Between June 2011 and February 2012 the FSA conducted thematic reviews of asset management firms on the subject of managing conflicts of interest.
The Regulator identified many failings, which may result in enforcement actions against some firms, and has felt compelled to communicate the findings to a wider audience.
The FSA has published a 22 page document communicating their findings entitled “Conflicts of interest between asset managers and their customers: Identifying and mitigating the risks”. Some firms have received a ‘Dear CEO’ letter along with the document.
The FSA was concerned that most firms visited applied limited thinking to their approach to gifts and entertainment. Chapter 4 of the paper provides examples of policies with good controls.
Arrangements in firms for managing conflicts arising from personal account dealing were mostly satisfactory; some examples of good practice are provided e.g. imposing minimum holding periods.
Use of dealing commission (COBS 11.6) came in for criticism, with examples of disclosure failings and failing to ensure that services used could be paid for by way of commission arrangements.
Allocation of trades came under the microscope with most firms having satisfactory allocation procedures (COBS 11.3), although a couple of examples of failings are reported; one firm has had enforcement action taken against it.
The handling of errors by some firms, mostly hedge fund managers, comes in for particular criticism in their reliance on clauses in contracts to remove liability for the costs of errors – or even the need to report such errors to customers. The paper suggests that repeatedly making the same or similar errors might amount to gross negligence.
One message coming out of the document is the importance of involving both compliance and the business in identifying and managing conflicts, backed up by adequate MI for the board.
Firms should be aware that the FSA plans to undertake a further round of thematic visits on conflicts of interest and “will use the responses received to inform our selection of firms for follow up assessment visits”.
Not all asset management firms will receive the ‘Dear CEO’ letter and document (see ‘FSA Commentary’ link) so the actions required by such firms will depend upon whether they are a recipient or not.
Firms in receipt of the paper should note that the FSA expects “the board of each asset management firm to discuss this document” and for each firm’s CEO to complete and return an attestation (in Appendix 1) by February 2013. The Appendix includes the email address where a pdf of the attestation should be sent.
In any event, all asset management firms should review the findings in the paper and consider using it both as a means to benchmark their own processes and controls and whether they would be in a position to make the attestation if called for.
Given that e.g. SYSC 4 (“General organisational requirements”) and Principle 8 (“a firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client”) do not apply to just asset management firms, all firms may wish to take on board the paper’s comments when carrying out their compliance reviews.