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

3.6. Regulation on Judicial Power of Investors Aswementioned, the lackofharmonization of rules and even of compatibility of country legislative frameworks has recently been exposed to plain sight: “The Lehman bankruptcy involved a legal issue: the legal treatment of assets held as collateral at the prime broker, even when segregated, was different in France from what it was in the United Kingdom. The French regulator required that collateral, minus the debt of the investment funds to Lehman, be returned immediately to the investment fund; the British liquidator blocked the restitution of assets held as collateral, probably on the grounds that this collateral was not free of debt (the borrowings from investment funds). As a consequence, many investment funds could not complete any transaction, and the French regulator ordered depositaries to return the value of the assets to the investment fund” (Amenc and Sender, 2010b, p. 20). Bankruptcy rules are still set nationally, which renders legal resolutions hazardous at best. This has mainly impacted alternative funds for the moment, but it could well be that the same situation happens one day within Europe for custodians or sub-custodians of UCITS funds, which would certainly be most embarrassing (especially since ESMA has not incorporated the legal inconsistencies as events beyond the control of depositaries, see Amenc and Sender, 2011 for a comment). In addition, supervisory cultures still widely differ in Europe. As argued in Amenc and Sender (2010b), country laws originate

from differing original frameworks with varying reliance on financial law or corporate laws, as well as on civil code or common laws, but EU laws contribute to homogenising the regulatory frameworks. For instance, supervisory powers are now technically much more aligned, with the power of injunction and sanction of country supervisors. Yet, the details implementation of these supervisory powers differ, and while the AMF can fine firms to up to €100 million, in Luxembourg, the fine is limited to €12,500, and the AMF Damocles sword makes it easier to obtain changes from firms; the greater original reliance of Luxembourg on civil and corporate laws means by contrast that the CSSF has and exercises a greater power of sanction towards board directors. of competences between country jurisdictions are dealt by European laws, it is not obvious that in practice one can remedy to the inconsistencies both in country laws. To ensure that European laws are in practice compatible, and avoid blocking cases such as that of Lehman, a European savings authority could be defined for all decisions linked to financial matters. All these discrepancies would justify either a European ombudsman or an international savings authority. A related question is the organisation of the means of actions of individual investors. Even if supervisory agencies can play the role of mediator (now for all financial sectors), this possibility is in general ignored by investors (AMF, 2011), On the whole, even if in principle the delimitation and interaction

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An EDHEC-Risk Institute Publication