A “Restricted Ucits” label should be created to safeguard investors and the reputation of the Ucits brand, the French Edhec-Risk Institute says.
The sophistication of Ucits funds, made possible by the Ucits III regulations and “exploited to the absolute limit” by the “Newcits” concept, is a principal cause of increased non-financial risks, Edhec says.
Edhec defines non-financial risk as risks that are not a direct result of positions taken by funds on financial markets but produced elsewhere in the operational chain, such as assets lost by a depositary bank.
Edhec says Restricted Ucits would establish a Ucits category with a scope for investment that is limited to what a depositary can hold and return without difficulty. This means that a depositary should be able to give a total guarantee, which is an expectation under Ucits V.
Ucits V, like the Alternative Investment Fund Managers Directive for non-Ucits funds, is moving towards placing greater liability on depositary banks, effectively making depositaries insurers for assets.
But Edhec says that these regulations along with certain others “will not really solve the problem” of non-financial risks.
They may even give less sophisticated investors, particularly retail investors, a false sense of security, Edhec says.
Better regulation and practices with regard to non-financial risk are needed, Edhec says.
This “Restricted UCITS” label is one of three themes that Edhec proposes. Another is to increase the responsibility of all actors within the fund management industry through incentives rather than extend the Investor Compensation Scheme to Ucits.
There should also be a reinforcement of information on non-financial risks, the French body says.
The proposals are contained in Edhec’s ‘Proposals for Better Management of Non-Financial Risks within the European Fund Management Industry’.
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