Rajan’s comments follow the failure of Luxembourg’s financial regulator to come to the aid of a group of bond investors who lost money in a fund that violated Luxembourg’s investment laws. However, he added that many more jurisdictions were at risk if they valued new business at the expense of even-handed regulation.
Rajan, the chief executive of fund consultancy Create Research, told the Financial Times that Belgian Broker Petercam was a victim of a race between two rival jurisdictions, Luxembourg and Dublin, to attract investors, which, he claims has led to selective supervision of funds listed in Luxembourg.
“Although there is a level playing field in terms of EU laws we are not seeing a fair implementation of those rules,” he said.
“Regulations on paper in Luxembourg are different that what is enforced. Both Luxembourg and Dublin have been competing with each other furiously. These regulatory lapses are inevitable,” he added.
The regulator, Commission de Surveillance du Secteur Financier (CSSF) laid out the violation of Belgian broker Petercam’s L Bonds Eur Inflation-Linked fund (formerly known as Eur Medium), as well as the violation of Luxembourg’s fund laws, last October.
In the letter the CSSF said that the fund’s investments in perpetual bonds were “not permissible” as the fund managers said they would only invest in bonds of a limited duration. In addition, the CSSF said that the fund’s prospectus did not comply with laws which stated that it must carry all the necessary information and inherent risks.
Petercam argues that it has respected its obligations towards both the investors and regulators. Last week Investor Protection Europe, the group representing Petercam, sent a flurry of letters to influential industry players, to complain about CSSF’s failure to offer compensation.
Investors in the Petercam L Bonds Eur Medium fund endured a loss of 26.67% in 2008, while Morningstar’s Global bond-Euro biased index gained 0.33 per cent over the same period.
While the spotlight is currently on Luxembourg, Rajan added that, given the current environment, regulatory lapses are on the rise in all territories. He told International Adviser: “ I wouldn’t be surprised if some other jurisdictions will be found doing the same thing – whether that be London, Paris or Dublin.”
