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

out of reach. After all, the gaps between the regulatory and governance processes in common-law and civil-law countries are gradually narrowing. Although the concept of fiduciary duty differs greatly in common-law and civil- law countries, the entire industry is subject to common financial regulations such as UCITS and MiFID. These regulations impose obligations and assign liability, whether in contractual relationships with clients or not. 37 Financial regulations thus contribute to convergence. At the same time, several instances of fraud such as that perpetrated by Maxwell led the UK regulator to strengthen consumer protection and require stricter ring-fencing, an approach typical of civil-law countries. In addition, the industry is now demanding convergence. Depositaries are seeking modifications that would bring regulations in civil-law and common-law countries closer together. French depositaries are demanding a more principle-based approach to their liabilities and British depositaries clearer rules for their obligations. Convergence is also sought by pan-European asset servicing companies, since large depositary networks are in effect trying to develop practices that can be applied in all countries. They could then operate by a single standard, regardless of jurisdiction. The challenge is to take the best of common-law and civil-law systems. A precise description of depositary controls typical of common-law countries should go together with enhanced fiduciary duties and disclosure of non-financial risks. The last section takes a more detailed look at the ways to protect unit-holders from non-financial risks.

37 - MiFID requires that distributors provide their clients proper advice and information; distributors are then liable to their client whether they are from common- or civil-law countries, in a similar way in all European countries; UCITSrequires that “in the context of their respective roles the management company and the depositary must act independently and solely in the interest of the unit-holders”.

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An EDHEC-Risk Institute Publication