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

Transparency, information and governance are the industry’s top priority On the whole, the question of transparency, information and governance is recognised as a major issue in investment management. Arguably, it is also an area in which regulators have neither been ambitious nor very specific. An overwhelming majority of respondents (91%) agree (40% strongly) that regulators should ensure that the information is indeed fair, clear and not misleading (3% disagree). Governance comes close second. A very strong majority of respondents (79%) agree that fiduciary duties of asset managers should be reinforced, by stating that they must invest for the sole benefit of their clients (6% disagree). Together with many respondents that affirm that fiduciary duties are of great relevance, we argue that it is important that fiduciary duties are taken seriously, especially in civil-law countries. These duties should thus be enforced with a degree of severity, insufficiently provided in recent directives such as the AIFMD, and in the implementation measures proposed by the ESMA (2011a) (which has focused on the fiduciary duties of depositaries, not of investment managers). When an asset manager or a depositary voluntarily breaches its obligations and enters into strong conflicts of interest, it must be penalised, as it can be by the FSA – in 2006, both the managing director of GLG Partners and the firm itself were fined of £750,000 for market abuse and violation of FSA principles.

fair, clear and not misleading” (more than 90% agree, see Figure 3.2.1). Their lesser agreement with a quantification of non-financial risks in the KID is mainly explained by their lack of understanding on how this could be practically implemented. After all, no quantifications of non-financial risks exist today, and it is unclear to many respondents whether one can impose a quantification that is not available today. From a practical standpoint, this means that a process should be launched. From a conceptual standpoint, we have used the wording rating because it is, in the main, a qualitative process similar in spirit to those of rating agencies — but the risk that should be measured is that of a loss for unit-holders for instance when funds have been entrusted to sub-custodians, which is a very different risk to that measured for bond-holders. Further research is needed on this topic. An alternative solution would involve requiring a best practice set of tools to be used for risk assessment. The use of open solutions, such as Opera (Open Protocol Enabling Risk Aggregation), could allow for risk assessments and measurements that are comparable to a certain degree, as well as auditability. Some respondents have also expressed that they are uncertain about the benefits of the synthetic indicator available in the KID and that it does not apply univocally in an understandable way across all strategies. This remark echoes that in Amenc and Sender (2010b) that a loss based indicator would be more appropriate that a volatility based indicator.

38

An EDHEC-Risk Institute Publication