FSA directs asset managers to put customers first
All asset management firms need to pay very careful attention to the recent paper by the Financial Services Authority (FSA) concerning the management of conflicts of interest between firms and their customers. The paper was published on 9 November 2012 and requires action by the Board and Chief Executive Officer by 28 February 2013.
The paper, which can be found on the FSA website, follows a series of thematic reviews at asset management firms which clearly left the FSA unhappy about the approach that many firms currently take in relation to conflicts. Not only do many firms have an inadequate framework for management of conflicts but the regulator also found a number of firms in breach of its rules. The FSA concluded that it has to take action against some of the firms involved in the reviews which include section 166 skilled person reviews and is also considering enforcement action in some cases.
Many of the criticisms in the paper concern rules that the FSA had believed were well-understood and applied by the industry and there is a sense of surprise and disappointment in what the regulator has to say. It may be that the current deluge of regulatory change affecting asset managers has caused attention to be diverted from the ‘day job’ but the FSA is clearly not prepared to accept any excuses.
While many of the firms that were reviewed by the FSA probably had policies covering different aspects of conflicts management, the FSA was very concerned that most of the firms could not demonstrate that the policies were properly applied or effective. The FSA’s fear is that firms might be incurring inappropriate costs on behalf of their customers in contravention of FSA rules and principles.
The main issues addressed by the paper concern:
- Purchase of research and trade execution services;
- Gifts and entertainment;
- Equal access to investment opportunities;
- Personal account dealing; and
- Allocating the costs of errors made by the manager.
These are all familiar matters to asset managers so the paper should be read as a reminder of best practice in these areas which firms will be expected to benchmark themselves against. The FSA threatens to take disciplinary action against firms which fall below the required standard. This should not cause any surprise as acting in a client’s best interests is a fundamental requirement and conflicts management is a prerequisite to this. It is frequently left to legal and compliance departments to address but conflicts recognition and management should also be within the skill set of every portfolio manager. The FSA believes that better controls and standards are achieved where business line management work together with legal and compliance to design conflicts controls.
Further action by the FSA
To address the deficiencies, the FSA has placed accountability for management of conflicts squarely on the Board and the Chief Executive. The FSA is requiring the Boards of all asset management firms to review the paper and assess their arrangements for managing conflicts. Upon passing a resolution that the firm’s arrangements will ensure proper conflicts management, the Chief Executive must provide the FSA with a written attestation that the arrangements are effective and will ensure compliance. Firms have until 28 February 2013 to provide the attestation to the FSA.
It goes without saying that the attestation must be treated with the utmost seriousness. The FSA takes a very serious view of firms and individuals that affirm that they are in compliance with particular requirements but are later found wanting during an FSA visit. The FSA has said many times that it will hold senior management to account for compliance failings at their firms and by requiring the Chief Executive to attest to compliance is signalling how seriously it will deal with any failure to demonstrate that the firm has a proper framework for managing conflicts.
Although the FSA paper identifies a number of core conflicts, these are not exhaustive and each firm will have to give proper consideration to its own actual and potential conflicts when assessing the effectiveness of its procedures.
The FSA plans a second round of visits in 2013 and will use the attestation responses received to guide the selection of firms for follow up visits.
Director, Risk & Regulation, Investment Management & Wealth