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

of responsibility of the investment fund industry and that of regulators.

training; many were selling products they did not understand to inadequate clients, under false promises of absolute returns. The lack of professionalism contributed to spreading poorly evaluated risks within the system. Then, while still being relatively high, the reduced capacity of some intermediaries to guarantee “deposits” [the return of assets] comes out slightly less important than the previous causes. Some 16% consider it irrelevant in the increase of non-financial risks, and more than 24% only slightly important. Conversely, 59% consider it important or very important. The absence of responsibility of management companies regarding restitution is also ranked slightly lower as an important cause of the rise of non- financial risks (53% consider it irrelevant or slightly important). Those last two scores can be explained because many risks are the combined result of a lack

Money market funds are an example of where underlying assets were believed to be liquid, but turned out not to be. By certifying funds invested in potentially illiquid assets as liquid UCITS funds, sometimes even as very liquid money market funds, regulators gave investors a false sense of security. It is a typical case of mis-selling, as proper information on this risk was unavailable to the investors, and it is debatable whether, in some cases, access to such sophisticated products by non-sophisticated investors was appropriate (in a MiFID sense). Overall, a majority of respondents (57%) believe that inadequate and/or unclear regulation (especially related to non-financial risks) is an important or very important cause in the rise of non-financial risks (slightly important for 32 %, irrelevant for 11%).

Figure 2.2.2: Country group average of the causes of increased non-financial risks How important were the following factors in the recent rise in prominence of non-financial risks?

“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: -2 for Irrelevant, -1 for Slightly important, 0 for Important, 1 for Very important.

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An EDHEC-Risk Institute Publication