EUROPE - A new report has called for greater transparency in custodian contracts.
The research - The Roles of Custody in European Asset Management - was commissioned by EAMA (European Asset Management Association) and examined custodian liability in the event of operational failures.
The association said that failures in asset management arose mostly from “information asymmetries and fraud, not systemic risks”.
EAMA explained that although the presence of a custodian added to the overall level of investor protection, much confusion remained around the role of the custodian and “unclear” levels of liability in the event of loss.
The report suggested that these should be remedied directly through “disclosure, auditing, enforcement, insurance, custody and trustees” and not indirectly through capital requirements which could disadvantage Europe’s asset management industry as well as “provide a false sense of security.”
“It seems desirable that contracts should be made more transparent so that the bearer of risks is clearly identified. In addition, it is important that contracts offered enable risks to be shifted from asset manager to custodian where appropriate.”
EAMA draws attention to the possibility of a more standardised contract with clearer definitions on roles and responsibilities. But the report shows that many investment professionals are reluctant to change existing measures in fear of incurring additional costs for their clients.
“There is scope for increasing the role of custody in protecting against operational risks. However, many custodians and asset managers do not see a need to revise custody arrangements to improve client protection, especially since this would increase custody fees which clients might not be willing to pay.”
EAMA intends to hold a series of meetings in early 2003 for members, custodians and other interested parties to discuss issues raised by the report. Further details can be obtained by emailing [email protected]
EAMA is a lobby group which consists of 28 asset management firms and six national groups.
The report surveyed 32 asset managers and 22 custodians across 8 EU countries and was written by UK-based OXERA.
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