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Risk Management - March 23, 2012

We welcome the growing recognition of the importance of non-financial risks among the players in the fund industry - an interview with François Marion

In this month's interview, François Marion, CEO of CACEIS, discusses EDHEC-Risk Institute's recently-released publication “Shedding Light on Non-Financial Risks - a European Survey,” and also implementing measures for the AIFMD directive, regulatory developments in Europe, specific legislation for depositary banks, and the overall health of the European fund management industry in the wake of the financial crisis.

François Marion

EDHEC-Risk institute has just released a survey entitled “Shedding Light on Non-Financial Risks - a European Survey,” which is drawn from the CACEIS research chair on Risk and Regulation in the European Fund Management Industry?”. Top of the list of concerns for European fund management professionals in this survey is “transparency, information and governance.” Does this result come as a surprise to you?

François Marion: First of all, we certainly welcome the growing recognition of the importance of non-financial risks among the players in the fund industry. Then, and it is not really a surprise, responses to the survey clearly reaffirm the central role of the investment firm.

Presently, there are needed clarifications on the depositary function and its responsibilities but this has diverted attention away from the debate on transparency, information and governance.

In general, most non-financial risk is derived from fund managers' decisions, and the investment firm's central role makes it an ideal starting point for improving regulations since in recent times, regulators have neither been bold nor very precise on these issues.

EDHEC also produced a position paper last year to respond to the ESMA Consultation Paper on implementing measures for the AIFMD directive in which the authors stated that in fund regulations, the asset manager has the central responsibility and regulations should enforce that responsibility by giving them strong fiduciary duties. Do you agree with that position?

François Marion: Yes, we agree that fiduciary duties of asset managers should be reinforced, also explicitly by stating that any investment should be to the sole benefit of the client. This reinforcement has to go along with the implementation of a renewed legal and regulatory framework that will clearly define the roles and responsibilities of all players along the value chain and throughout the European Union.

At present, it is a source of concern for us to see that the implementation measures proposed by ESMA and the directives such as AIFMD concentrate on the depositary's fiduciary duties rather than those of the investment manager. If this were to be confirmed, in the long run, the pricing for depositary services would have to increase substantially.

The current period is a particularly challenging one in terms of regulatory developments. Do you think that European regulators are generally moving in the right direction and what major concerns do you have in relation to your own business?

François Marion: We believe European regulators are currently moving, be it slowly, in the right direction as the financial crisis prompted a major shift in regulatory priorities. Innovation and product oriented initiatives have given way to safety and investor protection oriented objectives. And we certainly welcome moves that serve to regain investors' confidence in financial products. Yet, our main concern is that it is still not stated clearly enough that the depositary is not deemed the insurer for the entire funds industry. We fully support the depositary having responsibility for risk it is able to control, but where a fund manager decides for example to invest in a high risk country or in complex financial products beyond the control of its depositary bank, the onus should be on the manager and the end-investor to support that risk. If this were not to be the case, it would mean a fundamental change in the function of depositary bank, especially in terms of its financial reserves structure.

We spoke two years ago specifically about the difficulties of having a level playing field for depositary banks in Europe and the differences of interpretation of legislation among Member States. Do you think progress has been made in this regard?

François Marion: On the positive side, the good news is that there has been some progress in this area and initiatives such as AIFMD and UCITS V are under way. Unfortunately the pace of European regulatory developments is such that the current fragmented situation will remain for quite some time. I would hazard a guess that to attain a fully harmonised, level playing field for depositary banks in Europe, we will have to persevere for several years yet. Besides, although these new pieces of regulation are a clear indication that the differences in interpretation among Member States have been acknowledged and need to be ironed out, we are concerned that the final picture is still quite blurred in some areas.

Under the proposed regulations, some duties for the depositary banks are still rather vague (such as monitoring and due diligence) and obviously leave room for implementation discrepancies on different markets, which will be cause for uncertainty and risk in the event of a major case of non-financial risk in the future.

How do you view the overall health of the European fund management industry in the wake of the financial crisis?

François Marion: The crisis has of course had a major and direct impact on asset values and an indirect impact in the form of more stringent demands from investors and an increasingly heavy regulatory burden. So far, the European fund management industry is not yet back to pre-crisis levels, but it is a mature industry that plays an important role in investor wealth creation and preservation. Its share and role in the whole European economy should not be underestimated.

At CACEIS, we also understand that the crisis has served to force all industry players to look at two important areas that will, in the long run, improve the quality and safety of the service it provides to investors. Asset managers will probably need to focus increasingly on their core business which will allow for improved risk management and investor protection on the one hand, and closer control of the costs associated with the fund on the other. As a result we are confident that the European fund management industry will then be on course to become a safer and more efficient place to invest, and we therefore believe it will continue to attract an ever increasing share of available capital.

About François Marion

François Marion, 54, graduated from the Ecole des Hautes Etudes Commerciales (HEC), Paris. He started his career in internal audit with Banque Indosuez in 1983.

From 1985 to 1991, he was in charge of operations for Banque Indosuez New York. In 1991, he joined the bank’s Money and Bond Markets Division in Paris and was responsible for monitoring market risks in international branches and subsidiaries. In 1992, he was appointed Chief Operating Officer for the Asia-Pacific region, based in Hong Kong. In 1997, following Credit Agricole’s acquisition of Banque Indosuez, he assumed responsibility for financial control, budgets and strategic planning for Crédit Agricole Indosuez in Paris. In 1999, he became a member of the Executive Committee of Crédit Agricole Indosuez and Head of Systems and Operations. In June 2004, he was appointed Chief Executive Officer of Crédit Agricole Investor Services. He has served as Chief Executive Officer of CACEIS since 2005. François Marion is also a member of the board of Euroclear SA/NV and Chairman of Sicovam Holding.