Shedding Light on Non-Financial Risks – a European Survey

Shedding Light on Non-Financial Risks – a European Survey — January 2012

Executive Summary

In any instance, regulators cannot afford to turn a blind eye to non-financial risks. Again, transparency is a major concern that can be significant improved at moderate costs. Clarification is needed on various aspects, notably the split of responsibility between depositaries and asset managers. So far, too much of the emphasis has been put on depositaries; the pendulum should swing back towards asset managers who, after all, are in the best position to manage those risks. The politically-driven regulatory attitude makes us worry that very little or no “objective reasons to discharge” will be allowed in UCITS funds and that implicitly or explicitly, depositaries’ restitution liability will be close to unconditional in such funds, whereas exemptions are economically needed, for instance when the assets are not under the control of the depositary, or when there are external events beyond reasonable control. We believe that administrative-like protection should be made available to investors by means of a set of funds where the depositary is unconditionally responsible for the restitution of assets. However, such protection should not be mandatory in all funds, not even in retail funds. After all, professionals favour an approach based on transparency, fiduciary duties and, within the less important theme of judicial means of investors, class actions.

law countries and to avoid vagueness in contracts and responsibilities. A regulatory approach limited to box- ticking would be severely counter- productive. Overall, Regulators have been Paying too Little Attention to Transparency and Responsibilities of Asset Managers As it happens, in the themes of interest in our study, the major themes that emerge are those that have largely been overlooked by regulators in recent works. Firstly, in the respondents' eyes, transparency should be the primary regulatory requirement for non-financial risks, which suggests that non-financial risks should be communicated with similar indicators to financial risks. Secondly, we argued in Amenc and Sender (2010b) that since non-financial risks primarily arise from the fund manager’s decisions, they must be the primary responsible party too. The answers to the survey largely support this view, making the role of the asset manager at least as important as that of the depositary. In these matters, practical challenges remain. For transparency, adequate measurement processes remain to be found. For manager’s responsibility, since capital requirements are costly, fiduciary duties should be taken at face value in regulations. In this field, regulations should, rather than limit manager compensation, focus more on optimal compensation contracts.

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An EDHEC-Risk Institute Publication