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

2. Key Topics on the European Regulatory Agenda

2.1. Responsibility for Non-Financial Risks and Restitution The survey of European professionals conducted by EDHEC-Risk Institute in the third quarter of 2011 documented that non-financial risks were actual concerns for practitioners (Figure 1). Some 78% of the respondents defined bankruptcy risk of an intermediary as important to them, 77% in the case of collateral risk, 79% for internal or external fraud, 80% for liquidity risk and 78% for breaches of investment rules. Mis-selling risk came out lower, being nevertheless important for 70% of respondents. These respondents yet felt well protected except for the risk of fund freezes (Figure 2). When asked about ways to improve the management of non-financial risks, professionals indicate a strong preference for transparency, information and governance (first choice for 61% of the 163 respondents), then cite financial responsibility of the industry (second choice for 40% of the respondents). Regulation on distribution comes third and regulation on restitution fourth (Table 1). Giving more

improve consumer protection by creating common standards across insurance sales and ensuring proper advice. It widens the scope of the Directive to include all distribution channels where the Directive in force concerns only agents and brokers; strengthens conduct of business rules (obligation to act honestly, fairly and professionally in accordance with the best interests of customers; disclosure of fees and product information) and creates further customer protection requirements in relation to insurance investment products, which are modelled on MiFID II. Taken together, the proposed MiFID II, IMD II and KID go a long way towards harmonising the PRIPs market. In the rest of this chapter, we comment upon the status and direction of European regulation with respect to some of the key themes present in the regulatory agenda and in relation to non-financial risks, i.e. the responsibility for non-financial risks and the restitution of lost assets; distribution and complexity; and transparency.

Figure 1: How important to you are the following non-financial risks?

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An EDHEC-Risk Institute Publication