The Financial Conduct Authority has fined Aviva Investors £17.6m for weaknesses that led to compensation of £132m being paid out to investors.
The final notice issued today (24 February), revealed the fine was dished out because from 20 August 2005 to 30 June 2013, Aviva Investors employed a “side-by-side management strategy” on certain desks within its fixed income division, meaning 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.
According to the watchdog, this type of incentive structure created conflicts of interest as traders had an incentive to favour one fund over another. This risk was judged to be particularly acute on desks where funds traded in the same instruments.
While Aviva Investors identified risks inherent in the side-by-side management of funds and recorded it in its conflict log, the FCA found that there were significant weaknesses in the asset manager’s risk management framework and the systems and controls operated in fixed income.
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.
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 £132m was paid to eight impacted funds. It 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 regulator ruled.
Georgina Philippou, acting director of enforcement and market oversight at the FCA, said that this case served 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,” she added. “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.”
Euan Munro, chief executive of Aviva Investors, said: “We fully accept the conclusions of this investigation. We have fixed the issues, improved our systems and controls, and ensured no customers have been disadvantaged.
“We have also made substantial changes to the management team which is leading the turnaround of Aviva Investors.
“We have a clear focus on simple and specific investment outcomes for clients and we are delivering strong levels of investment performance within a robust control environment.”
emma.hughes@ft.com
