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

law) assigns them clear fiduciary duties. Besides being highly dependent on member state legal traditions, the nature of this responsibility remains vague. We thus consider that the strengthening of investor protection requires a clarification and reinforcement of the fiduciary duties of the board and of the chief compliance officer; these should notably include a formal responsibility to end-investors to ensure high standards of governance and risk management. Institutional investors could contribute to better fund governance by seeking representation on the relevant boards or by contracting more private monitoring services. Governance would be further strengthened if depositaries (like auditors) were required to provide investors with reports of anomalies and breaches discovered in the course of their missions. Having reviewed the consumer protection landscape across Member States and concluded to its fragmentation, the European Commission now seeks to harmonise sanctioning powers and minimum sanctions by introducing provisions to that effect in its latest regulatory initiatives; however, we consider that it would still be in end investors’ interests, and particularly so for non-professional investors, to add class actions to the European judicial arsenal. Investors in UCITS are largely inactive when it comes to monitoring fund governance and this is true with annual meetings as well as in daily management. When exceptional circumstances arise, it is difficult for investors in a widely held fund to defend their interests, especially if their means are limited in the absolute or relative to the amounts they invested.

Class actions make it possible for investors to pool their means to bring effective claims against management or the board of directors. When it is hard to assign responsibilities, class action can enable investors to finance the legal and financial consultations necessary to the defence of investors’ interests and to obtaining fair compensation for any damages. 62 The threat of such actions would contribute to promoting good practices of corporate governance. To promote a clarification of the responsibilities for and better management of non-financial risks, capital requirements linked to non-financial risks should be imposed across all links in the chain of fund management. The objective is not to transform own funds into a buffer for losses, which would be illusory given the amounts at stake, but to incentivise all stakeholders, and primarily the fund manager, to mitigate non-financial risks. European law has established a minimum level of harmonisation of prudential rules with respect to capital and risk management. Despite creating a European passport for investment firms (MiFID) had remained silent on these issues. The Directive on the capital adequacy of investment firms and credit institutions (CAD), which applies to all investment firms, including those managing collective investment schemes, requires firms to hold own funds equivalent 3.2. Integration of non-financial risks in the prudential oversight of asset management Asset management companies Current prudential requirement

62 - Given Europe’s legal culture and traditions and in the light of political opposition to the concept of punitive damages, see for example the European (2011/2089(INI)), these would have to be disallowed in the context of the European class action and damages awarded be strictly limited to compensatory damages. Parliament resolution on collective redress

65

An EDHEC-Risk Institute Publication