing so would allow firms to adequately deal with new operational risks, such as the challenges of attracting and retaining qualified staff with the right skill sets.”

Adaptation to Current Era

The report emphasizes the need for financial institutions in Luxembourg to adapt their risk management strategies to fit the current era. With ESG risks becoming increasingly important, a failure to properly take them into account can lead to:

• Substantial drops in a portfolio’s value at the slightest extreme weather event
• Reputational harm which can quickly spiral out of control

Conclusion

It is time for financial institutions in Luxembourg to emerge as “Risk Pioneers” and adapt their risk management strategies to fit the current era. Download the full report: “From Compliance to Competitive Advantage: Risk and Performance in a Fractured World”.