Shedding Light on Non-Financial Risks – a European Survey

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

5. Limitations of Regulation and Alternative Solutions

5.1. Regulations on Non-Financial Risks There are differing conceptions of regulations worldwide. In an ideal world, one could envisage regulations as either giving incentives for risk management – aiming to suppress non-financial risks for retail investors who may require a proper insurance against these risks – or a mix of incentives and delimitation of risks by imposing constraints. While giving adequate incentives is a difficult exercise linked to incentives and fiduciary duties, restrictions made to limit risk unfortunately run the risk of limiting innovation. We asked respondents to evaluate the following assertions: •  "The role of regulations is to limit non-financial risks and ensure that they are controlled and managed, not to suppress them." •  "Insuring risks will lead to a de-responsibilisation of investors." •  "A depositary cannot guarantee the restitution of assets that are not under its custody and control."

•  "Regulations cannot guarantee the restitution of assets at a reasonable cost." •  "The fund management industry cannot guarantee the restitution of assets at a reasonable cost." •  "The greater regulatory constraints drastically limit the innovation in financial markets." On the whole, there is a certain consensus on the idea that there are some non-financial risks inherent to investing which, even when not rewarded, must be taken. Respondents agree more than anything that the role of regulation is to limit non-financial risks and ensure that they are controlled and managed, not to suppress them (87% agree with the first statement, and only 6% are unsure). A very strong associated statement is that 56% agree that insuring risks will lead to a loss of accountability with for investors (15% are unsure). In addition, when it comes to a much discussed practical detail regarding the way to protect investors, increasing the depositary liability regarding Respondents are split but generally rather sceptical of regulation

Figure 5.1.1: How much do you agree with the following statements?

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An EDHEC-Risk Institute Publication