A recently published report by the FSA (Financial Services Authority) looked to address the problems that came as a result of the day to day running of asset management businesses clashing with the interests of their customers. These conflicts of interest cover all sorts of obligations under the SYSC 10 regulations and also how firms have failed to abide by the COBS11 regulations with regards to dealing commission and allocations.
This publication has come as a result of evidence provided on the sector that firms working within the industry have ‘relaxed’ controls and have neglected their duty to consider the conflicts of interest of their customers. This comes as a surprise to the FSA who had previously set out guidelines which firms were encouraged to abide by on a day to day basis. Consequently, as a result of these failings, the FSA is now putting into place more visits to firms in order to address the problem.
The FSA has put forward some observations followed by recommendations that firms should look to put into practice:
Management and Corporate Culture
The FSA has found that there is a strong sense of poor compliance culture and lack of interest from the boardroom in addressing conflicts of interest. The FSA has made it evidently clear that boards need to carry out regular reviews of their practices to make sure that they are abiding by FSA regulations particularly when looking to implement change throughout an organisation.
The FSA has recommended that firms look to adopt a “bottom-up” approach where the head of each department proactively engages with compliance in order to evaluate conflicts of interest. It is of fundamental importance that all employees are aware of the possibility of conflicts and up to date on the practices in place to combat this.
Research and execution services
The FSA discovered that not enough companies were in control of their budgets with regards to both research and execution services. Furthermore, the report also stated that many firms were also rather carefree with their clients’ money more so than their own money. The FSA expects companies to evaluate which services provide the best possible value to its investment process and to discuss with brokers reasons as to why they should pay for their services. The most popular reason often stated for using a broker can be access to management; the FSA pointed out that companies could not demonstrate how corporate or preferential access justified research or execution services. Furthermore, the FSA reiterated the fact that senior management should provide control; governing bodies should review products and services through the use of client commissions.
Action required by Firms
Furthermore, the FSA also expects senior management of all asset management companies to read and fully understand the report’s findings. The main message that is trying to be illustrated by the FSA is the fact that corporate governance is paramount. A culture of compliance needs to be fully integrated into the firm from the top down and tested from the bottom up.
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