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

Fee and remuneration structures must be made transparent.

the responsibilities are not always easy to assess.

Like France, the United Kingdom has a large domestic savings market, and it has focused on investor protection, relying on the fiduciary duties of all parties and on the subsidiarity principle, by which responsibility for any losses is determined and appropriate action is taken. Though this practice may be more appropriate in theory, it has led to problems, because the responsibilities of each party are undefined and because there have been no clear guidelines (see the failure of Morgan Grenfell in 1996, a failure characterised by a lack of risk monitoring from all parties). In addition, capital requirements are very low in the United Kingdom (as in most countries), which means that when asset managers are not backed by a well-capitalised parent the degree of investor protection is unknown, and depositaries, trustees, and custodians have wondered whether regulators would have tapped their capital reserves if Deutsche Bank, the parent company of Morgan Grenfell, had not paid. In principle, when the depositary chooses to delegate the custody, it remains responsible for the return of assets; when the asset manager delegates it, the asset manager retains the responsibility for potential losses. Naturally,

3.1.3.4 Ireland: A Service Industry, Taking the British Rules as Guidelines British funds have relied fairly heavily on Ireland-based providers of asset management services. As many of the services are sent “offshore” to Ireland from head offices in the UK, and as the two countries have a common language and are bound by social and cultural ties, Ireland has drawn up a set of rules inspired by those of the United Kingdom; 25 aspects of the code of conduct draw on that of the United Kingdom as well. As a result, Ireland has developed expertise in fund administration and custody. It is the fourth biggest market for domiciliation of funds in Europe: at the end of 2009 assets under management were of € 0.75 trillion of UCITS and non-UCITS, an 11% share of the European fund market (ALFI 2010). At the end of August 2009, the Irish fund administration industry, which services offshore funds as well, oversaw 9,600 funds with assets of € 1.2 trillion ( € 706 billion domiciled in Ireland and € 536 billion in other countries) (IFIA 2010). Ireland services an alternative fund industry regulated as non-UCITS funds, which includes qualified investor funds (QIFs) and professional investor funds (PIFs). Qualified

25 - The Irish regulator requires a truly independent administrator to value funds; British regulation does not require an independent valuator.

Figure 3: Change event diagram

Change proposed by the authorised fund manager

Fundamental change

Significant change

Notifiable change

Approval by meeting

Pre-event notice

Pre/post-event notification

Extraordinary resolution

Reasonable notice period

Ad hoc

Published

Available

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An EDHEC-Risk Institute Publication