Shedding Light on Non-Financial Risks – a European Survey

Shedding Light on Non-Financial Risks – a European Survey — January 2012

4. The (Fair?) Cost of Protection

cost or benefit for each party. AIMA has conducted a quantitative study to assess the impact of the implementing measures proposed by ESMA for AIFMD. As for who will pay the costs, according to AIMA, “the majority of manager respondents indicate that increased costs of doing business as a result of increased servicing charges would have to be passed on to the Fund, thereby impacting its Total Expense Ratio (TER). This is in turn would, unavoidably, be borne by investors in the fund“ (AIMA, 2011). Our own survey indicates similar anticipations. AIMA (2011) summarises possible costs as follows “Depositaries – the liability related issues and the operational complexities associated with some of the proposed options could dramatically drive up costs or cause depositaries to withdraw from certain markets. Under an adverse impact scenario, we estimate that the increase in costs for depositary services could range between 100 to 150 basis points, meaning that the cost of AIFMD to hedge funds could amount to more than US $6bn with equal on-going costs per year”. The survey performed by AIMA, however, only gathers 9 responses, so it is likely to be highly insignificant from

Everyone wants protection — but at what cost? The trade-off should be central to regulatory decisions. Before costly implementing measures are decided, it is necessary to understand the attitudes of the industry. We asked respondents how much they are willing to pay for greater protection, and how much they are willing to charge, on the four themes previously discussed: transparency, financial responsibility of the industry, distribution and restitution. Our goal was thus to determine the order of priorities and to assess not only what measures parties support, but also whether increased regulatory protection would be a net cost or benefit for each party. Some parties, notably in the United Kingdom, have tried to pre-empt implementing measures for AIFMD (Charles River Associates, 2009). The Alternative Investment Management Association (AIMA), in its answer to the ESMA, has aimed to quantify implementing measures for AIFMD.

4.1. Increased Protection: A Net Cost or a Benefit? At the end of the day, it is necessary to assess whether regulations could be a net

Figure 4.1.1: Would greater protection be a net cost to asset managers?

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An EDHEC-Risk Institute Publication