Proposals for Better Management of Non-Financial Risks within the European Fund Management Industry

Proposals for Better Management of Non-Financial Risks within the European Fund Management Industry - December 2012

Introduction

distribution, complexity and non- financial risks; and (iii) the responsibility for information on non-financial risks. Finally, it makes proposals towards better management of non-financial risks, focusing on the organisation of and responsibility for information on non- financial risks, the integration of non- financial risks in the prudential oversight of asset management, and the creation of a subset of UCITS that minimises non- financial risks through restrictions on investments and practices.

The research chair’s second paper, “Shedding Light on Non-Financial Risks – a European Survey” (Amenc, Cocquemas and Sender, 2012), surveyed European fund industry professionals for their views on non-financial risks and the possible regulatory and industry solutions presented in the foundation paper. The survey revealed that transparency, information and governance were regarded as the preferred means to handle risks, followed by the financial responsibility of the fund management industry. While respondents recognised that non-financial risks primarily arise from the fund manager’s decisions, they had mixed views about imposing capital requirements but fewer qualms over increasing the fiduciary duties of managers. The survey also covered restitution and depositary liabilities, distribution and judicial powers of investors. It documented that the principal regulatory priorities for respondents were absent from recent regulatory initiatives and noted that in an ideal world, regulatory initiatives should focus on transparency as opposed to administrative protection, with the pendulum swinging away from an unconditional responsibility of restitution of depositaries towards greater responsibility of fund managers. After a short review of the materialisation of non-financial risks during the global financial crisis, this final contribution looks at the causes of the rise of non- financial risks in the fund management industry. It then resituates non-financial risks in the European regulatory agenda and examines (i) the questions of the responsibility for non-financial risks and restitution; (ii) the link between

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An EDHEC-Risk Institute Publication