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

performs due diligence on assets, makes investment decisions, and is responsible for managing the risks of its investments. It is also responsible for valuation; for compliance with quantitative restrictions; and for providing legal information, annual reports and key information documents to unit-holders. As such, investment firms have great responsibilities in the management of non-financial risks: they choose the product, the geographies and jurisdictions they invest in and they are responsible for liquidity and collateral risk management. The role of the depositary is to ensure that the fund manager respects the fund statutes and the law. While the UCITS framework and the AIFMD include the need for the asset manager to identify, measure, manage and monitor risks 36 , there is little in the way of fiduciary duty of the manager beyond a general requirement to act in the best interests of the fund or its investors or provisions on conflicts of interests. In stark contrast, these directives which jointly define the framework of fund management in Europe put the emphasis on the duties of depositaries and their liability regime in case of loss of assets. Our survey showed that industry professionals have a more balanced view of responsibilities: 67% of respondents agree that asset managers should have greater responsibility regarding non-financial risks (21% are unsure). The burden should not be limited to them, though, since a majority of respondents (65%) agree that greater fiduciary duties should be required of depositaries (14% disagree). Most prominently, 75% agree that a clearer responsibility regime should be instated

for depositaries, with monitoring and obligation of means (18% are unsure).

The AIFMD and UCITS V squarely put the responsibility for restitution on the shoulders of the depositary, with limited (AIFMD) or no (UCITS V) possibility to contractually discharge their liability. While the role of the depositary as a crucial prudential safeguard for UCITS investors is presented in very high level terms in the original 1985 UCITS Directive and has not been revised significantly, it would be unfair to write that the commission had not detected issues before the Madoff fraud or the Lehman bankruptcy. Work by the European Commission dating as far back as 2004 identified problem areas that included diverging liability regimes across Member States; disparate approaches to organisation and delegations; different approaches to independence and conflicts of interest; varying levels of investor information on costs, organisation and management of conflicts of interests and liability of depositary. In terms of liability regimes, the depositary may be subject to an obligation of result or an obligation of means in the performance of its prudential duties; limitations or derogations may exist with respect to the conditions of liability (“unjustifiable failure to perform” or “improper performance" of obligations); the meaning of “asset safekeeping” is not harmonised and some Members States impose a strict liability with an obligation to return assets lost in custody while other allow limits to liability e.g. when the depositary has exerted all due skill, care and diligence in the choice of sub-custodians (COM (2004) 207). In subsequent work, the Commission nevertheless considered

36 - Article 51 of 2009/65/EC and Article 15 of 2011/61/EU, respectively.

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An EDHEC-Risk Institute Publication