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

central role of the distributor and require clarifications on the responsibility of each actor. They also insist on the central role of the investment firm, which comes third. A very strong majority of respondents (81%) agree that responsibilities should be clarified ex-ante according to who controls each subset of information (6% disagree). Clarification is much needed in the area of non-financial risks. Amenc and Sender (2010b) suggest that specific ratings for non-financial risks could be introduced. Existing ratings of investment companies are clearly not sufficient to deal with those; sub-custodian risk, for instance, is completely outside their realm. A possibility would be to give less-sophisticated investors access to funds with only the best ratings; in any instance, “[m]aking such ratings publicly available would, without further regulation, facilitate investment in funds, since investors are now eager for disclosures of non-financial risks; as such, ratings would implicitly favour the funds with better practices” (Amenc and Sender, 2010b, p. 60). Thus, such ratings or more generally complete information about non-financial risks require clarification of the responsibility of each party. Additionally, a majority of respondents (69%) agree that distributors should have complete responsibility as the first line of defence for investors, but it could fall back on other parties if they have provided inappropriate or misleading information (18% disagree). So, distributors have a major role to play, not only to be transparent themselves but also to request transparency from their providers. These views are aligned with those in Amenc and Sender (2010b, p. 75): “Distributors

and this is one of the goals of UCITS IV. Nonetheless the link between distributors and asset managers has not been as formally defined, which leaves a lot of leeway — and room for non-financial risks to grow. So, it is essential that responsibilities regarding distribution are properly defined. A framework involving different actors, but defining only global goals without specifying the duties and responsibilities of each actor, would likely translate into a failure to give adequate incentives to deliver adequate information. Again, the Madoff affair clearly illustrates the failure to adequately communicate information at all levels (see Amenc and Sender, 2010b, Groendahl, 2011, as well as Bodoni and Doyle, 2011). • Distributors should have complete responsibility as the first line of defence for investors, but it could fall back on other parties if they have provided inappropriate or misleading information. •  Responsibilities could be clarified ex- ante according to whom controls the information • Depositaries could be in charge of controlling all information •  The central responsibility of the investment company could be reaffirmed and strengthened •  Responsibility of fund sponsors could be strengthened Clarifications are needed for distribution; asset managers must play their role On aggregate, respondents reaffirm the We study the following options regarding the definition of responsibilities:

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An EDHEC-Risk Institute Publication