A Better Grasp of Non-financial Risks

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

5. Conclusion

risks, together with an indicator of financial risks (such as the proposed synthetic risk indicator), should thus be displayed in the key information document; such information could be used by distributors to comply with their obligations to provide appropriate advice and relevant information to retail investors. Governance could also be improved, first by making the boards of investment firms and chief compliance officers formally answerable to end-investors for ensuring high standards of governance and risk management. Ultimately, it is expected that improved governance will improve risk management practices, but this improvement requires work of its own. In some cases, regulators can provide guidelines. In others, the industry will have to devote resources to improving methods and establishing best practices. Last, if the member states of the European Union are unable to agree on reform, UCITS not exposed to non-financial risks should be distinguished from more modern UCITS that have potentially greater exposure to these risks. Secure UCITS funds would be investment funds for which the depositary is unconditionally responsible for returning assets. The eligibility of assets—by regulation or by the contract between the fund and the depositary—would then depend on both financial and operational criteria. These funds, with the necessary changes having been made, would be akin to those of the 1980s, when the UCITS label was created: for the most part, their assets would be listed European financial securities admitted to central securities depositories systems.

models, with investors paying for protection from non-financial risks, are likely to emerge or whether investors prefer to keep fees low and go without such protection. Non-financial risks are usually taken to capture new risk premia, as liquidity risk is taken to capture a liquidity risk premium. So non-financial risks can be accepted by investors if the risks they take are made clear to them. Secure UCITS would limit the number of investment opportunities and protect investors from non-financial risks; they could be a major option if information about non-financial risks is not transparent.

The survey will show whether new business

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An EDHEC-Risk Institute Publication