FCA fines Aviva Investors £17.6m for systems and controls failings that led to its failure to manage conflicts of interest fairly
24 Feb 2015 02:07 PM
The Financial Conduct Authority (FCA) has fined Aviva Investors Global Services Limited (Aviva Investors) £17,607,000 for systems and controls failings that meant it failed to manage conflicts of interest fairly. These weaknesses led to compensation of £132,000,000 being paid to ensure that none of the funds Aviva Investors managed was adversely impacted.
Georgina Philippou, Acting Director of Enforcement and Market Oversight at the FCA, said:
“Ensuring that conflicts of interest are properly managed is central to the relationship of trust that must exist between asset managers and their customers. It is also a fundamental regulatory requirement. This case serves as an important reminder to firms of the importance of managing conflicts of interest effectively by implementing a robust control environment with effective systems to manage the risks. Not doing so risks customers’ interests being overlooked in favour of commercial or personal interests.
“While Aviva Investors’ failings were serious, the FCA has recognised that its actions since reporting its failings were exceptional. The level of co-operation during the investigation and commitment to ensuring no customers were adversely impacted meant it qualified for a substantial reduction in the penalty.”
From 20 August 2005 to 30 June 2013, Aviva Investors employed a side-by-side management strategy on certain desks within its Fixed Income area whereby funds that paid differing levels of performance fees were managed by the same desk.
A proportion of these performance fees were paid to traders in Aviva Investors Fixed Income area who managed funds on a side-by-side basis. This type of incentive structure created conflicts of interest as these traders had an incentive to favour one fund over another. This risk was particularly acute on desks where funds traded in the same instruments.
The conflicts of interest and risks inherent in the side-by-side management of funds require robust risk management systems and controls. Aviva Investors identified this and recorded it in its conflict log. However the FCA found that there were significant weaknesses in Aviva Investors’ risk management framework and the systems and controls that operated in the Fixed Income area.
While Aviva Investors’ policy required trades to be allocated in a timely manner, weaknesses in systems and processes meant traders could delay recording the allocation of executed trades for several hours. By delaying the allocation of trades, traders who managed funds on a side-by-side basis could assess a trade’s performance during the course of the day and, when it was recorded, allocate trades that benefitted from favourable intraday price movements to one fund and trades that did not to other funds. This is an abusive practice commonly known as cherry picking.
In May 2013, Aviva Investors found evidence to suggest that two former Fixed Income traders had been delaying the booking of, and improperly allocating, trades. Aviva Investors sought to ensure that none of the funds it managed were adversely impacted by this conduct and compensation of £132,000,000 was paid to eight impacted funds.
Aviva Investors operated a ‘three lines of defence’ model of risk management, which, had the firm ensured it was operating effectively, could have mitigated the inherent conflicts of interest associated with side-by-side asset management. Its failure to implement robust systems and controls in this area where there were clear conflicts of interest led to an unacceptable risk that these weaknesses could be exploited for personal gain.
The FCA concluded that Aviva Investors failed to take reasonable care to organise and control its affairs responsibly and effectively with adequate risk management systems and failed to manage conflicts of interest fairly, both between itself and its customers and between customers and other clients.
Since discovering the failings, Aviva Investors and its senior management have worked with the FCA in an exceptionally open and cooperative manner and have committed significant resources to investigating and addressing the weaknesses in its control environment, making significant improvements, which include enhancing governance, strengthening its control framework and seeking to embed an appropriate culture under the leadership of a new management team. Prompt compensation was made to the eight funds Aviva Investors identified may have been adversely affected by its breaches, ensuring that they were not adversely impacted by Aviva Investors’ failings.
Aviva Investors agreed to settle at an early stage of the FCA’s investigation and therefore qualified for a 30% (Stage 1) discount under the FCA's executive settlement procedure. Were it not for this discount, the FCA would have imposed a financial penalty of £25,152,900 on Aviva Investors.
Notes to editors
- The Final Notice for Aviva Investors Global Services Limited.
- Aviva Investors breached Principle 3 (Management and control) and Principle 8 (Conflicts of interest) of the Authority’s Principles for Businesses (“the Principles”) and related Rules.
- Aviva Investors breached Principle 3 by failing to exercise adequate and effective control over its side-by-side management of funds. Aviva Investors operated a ‘three lines of defence model’ of risk management. Aviva Investors primarily relied upon the first line of defence, the business, to identify, assess and manage risk. The business failed to do so in relation to the inherent conflicts of interest and risks associated with the side-by-side management of funds. Weaknesses in compliance oversight and monitoring, along with flaws in the approach to closing audit issues meant that the business’s failure to address the risks went unaddressed.
- Aviva Investors breached Principle 8 by failing to manage fairly the inherent conflicts of interest between itself and its customers, and between customers and other clients, that arose from managing funds that paid differing levels of performance fees on a side-by-side basis.
- References to ‘traders’ mean fund managers and other employees of Aviva Investors, who had authority to decide on trades, place orders, execute, book and allocate trades on behalf of funds managed by Aviva Investors.
- On the 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
- Find out more information about the FCA.