Shedding Light on Non-Financial Risks – a European Survey

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

6. Conclusion

AIFMD. Moreover, they could pave the way for exemptions that are economically needed. Of course, there is a possible demand for administrative-like protection for some retail investors as well as in countries such as France (where the reinforcement of the obligation of depositary liability on the European scale remains an important priority), in contrast to respondents from the rest of Europe. Yet, because this reinforcement is neither a global priority nor a source of agreement, it must not be imposed on all funds and all investors, not even in the retail space. To avoid the risk of such worrying developments of regulatory depositary liabilities, we believe that retail investors must have access to a class of funds that are immune from restitution risk. A subset of secure UCITS where the depositary is unconditionally liable for the restitution of assets would be made available, yet not implicitly or explicitly imposed as a unique choice to retail investors. The greater depositary liabilities in these funds would naturally come with investment restrictions that make restitution feasible at a reasonable cost. These investment restrictions could be defined either by regulations or in the contract between the investment firm and the depositary. Then, an administrative form of protection would be available, but only as an option. The more generic approach to investor protection would be principle-based, with investors benefitting ex-ante from transparency and greater fiduciary duties from fund managers, and benefitting ex-post from increased judicial powers,

priorities for regulators should be taken into account for an adequate regulation. Regulatory initiatives should now focus on transparency as opposed to administrative protection, with the pendulum swinging away from an unconditional responsibility of restitution of depositaries towards greater responsibility of fund managers. Though the findings of this survey partly echo some of the answers from industry groups in the EU consultation process, there is a risk that regulators ignore these key messages. The AIFMD offers the possibility for depositaries to transfer or discharge their responsibility of restitution for the assets that they cannot safe-keep, yet the politically-driven regulatory attitude makes us worry that very little or no “objective reasons to discharge” will be allowed in UCITS funds and that implicitly or explicitly, depositaries’ restitution liability will be close to unconditional in such funds. Such stringent liabilities would introduce severe limitations in the UCITS space or strongly increase costs: depositaries would be inclined to either refuse some contracts which would limit diversification (between asset classes and geographies) or to charge an insurance premium for their regulatory obligations. We thus recommend a strong clarification of the regulatory framework and propose that the AIFMD rules apply to UCITS depositaries. These rules could be enacted either in revisions of the UCITS directive or by means of a specific depositary directive that relies on the same principles as the

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An EDHEC-Risk Institute Publication