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

restitution, 62% agree that a depositary cannot guarantee the restitution of assets that are not under its custody and control. Pension funds nonetheless stand out as disagreeing more with the last two statements. This may be due to the fact that pension funds are more able to escape costly investment fund regulation than other investors because they are less subject to quantitative restrictions; in addition, they have strong fiduciary duties so they do not fear a loss of accountability. Respondents are also afraid that enforcing restitution duties will be costly (49% think that regulations cannot guarantee the restitution of assets at a reasonable cost and 29% are unsure, so only 22% think this is possible). Respondents in AM servicing, who may be more concerned with these questions, are more worried than others that it cannot be done at a reasonable cost. After all, they think that they will bear a large chunk of the costs associated with greater regulations (see Section 5.1). At the same time, there is a clear limit to how much cost can be absorbed by low fees services such as depositary services, and for this sector, it is likely that expenses will be largely absorbed by increases in fees, which respondents sometimes seem to ignore. Similar percentages (42% agree, 31% unsure) are given to the assertion that the fund management industry cannot guarantee the restitution of assets at a reasonable cost. This last item sees a lot of divergence between countries. While France believes it is possible more than average, the United Kingdom and the Germany, Austria and Netherlands group are significantly more sceptical than average. In terms of categories of respondent, we

also see an interesting group of pension funds, insurers and resellers being more optimistic on that options that assets managers and AM servicing. Whether this reflects a more informed position or a different prior is up for debate. Respondents have very mixed views regarding the impact of regulatory constraints: 44% disagree that the greater regulatory constraints drastically limit the innovation in financial markets, while 41% agree. France appear to believe less so, and the United Kingdom more so, which we can relate to the characteristics of each country’s industry. British respondents, in open answers, in general favour transparency, adequate information and strong fiduciary duties, which reflects their regulatory and political culture, but they might not ready to pay for it, and some hedge fund managers have envisaged moving abroad if AIFMD’s prescriptions prove too costly – unregulated funds would then have an advantage. At the same time, most British respondents would agree in interviews that the regulatory process in AIFMD has allowed substantial clarification for investors, a better understanding of non-financial risks and of the role and means of protection of depositaries, which will tend to contribute to improving practices. A minority of respondents, usually from the British regulatory and political culture, are very pessimistic about regulations because they think that regulators have absolutely no hindsight and, just like the industry, they are following market trends and acting after risks have materialised, but will always fall short of preventing them. This view confirms that regulations are partly

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An EDHEC-Risk Institute Publication