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

Figure 3.2.2: Country group average of regulation on transparency, information and governance How much do you agree with the following assertions regarding regulations on transparency, information and governance for 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 Strongly disagree, -1 for Disagree, 0 for Unsure, 1 for Agree, 2 for Strongly agree.

3.3. Regulation of Capital Protection and Financial Responsibility of the Industry A reasonable objective for regulations is to ensure that whenever possible, the financial industry faces up to its responsibilities before the supervisory or judicial authorities have to step in. However, at almost every crisis, the lack of ex-ante clarification of responsibilities has led to a “blame game”. The investment manager has the central role in the value chain, but this party is oftenweakly capitalised – unless it benefits from the support of a large shareholder.

This lack of regulatory capital means that various options can be considered: • More responsibilities can be given to investment managers to better manage non-financial risks. Logically, this greater responsibility should be accompanied by increased capital requirements. •  An alternative to capital requirements is retail insurance. Insurance can be either private or public, and the EU (2010) has proposed such retail insurance in its thorough revision of the investor compensation schemes directive (ICSD) • One can rely more on heavily capitalised parties, i.e., depositaries. This has been a temptation of regulators recently; it

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An EDHEC-Risk Institute Publication