Shedding Light on Non-Financial Risks – a European Survey

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

2. A General View of the Situation and Challenges

Figure 2.1.4: Country group average of the protection against major non-financial risks How protected from the following non-financial risks do you feel you are?

“Fr” is France, “UK” is the United Kingdom, “Ge+Au+Nl” is Germany, Austria and the Netherlands, “Lux+Irl” is Luxembourg and Ireland, and “RoE” is the rest of Europe. Answers are coded in the following manner: 0 for Not at all, 1 for Poorly, 2 for Rather well, 3 for Very well, 4 for Completely.

Legal risk is the risk inherent to the interpretation of laws and bylaws in front of a court of justice. Both of these risks are undoubtedly significant and uncertainty has consequences on the behaviour of actors, so definitive clarifications of the regulations and responsibilities for non- financial risks are important for the industry. In order to find appropriate regulations and risk-management techniques to mitigate non-financial risks, it is of course crucial to understand how they came to be. Amenc and Sender (2010b) describe a series of causes: “the evolution of fund management techniques has increased non-financial risks. UCITS regulation was originally constructed from country regulations when funds invested mainly in domestic listed securities, and when 2.2. Historical causes of the rise of non-financial risks

Looking at countries, France, which feels less protected from those risks, also believes they are less important, with the notable exception of mispricing. The United Kingdom feels significantly more protected than average regarding fraud (which was regarded as an important risk) and mis-selling risk. Germany, Austria and the Netherlands feel more protected than average against the risk of bankruptcy of an intermediary and the breach of investment rules. mentioned some categories of risks that we did not specifically study. Among these, the most commonly cited are by far regulatory and legal risks, also underlined in Grene (2010). Regulatory risk could be defined as the impact of sudden changes in the regulation either of the country a firm or a fund is registered in, or in that of other competing countries, hence changing the competitive landscape. Respondents sometimes

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An EDHEC-Risk Institute Publication