Shedding Light on Non-Financial Risks – a European Survey

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

1. Introduction

There is a distinct risk that the lack of a unified goal may turn this directive into an inapplicable patchwork. In particular, politically driven decisions mean that some relevant outputs from consultations to professionals may be foregone for political reasons. For instance, very little attention has been paid to transparency for investors, although it clearly appears to be a top priority for the industry. Similarly, harmonisation in implementation has been a major failure of past regulatory attempts in this area; it appears uncertain that this directive will alter that course. From a practical standpoint, the judicial powers of investors are therefore important. Amenc and Sender (2010b) remind there are inconsistencies in country regulations – mainly in those prior to the implementation of EU financial laws, but which interact with them. Due to the liquidation, Lehman’s assets were frozen and in the hands of the liquidator; some European investors tried to intervene. The British liquidator blocked the restitution of assets held as collateral by Lehman Brothers as a prime broker, probably on the grounds that this collateral was not free of debt (the borrowings from investment funds). As a consequence, many investment funds could not complete any transactions, and the French regulator ordered depositaries to return the value of the assets to the investment fund. In addition, the Madoff fraud also illustrates more widely the disparities in responsibilities of all actors and that regulators were ill-equipped for this sort of fraud (see Amenc and Sender, 2010b and Le Page, 2011 for a summary).

In this theme, the organisation of the means of actions of individual investors is important. Firstly, the lack of participation of investors in the monitoring of the fund, even when they are of the corporate form, makes it difficult for them to ensure that fiduciary duties are taken seriously in funds. Secondly, even if supervisory agencies can play the role of mediator (now for all financial sectors), investors generally ignore this possibility (AMF, 2011), and even if it is advertised, it could prove inconsistent in countries (see above). Moreover, the recourse to civil procedures is always considered as costly, possibly lengthy and technically difficult for individual investors who often find it hard to bring evidence against professionals. 3 For that reason, collective means of actions such as class actions would adequately complement existing laws: “Class actions are a possible means of imposing responsibilities, as investors can, as consumers, pool their resources to bring claims, regardless of the legal structure of the investment fund (investors are currently not greatly involved in daily monitoring of fund management and the unit-holder base is generally too highly fragmented to bring a claim, after the fact, against management)” (Amenc and Sender, 2010b, p. 11). This case is made much more complex when investors invest in foreign funds. In principle, the delimitation and interaction of competences between country jurisdictions are dealt with by European laws. For instance, individual complaints of French Luxalpha investors against UBS must be dealt by the Tribunal d'Arrondissement of Luxembourg in the case brought to it by the liquidator (Agefi, 2011). But such

3 - In commercial laws, the presumption of innocence of professionals prevails, and investors need to prove that their loss is a direct consequence of a faulty action of professionals to obtain reparation.

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An EDHEC-Risk Institute Publication