Shedding Light on Non-Financial Risks – a European Survey

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

6. Conclusion

Increased responsibility usually comes with capital requirements, but since capital requirements are costly, respondents have mixed views (and as expected asset managers do not favour increases in capital requirements). The question of capital requirements thus deserves further investigation, but in the meantime, fiduciary duties should be taken at face value in regulations as respondents are very much in favour of increased fiduciary duties. In this field, an interesting question for regulators is to consider whether regulations, rather than limiting manager’s compensation, would focus more on optimal compensation contracts. When it comes to restitution risk, respondents argue that responsibilities should be adequately shared between the investment firm and depositaries. Indeed, for 68% of respondents, the restitution of assets should be contractually defined between depositaries and asset managers at the creation of the fund. Furthermore, for 69% of respondents, depositaries should only be unconditionally responsible for assets under their custody or control, and responsibilities can be adequately defined in terms of asset classes. Overall too much of the emphasis has been put on depositaries; the pendulum should swing back towards asset managers who are in the best place to manage those risks. The factual analysis of answers above also carries an implicit criticism of the EU regulatory process, which is unfortunately too politically driven. The preferred options and the widespread view on top

Regulations are now progressively tackling some aspects of non-financial risks, but are they tackling the appropriate items? Though the survey seems to indicate that regulatory initiatives are welcome, they also run the risk of pursuing inadequate changes. In particular, we find that within the themes surveyed — transparency and governance, financial responsibility of the industry, restitution and depositary liabilities, distribution and judicial powers of investors — there is a general agreement among professionals that the most important themes are those that happen to have been, in the main, overlooked by regulators in recent works. After all, the top priorities for respondents are those to which the least attention have been paid to in recent regulatory works. Transparency, information and governance appear as the preferred way to handle risks. The second priority is the financial responsibility of the industry, with a recognition that non-financial risks primarily arise from the fund manager’s decisions. So, their primary responsibility must be recognised and generally increased – the responsibility for decisions and for compliance with regulatory obligations lies with asset managers themselves, and not just depositaries. For instance, 79% agree that “fiduciary duties of asset managers should be reinforced by stating that they must invest for the sole benefit of their clients”, and 67% agree that the responsibility of asset managers must be reinforced. In these matters, practical challenges remain. For transparency, adequate risk measurement processes remain to be found; respondents are clearly in favour of an increase in managers’ responsibility.

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An EDHEC-Risk Institute Publication