November 9, 2012 1:21 pm

FSA to take action against fund managers

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The Financial Services Authority is to take action against a number of large fund managers in London after uncovering evidence that abusive business practices are pervasive in the sector.

An investigation into the activities of 15 unnamed asset managers, including hedge funds, revealed that many were breaking the regulator’s rules on managing conflicts of interest and upholding customers’ rights.

The FSA’s report suggested that conflicts of interest were rife in the sector, and said action was now being taken to force some managers to change the way they operated.

Examples uncovered in the review included failing to meet the FSA’s requirements on disclosing commission payments, and not trading in customers’ best interests. One firm investigated permitted senior fund managers to delay allocating trades until several hours after execution – a practice that favoured some customers over others. Other firms could not show regulators that cross-trading, or the transfer of securities between customers’ portfolios, was always in the interest of customers.

Evidence was also found to suggest that fund managers regularly spent millions of pounds of their customers’ money buying research and execution services from brokers while failing to check that the services were eligible to be paid for in that way.

“We concluded that most of the firms visited could not demonstrate that customers avoid inappropriate costs and have fair access to all suitable investment opportunities,” the regulator wrote.

The report continued: “We identified that many firms had failed to establish an adequate framework for identifying and managing conflicts of interests.”

The FSA has accused some of the managers under investigation of violating Principle 8 of the FSA’s Principles for Businesses, which requires firms to manage conflicts of interest fairly.

From our perspective, if you can’t manage your conflicts well, it’s hard for us to understand how you can be managing people’s money well

- Ed Harley, FSA

Firms that have failed to comply with the FSA’s rules on conflicts of interest have been asked to either justify their approaches or to take remedial action to correct them.

Enforcement action has also been taken against an unnamed firm that purchased a security for one customer, the proceeds of which allowed another customer to redeem a different, illiquid security issued by the same group. “This connected transaction enabled the second customer to meet redemptions it could not otherwise meet,” according to the FSA report.

The boards of the asset managers under investigation must discuss the FSA review and the chief executives of asset managers must respond to the FSA’s demands by the end of February.

The FSA’s review, which took place between June 2011 and February this year, was prompted by concerns that some asset managers no longer saw “conflicts of interest as a key source of potential detriment to their customers, and had relaxed controls”.

Ed Harley, head of asset management supervision at the FSA, said the findings called fund managers’ wider business practices into question. “Conflicts of interest are a core aspect of being an asset manager,” he said. “From our perspective, if you can’t manage your conflicts well, it’s hard for us to understand how you can be managing people’s money well.”

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