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 2.3.1:

The recent European regulations are met with uncertainty and caution 31% of respondents believe that the accelerated notification procedure will increase or greatly increase non-financial risk, while almost 59% believe it will be neutral and only 10% think it will decrease risks. After all, the accelerated notification procedure in UCITS IV might create some country competition detrimental to non-financial risks: “Since the domestic supervisor opens the European market by validating the prospectus or the KID, countries may try to attract funds by facilitating validation” (Amenc and Sender, 2010b, p. 33). This risk is also illustrated in the Madoff fraud, see Keena (2010). One should note that this possibility or arbitrage implies that the ESMA should have sufficient powers over national supervisors which will have “reduced means of controlling the distribution of foreign funds” (ibid.). Answers to the related open question and interviews allow better understanding of respondents’ views. A recurring concern is deficiencies in the harmonisation in rules, implementations of the directive, as well as law enforcement. Some commenters argued this might exacerbate regulatory arbitrage, mis-selling and generally, operational risks, why might become

dangerous if due diligence does not improve at the same time. One may be surprised that not everyone thinks that the accelerated notification procedure will increase non-financial risks. On a more neutral side, some put forward that even if the accelerated notification procedure yielded adverse effects, the regulation of UCITS in itself was a good thing and would which would at least compensate those effects. Some respondents mentioned that the risk was already present before the introduction of the accelerated notification procedure, and that the much-feared problem would fail to materialise, as generally European and national regulations already control the activity of the funds. Conversely, 27% believe that the AIMF directive will decrease or greatly decrease non-financial risks, while 21% believe it will increase or greatly increase them, and 52% adopt a neutral stance. The comments on these answers seem to indicate that the majoritarian neutral answers are largely due to the uncertainty either on the implementation or the unintended consequences of the measures.

Regarding the AIFM directive, most comments praised its objective of greater

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An EDHEC-Risk Institute Publication