Aviva Investors operated systems which were open to abuse and allowed traders to “cherry pick” funds, the FCA has found.
Earlier today the FCA fined Aviva Investors Global Services £17.6m for systems and controls failings that meant it failed to manage conflicts of interest fairly.
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.
The firm’s incentive structure meant side-by-side traders had an incentive to favour funds paying higher performance fees.
Between August 2005 and November 2012, two fixed income traders cherry picked hedge funds and long-only funds. This meant that a trader could buy an instrument at 9am intending to allocate it to the hedge fund, but by 3pm, seeing that the instrument had fallen in value, allocate it to a long-only fund.
By cherry picking trades, side-by-side traders could enhance the performance of hedge funds so they benefitted from favourable intraday price movements, and lead to increased incentive payments to traders.
Between 20 August 2005 to 30 June 2013, £27.4m was paid to certain traders as a result of hedge fund performance.
Aviva Investors operated a ‘three lines of defence’ model of risk management.
But “significant deficiencies” in responsibilities, procedures, systems, management information and culture meant the first line of defence failed.
The FCA says there was a lack of clarity as to who had responsibility for risk management in the fixed income division, with frequent changes to personnel and reporting lines.
The regulator also found that Aviva Investors’ systems did not contemporaneously record when an order was placed. This meant that traders could misreport the time they had executed trades.
In addition, the management information provided to the business was not timely and did little to enable line managers to gauge whether traders were following processes.
The FCA found the culture within the fixed income business was “heavily focused on performance”, and risk and controls were perceived by some as hindering performance.
The firm’s second line of defence was meant to act as a safety net to catch issues that were not detected by the first line policies and systems.
But the FCA says this did not operate effectively, as trade compliance monitoring used limited sample sizes, and compliance was “under-resourced” and lacked the necessary skills and experience to challenge business practices.
Finally, the regulator found that weaknesses in Aviva Investors’ third line of defence – an internal audit – meant issues were not addressed adequately.
The FCA says there were “systemic weaknesses” in the firm’s systems and controls, which went unaddressed for almost eight years and created an unacceptable risk of trader misconduct.