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

professionals. 7 For that reason, collective means of actions such as class actions would complement adequately existing laws: “Class actions are a possible means of imposing responsibilities, as investors can, as consumers, pool their resources to bring claims, regardless of the legal structure of the investment fund (investors are currently not greatly involved in daily monitoring of fund management and the unit-holder base is generally too highly fragmented to bring a claim, after the fact, against management)” (Amenc and Sender, 2010b, p. 11). This subject is currently being examined even in countries where class actions are not part of the legislative arsenal (see AMF, 2011). One should note that the recourse to class actions could imply strong modifications of the regulatory culture, as if class actions are the preferred means of action it would imply that de facto legal protection could prevail on administrative protection (“a logical consequence of the administrative approach to protection is that France has long delayed adding class actions to its legislative arsenal” Amenc and Sender, 2010b, p. 37). In the US, where class actions are part of the legislative arsenal, they are often used in a corporate context to reinforce fiduciary duties, notably in the case of insider trading from management, allowing shareholders to obtain reparation, as they distinguish themselves from management in these situations. The subjects of class actions and European authority are interconnected because of the need of a homogenous application of such laws at the European level. Once again, class actions are part

and even if this possibility is advertised, it could prove inconsistent in countries because of differing supervisory cultures, 6 in particular for fiduciary duties: “In common-law countries, the principle of fiduciary duty leads to the recognition that each party is responsible for its actions; because the duties are not practically defined, this principle leads to reliance on court procedures, which ends up being costly. Regulation in civil-law countries, French regulation in particular, perhaps, has historically avoided the excessive reliance on court procedures” (Amenc and Sender, 2010b, p. 37). And, of course, such recourse would be extremely complex from one jurisdiction to another. As the main responsibility for a financial product distributed in Europe lies on its manager, a Portuguese investor in a German produced fund would need to call the Bafin mediation department, but this may not seem practicable. Of course, the role of the ESMA is to harmonise supervisory decisions and it can act when there are conflicts between supervisors. But there is no clear procedure for an individual investor to recourse to the ESMA, and it would be natural that a European financial ombudsman is formally defined (this role could, of course, be attributed to the ESMA). Firstly, the lack of participation of investors in the monitoring of the fund, even whey are of the corporate form, make it difficult for them to ensure that fiduciary duties are taken seriously in funds. Secondly, the recourse to civil procedures is always considered as costly, possibly lengthy and technically difficult for individual investors who often find it hard to bring evidence against

6 - While the ESMA will contribute in homogenising the country implementation of financial regulations, the homogenisation of non-financial laws and supervisory cultures is a more difficult exercise. innocence of professionals prevails, and investors need to prove that their loss is a direct consequence of a faulty action of professionals to obtain reparation. This necessitates an understanding of professional practices far beyond the knowledge of an ordinary investor. In addition, not only do lawyers’ fees need to be paid in advance by investors, but also it has been reported that judges are reticent to ask for lawyers’ fees to be fully reimbursed. In criminal laws, which are usually less fit to obtain reparation of losses unless in cases of proper and intentional fraud, one must prove the intention to harm, and the list of financial derelicts is quite restricted. 7 - In commercial laws, the presumption of the

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An EDHEC-Risk Institute Publication