Dense regulatory agenda putting upward pressure on costs for Luxembourg banks
In 2024, the regulatory landscape for Luxembourg's financial services will be brimming with new directions and challenges. The increasing burden of regulatory costs is escalating, putting an extreme upward pressure on operating costs. This situation affects smaller financial firms disproportionately, putting them at risk of being pushed out of business by larger firms, or compelling them towards a size threshold where they are better positioned to absorb these costs and remain competitive. In Luxembourg, a jurisdiction with many small-sized banks compared to the rest of Europe, this phenomenon is prominent. The present regulatory agenda is pushing these banks to consider scaling up, to bolster capitalization and liquidity to cope with the escalating compliance costs.
Beyond popular regulatory topics such as ESG, other areas of regulatory focus include payments, solvency, risk management, capitalization and liquidity. Among others, firms will have to significantly engage with up-and-coming regulations, such as DORA (application by 2025), which aims to strengthen the resilience of the EU financial sector, and the incoming RIS, an omnibus directive that aims to enhance conditions that promote the participation of retail investors in capital markets (due late 2025 or early 2026). Both regulations require substantial preparation efforts before their application dates, and many firms are partnering with external providers for their topic expertise and their independent perspectives.