A Better Grasp of Non-financial Risks

The European Fund Management Industry Needs a Better Grasp of Non-financial Risks — December 2010

3. Risks and Responsibilities in the Fund Industry

The lack of transparency can be seen as a logical consequence of the administrative approach to protection. In France, both independent investment firms and depositary banks were created in the 1990s, first as subsidiaries of banks; before then, banks were integrated entities and provided asset management services as part of their banking services; depositary banks usually provided bundled depositary and custodian services for what were captive assets. Only with the independence of fund management companies were depositary services properly identified and priced independently of custodian services. French investment firms usually outsource valuation; they nonetheless take full responsibility for the pricing of units (and the valuator is simply an outsourced service, not a regulated activity). 3.1.3.3 The United Kingdom: A Consumer Country with Principle-Based Laws and an Older Fund Management Industry The United Kingdom is the largest European country representative of common-law regulation; its fund industry has assets under management of more than € 1.17 trillion. Because the United Kingdom is the home country of managers of funds domiciled offshore, the funds domiciled in the United Kingdom accounted for only € 0.6 billion at the end of 2009, and, by this metric, British funds managed 9% of all assets managed by European investment fund, making its fund industry the fifth largest in Europe (ALFI 2010). In the United Kingdom, as in other European countries, regulations result from the transposition of European directives such as UCITS and from domestic

regulations sometimes modified to comply with European directives. The UK fund management industry has been independent longer than its French counterpart. 23 The United Kingdom relies on detailed regulations as well as on decrees or laws. The country has harmonised the regulation and practical monitoring of trust funds (authorised unit trusts or AUTs) and of corporate-type mutual funds (open-ended investment companies or OEICs). The Financial Services and Markets Act 2000 (FSMA) regulates authorised funds in the form of UK AUTs and UK OEICs and other recognised schemes, such as UCITS, constituted outside the country. An FSA handbook (UK FSA) in which guidelines and rules are published is updated and amended on an ongoing basis. Regulation of investment funds is not greatly inspired, as it is in the United States, by corporate law. For OEICs, regulation requires that there be at least one director, and when, as is generally the case, there is only one, that this director be an authorised corporate body (the authorised corporate director or ACD). The ACD is the authorised fund manager of the OEIC. The depositary must be independent of the OEIC and its director(s). The trustee of an AUT, the counterpart of the depositary of an OEIC, has extended fiduciary duties towards the investor and must be independent of the AUT manager. In addition, the United Kingdom has tackled some of the usual bones of contention by making mandatory notification of significant changes and prior approval by unit-holders for fundamental changes, including any modifications that “changes the purposes or nature of the scheme or may materially prejudice a unit-holder”. 24

23 - In the UK, the fund industry has its roots in the nineteenth century, and M & G launched the first UK unit trust in 1931. The 1980s were a period of fast growth for mutual funds and investment firms. 24 - See section 4.3 of the Collective Investment Schemes Sourcebook of the FSA Handbook.

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An EDHEC-Risk Institute Publication