Shedding Light on Non-Financial Risks – a European Survey

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

3. The Need for Change in Regulation and Risk Management Practices

which, in our view, is insufficient and does not help resolve the lack of homogeneity in practices and law enforcement across Europe. In the survey we asked respondents to consider the following: •  Improve the communication on information, with the same distinction between a reaffirmed principle-based requirement that information is fair, clear and non-misleading, and the requirement of a rating of non-financial risks, that would stand for an approximate quantification just as the information of financial risks stands today in the Key Information document •  Improve governance, with either reinforced, meaningful principled- based regulations on fiduciary duties, organisational requirements and reinforced external monitoring (from auditors and independent administrators, in the spirit of American requirements, see Pavlenko Lutton, 2007), or code of conducts, in the spirit of the external code of conduct proposed by EFAMA (2011). •  Finally, we also review the relevance of the regulation on the use of information on rating agencies by investment managers (see Tait, 2010 as well as well as ESMA, 2011 for a summary of regulatory initiatives on rating agencies). investment managers is primarily regulated by UCITS, the prospectus directive and MiFID, but no transparency on non-financial risks is currently required. Yet respondents strongly value transparency. They rank first, before any other topic in the current theme, the view that “regulators should ensure that the information is indeed Communication from

There are significant variations across country groups. We constructed a synthetic priority index where each theme is computed as the sum over n of (1/n) times the percentage of people who chose that theme in the nth place. Using that measure, it appears that transparency, information and governance is the priority only for France on the one hand, and Luxembourg and Ireland on the other hand. The United Kingdom as well as Germany, the Netherlands and Austria favour giving more judicial powers to investors, which nonetheless appear lower overall. Note: In what follows, we take “agree” to mean “agree or strongly agree” and “disagree” to mean “disagree or strongly disagree”, unless specified otherwise. The investment manager unquestionably has the central role in the fund management industry, so it would be quite natural to expect it to be the first line of defence towards the end investor. In practice, however, his or her responsibility is largely undefined. UCITS is in the main a product directive that has left the responsibility of parties undefined (see Amenc and Sender, 2010b). Unfortunately, in the AIFMD, a manager’s directive, insufficient attention has been paid to transparency and fiduciary duties: in the words of ESMA (2011a, p. 43), 5 the AIFMD should, in line with UCITS requirements, avoid malpractices such as market timing and late trading. So, fiduciary duties are in spirit copied from the UCITS directive, 3.2. Regulation on transparency, information and governance

5 - ESMA (2011b), published after the close of this survey, is the final advice of the European Commission on possible implementing measures of the Alternative Investment Fund Managers Directive. It contains in the main the same provisions as the consultation and leaves some uncertainties regarding the country implementation and supervision of delegation and exemptions of depositary duties and liabilities in particular regarding sub-custody risk and the ways it should be practically managed and communicated by the depositary.

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An EDHEC-Risk Institute Publication