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

with those of people who manage their money, let alone with that of depositaries or rating agencies. Owing to the lack of control, this moral hazard issue is particularly sensitive in the finance context; but it is of a much broader scope, which is largely outside of the perimeter of this study, although we consider some possible remedies later when we talk about governance. We asked our respondents to evaluate the overall impact that the accelerated notification procedure and the Alternative Investment Fund Managers directive (AIFMD) were each likely to bear on non- financial risks, and why. As a reminder, the accelerated notification procedure is a UCITS disposition that accelerates the procedure for recognising funds across the EU once they have been recognised by the home country regulator. The AIFMD regulates and attempts to create a unified framework for alternative investment funds managers and associated actors in the value chain, notably depositaries as depositary’s liability regime is a central issue of the AIFMD. 2.3. Consequences of the new European regulations

The most significant country difference is the importance of sophistication, which is significantly greater for France, and lower in other zones. It might be due to the fact that French administrative protection is largely limited to traditional forms of investing, hence the increasing sophistication of the system might be perceived as increasing risks across the board for reasons reminiscent of the analysis of common-law and civil- law systems: in theory, rule-based administrative regulations lead to more arbitrage than principle-based ones. Interestingly, we also notice that Luxembourg and Ireland place less blame than their peers on the lack of harmonisation of rules and the increasing internationalisation of rules — this might not come as a surprise considering both countries’ industries developed thanks to these phenomena. One potential cause of non-financial risk that we did not analyse at this stage, but that some respondents mentioned in open answers and interviews, is the rise of conflicts of interests within the financial system. There is undoubtedly such a risk at various levels, as moral hazard is omnipresent at every step of delegated responsibilities. Investor incentives might not be aligned

Main changes in depositary rules in AIFMD and their application to UCITS

Accelerated Notification Procedure (UCITS IV) • Automatic notification procedure authorises the distribution of funds in target countries. • Communication aims to be electronic. •  Simplified prospectus replaced by Key Information Document. •  Submission file reviewed within 10-working day approval. • Will diminish the control of the target country supervisor as, practically, it is the home country regulator that will authorise the distribution of funds.

• Regulation of depositary duties, first set within the AIFMD, should be transposed in UCITS V (an EU proposal is expected for summer 2012). •  The ability of depositaries to transfer their responsibility should be more limited in UCITS than in an AIF (it is expected that there are less “objective reasons to discharge” ... or even possibly no reason to discharge). • AIFMD implicitly establishes the asset classes where the depositary has responsibility of restitution (eligible assets must be specified in the depositary contract with the fund). • UCITS has greater asset restrictions (and UCITS V may further clarify the eligibility of assets – recall that the vague definitions in UCITS have been a problem). Other provisions of AIFLD, such as manager’s fair compensation practices should be transposed too. • Beyond laws, the large debate that has taken place in the last two years on depositary duties has had a pedagogical role to the industry.

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An EDHEC-Risk Institute Publication