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

Conclusion

non-financial risks of funds and being warned of the depositary’s liability limits. With the new label of “ Restricted UCITS ”, our aim is to allow non-professional investors to have access to a specific form of UCITS for which the depositary is liable for the full restitution of all assets. In some ways, the concept of Restricted UCITS is a mirror image of NewCITS, which left investors exposed to greater non-financial risks given the nature of operations and assets eligible within the post UCITS III framework. It is a reasonable response to a call for more security for the operations of actors within the fund management industry value chain. Its prescriptive nature also prevents the potential scenario of escalation in which depositaries would attempt to satisfy their clients by offering guarantees for risks they cannot really control. Additionally, we believe that this Restricted UCITS proposal is a better response to the issue of non-financial risk control than the attempt to distinguish between complex and non-complex products, which leads more towards questions about an average investor’s ability to understand financial risks and fund pay-offs rather than to a relevant approach to ascertain whether non-financial risks are present. Encompassing very heterogeneous products as far as non-financial risks are concerned, the UCITS label has been questioned in recent years and is no longer the undisputed hallmark of safety supporting the international development of the European fund management industry. In this context, the creation of a new UCITS category that carries virtually no non-financial risk could prove an attractive brand on the global fund market.

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An EDHEC-Risk Institute Publication