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Iris H-Y Chiu

The chapter provides a comprehensive analysis of pan-European investment law. By providing an overview of European Union sources of law and regulatory objectives, he offers a thorough introduction to a large and growing market that rivals the United States in global economic importance. It explores the unique features of the two key pillars of European fund governance: UCITS (broadly corresponding to public funds like mutual funds in the United States) and Alternative Investment Funds (broadly corresponding to private US funds, such as hedge or private equity funds). It then offers an analysis of the future trajectory of European investment fund law.

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Iris H.-Y. Chiu

The interpretation of ‘shadow banking’ and the mapping of the shadow banking universe is the subject of much academic commentary and policy discussions. This is because ‘shadow banking’ is often used as a catch-all term to refer to financial activities and transactions that may not be subject to traditional realms of regulation, but the amorphous nature of the term is unsatisfactory for informing debates on regulatory perimeter and policy. Often, a ‘functional’ approach is suggested in order to understand the nature of financial activities and transactions that are lumped into the shadow banking category. The functional approach focuses on the economic function of the financial activity in question, regardless of the type of institution carrying it out. By looking at the economic function performed by the financial activity in question, one may better be able to ascertain the underlying demand and supply for such function and the risks that such functions give rise to, particularly whether systemic risk is implicated. The approach may also highlight the functional similarities and differences with already-regulated financial activity in order to form views as to the regulatory perimeter for shadow banking activities. The functional approach to shadow banking is therefore a prima facie useful approach to surveying the universe of shadow banking and informing the policy-making process in relation to shadow banking activities and transactions at national and international levels. This chapter however raises queries as to the limitations of the functional approach, and whether such limitations would ultimately hamper the development of regulatory policy. In particular, we question whether the functional approach is too embedded in market-liberal assumptions, and stymies imagination in regulatory design by converging upon ‘like-for-like’ analyses and applications. Further, we query whether the functional approach, though conceptually promising, is subject to the legal arbitrage that it seeks to overcome. Nevertheless, this chapter does not deny the achievements made by adopting the functional approach and suggests how it should be put to optimal use.

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Iris H-Y. Chiu

This chapter focuses on the nature of ‘private’ and ‘public’ enforcement against shareholders in order to critically tease out the differences in terms of their rationales and broad characteristics. The chapter will raise the question whether the boundaries between the two are clear, and the implications for considering the suitable loci for enforcement. It is not a comprehensive study of the sources of law for enforcement but key examples will be raised.

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Iris H.-Y. Chiu and Iain G. MacNeil

‘Shadow banking’ refers to a range of activities that have bank-like character, that is, credit intermediation, liquidity and maturity transformation, and that are undertaken outside the regulated banking system. This can mean activities carried out by non-bank entities that mimic bank-like activities, but can also refer to activities carried out by banks and other regulated firms that do not always operate within the established fabric of regulation they are subject to. Although such activities may be seen as a form of financial innovation, the relationship between innovation and regulatory arbitrage remains uneasy. The former is often viewed more positively than the latter, although it is clear from history that the former has often driven the latter (for example, the emergence of the Eurobond market). The Financial Stability Board (FSB) has provided leadership in developing international surveys of shadow banking activity around the world and policy thinking to govern these areas. In 2013, the FSB set out in a policy document the need to consider how shadow banking activity affects financial stability, but its focus was inevitably on known areas whose risks have played out in the global financial crisis of 2007–09. The spotlight on these areas has nevertheless led to regulatory reforms in many parts of the world, discussions of which are canvassed in this volume, but issues remain outstanding in relation to the effectiveness and scope of reforms.

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Research Handbook on Shadow Banking

Legal and Regulatory Aspects

Edited by Iris H.-Y. Chiu and Iain G. MacNeil

Research Handbook on Shadow Banking brings together a range of international experts to discuss shadow banking activities, the purposes they serve, the risks they pose to the financial system and implications for regulators and the regulatory perimeter. Including discussions specific to the UK, European Union, US, China and Singapore, this book offers high level and theoretical perspectives on shadow banking and regulatory risks, as well as more detailed explorations of specific markets in shadow banking.
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Investment funds in an era of financialisation

The Promises and Limitations of the New Financial Economy

Roger M. Barker and Iris H.-Y. Chiu

We discuss the rise of institutional fund management as part of the global trend towards financialisation. This context allows us to draw out the key characteristics of modern institutional fund management which are important in shaping their corporate governance roles. The context of financialisation allows us to appraise whether institutions behave like fiduciary or universal capitalists as some commentators have proposed, or self-interested agency capitalists, as suggested by others. Key words: financialisation, fiduciary capitalism, universal owners, agency capitalism, money manager capitalism, asset allocation.

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Roger M. Barker and Iris H.-Y. Chiu

We draw together broad level discussions in the structures and incentives in investment fund management, as reflecting a model of financialised business. We argue that most investment funds running a business model of pooled investments have structurally separated funds from managers for efficiency and regulatory reasons. This has further resulted in the growth and lengthening of the investment chain which has implications for the nature of investment management practice, including the assumption (or lack of assumption) of corporate governance roles for investment funds and their managers. The industry of professionalised asset manager is in particular susceptible to investor myopia and short-termism and is riddled with agency problems. Further, regulatory compliance pressures reinforce market preferences for these behaviours. However, these effects are also by-products of legitimate objectives in investor protection such as regular accountability and ensuring liquidity for investors. We query whether the embrace of ESG factors may change investment behaviour. We note that certain niche funds carry out different investment management practices, adopting ESG factors as a different ethos in their management. They come closer to an investment management paradigm that integrates savers’ long-term interests and the long-term wealth-creation role of the corporate economy. However, we do not think there are sufficient market-driven or regulatory forces that would compel such change to become mainstream. Hence, the model of investment management that the fund industry has developed raises considerable questions for the long-term objectives of meeting savers’ needs and supporting a long-term wealth-creating corporate sector. Key words: investment chain, asset managers, proxy advisers, socially responsible investing, investor protection, short-termism.

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Corporate equity ownership and misplaced hope in institutional shareholder stewardship

The Promises and Limitations of the New Financial Economy

Roger M. Barker and Iris H.-Y. Chiu

This chapter presents a high level perspective on the instrumental assumption of corporate governance roles by institutions, and shows that both neglect of such roles or the use of them in a self-interested manner by financial actors produces a mixture of beneficial and deleterious effects for investee companies. The desirability of promoting greater shareholder engagement in a world of institutional share ownership is far from obvious, and should not necessarily be seen as the key to an optimal system of corporate governance, as the UK Stewardship Code and the European Shareholder Rights Directive seem to assume. The awkwardly framed provisions in the new European Shareholder Rights Directive that are punctuated with public interest concerns regarding the nature and effectiveness of institutional investment management show that policy-makers have turned their attention to the governance deficits and issues in this area. We propose more comprehensive thinking about the governance and regulation of investment management practices, building upon the existing patchwork of UK and EU prudential and conduct of business regulation, but also more thoroughly to deal with issues hitherto unaddressed, such as the investment chain structuration and the role of the various entities of which it is composed, appropriate conduct in securities lending and, more broadly, the mitigation of agency problems and perverse incentives in the investment chain. Regulation may be the only means, albeit not necessarily perfect, to address the long-term needs of savers reliant on the investment management industry, and its impact on the long-term wealth-creating potential of the corporate economy. A soft law approach of shareholder stewardship which situates the underlying public interest notions in a private ‘corporate governance’ paradigm is unlikely to be an adequate one. Key words: Stewardship Code, shareholder activism, say on pay, short-termism, value extraction, long-termism.