Written on 18 April 2012.
For the respondents to this survey, entitled “Shedding Light on Non-Financial Risks – a European Survey,” the main causes of the increase in non-financial risks are firstly the growing sophistication of operations (a cause considered important by 77% of respondents), followed by the reduced capacity of some intermediaries to guarantee deposits (59%), unclear or inappropriate regulation (57%) and finally the total absence of responsibility of management companies regarding restitution (53%).
The main message from this study is that the regulatory priorities for the respondents relate to themes to which the regulator has paid less attention in recent work, notably AIFMD. For the respondents, “transparency, information and governance” are the priority for the regulation of non-financial risks, followed by the financial responsibility of the industry. On the latter point, it is important to stress the recognition that non-financial risks are largely the consequence of the fund manager’s decisions.
On “transparency, information and governance,” the primary concern of respondents, a huge majority (91%) agrees that the regulator must ensure that information is genuinely fair, clear and not misleading.
On the financial responsibility of the industry in non-financial risks, the second greatest concern for respondents, 79% consider 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 asset managers should have greater responsibility for non-financial risks. They are therefore in complete agreement with a previous EDHEC-Risk Institute study, which considered that the responsibility for decisions and compliance with regulatory obligations does not rest with the depositary alone.
Responsibilities for the restitution of assets should be contractually defined between depositaries and asset managers; for 68% of respondents this should be done at the creation of the fund. Moreover, the depositaries should only be unconditionally responsible for the assets that they actually control (69%), and responsibilities should therefore be defined by asset class.
In the area of distribution, a strong majority of respondents (81%) is in favour of clarifying responsibilities according to who controls the information, with distributors having a role to play as the first line of defence for investors (69%).
The costs of stronger protection should be largely supported by the industry and would not be totally transferable to investors. Strengthening the regulation would therefore result in a net cost for asset managers (for 70% of respondents), depositaries (69%) and custodians (73%).
Finally, faced with the growing complexity of UCITS and the resulting increase in counterparty risks, the idea of secure UCITS funds, where the depositary would be unconditionally responsible (contractually or legally) for the restitution of assets, should be an option to consider, according to 67% of respondents.
A copy of the EDHEC-Risk Institute survey can be found here:
This survey was produced as part of the “Risk and Regulation in the European Fund Management Industry” research chair in partnership with CACEIS.