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

3. Proposal towards Better Management of Non-Financial Risks

for these assets, the gross exposure to non-financial risks, the mitigation methods, and the residual risks. If the responsibility of the depositary is clearly established with respect to assets safe-kept by a strict liability standard, it is key that investors know for each fund what is the share of the assets that is covered by this obligation of restitution. This would both dispel mistaken assumptions about the extent of the protection provided and reduce moral hazard. 59 Asset management companies have a central role to play in the production and distribution of information on non-financial risks. In the first, they should explain how non-financial risks arise from their decisions and how these reflect each fund’s policy (or contribute to efficient portfolio management). They should cooperate with depositaries in the identification, measurement and mitigation of non-financial risks. Last but not least, they should describe how their risk management processes address non-financial risks 60 and what are their roles and responsibilities in relation with those of depositaries and other counterparties and agents. In the end, the asset management company is responsible for producing and disseminating clear, accurate, non misleading and comprehensive information documents (Chapter IX of the UCITS IV Directive (2009/65/CE)). The pan-European survey of non-financial risks conducted by EDHEC-Risk Institute in 2011 (Amenc, Cocquemas and Sender, The role of asset management companies

2012) documents a strong need for clarification of the responsibilities of the various links in the collective investment industry chain as far as non-financial risks are concerned. As an illustration, 68% of the respondents agree that the restitution on assets should be contractually defined between depositaries and asset managers at the creation of the fund, and 66% consider that this contractual definition should be presented in the KIID; it is also interesting to underline that 67% agree that asset managers should have greater responsibility regarding non-financial risks (21% are unsure). In the spirit of the CESR guidelines (CESR/10-1320), we recommend that key investor documents and notably the UCITS KIID disclose legally enforceable contracts organising the responsibilities of the various parties with respect to the restitution of assets and other guarantees and protections. Strengthening governance Greater responsibility on the part of the asset management company should be buttressed by reinforced fiduciary duties 61 which would deserve a sufficiently precise definition at the European level. As we have previously observed (Amenc and Sender, 2010), boards of directors (i.e. in corporate form funds), or, when there are none, investment firms, are the main parties responsible for management of non-financial risks. European laws impose no fiduciary duties on boards of directors, but corporate law (especially in common law countries and in countries such as Luxembourg, where the rules for investment firms draw on corporate

59 - The onerous requirements of UCITS V as far as restitution is concerned could lead to consolidation and specialisation in the securities services industry. In this context, information about the restitution risk exposure of depositaries would allow for monitoring systemic risk) and investors (concerned by the ability of depositaries to make good on their restitution obligations). 60 - This would be mere application of Article 38 of the UCITS IV implementing Directive (2010/43/EU). 61 - The UCITS IV implementing Directive does not explicitly mention a fiduciary duty for the asset management company, but it requires the latter to exert due diligence in several matters, including notably in delegating responsibilities and in the selection and monitoring of investments, which need to be in the best interests of the UCITS and consistent with its objectives, investment strategy and risk limits (2010/43/EU). of risk concentration by regulators (concerned by

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An EDHEC-Risk Institute Publication