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FCA finds failings in ‘below the radar’ fund services sector

The FCA has found governance and transparency failings at some firms in its first thematic review of the transition management sector.

The review, published today, comes after the regulator fined State Street UK £22.9m last month for deliberately overcharging clients substantial mark-ups on changes to asset portfolios.

Transition management is a service provided to support structural changes to asset portfolios with the intention of managing risk and increasing portfolio returns.

Transition management services may be required when a client needs a large portfolio of securities to be restructured, or when a client decides to remove or replace asset managers.  The FCA cites the example of a pension fund trustee deciding to change the type of assets the pension fund should be invested in.  Transition managers can be appointed where such changes are large and complex. 

Providers include BlackRock, Legal & General, Goldman Sachs and JP Morgan. Over £165bn of assets invested in pensions and other large funds are transferred between investment managers, markets and products every year.

The FCA review found oversight and governance of transition management can be limited as it often forms a small part of a firm’s business.

The FCA says it can therefore sometimes be “overlooked” by control functions and senior management in the belief it is low risk. The FCA says transition management is particularly vulnerable to conflicts of interest, such as pre-trade information and misuse of information.

It says before the review, some transition management desks “appeared to have had limited contact with their control functions and senior management”.

The regulator also found deficiencies in transparency and communication at some firms.

The review says: “We found instances of poorly worded and potentially misleading marketing materials.

“Several firms were also found to be issuing materials to clients stating that they would act as a ‘fiduciary’ during the transition process, even though the standard legal agreement governing transition arrangements at those firms had expressly excluded the existence of a fiduciary relationship. We have made clear our concerns to the firms involved.”

The FCA says it expects firms to be vigilant in monitoring the application of controls; to ensure all potential conflicts of interest are understood and managed; to ensure senior management teams apply appropriate controls and oversight; and to ensure customer communications are clear, fair and not misleading.

It says in the normal course of its supervisory work it will now focus on the following areas: management of conflicts of interest; governance and controls; transparency and communication; and client understanding.

FCA director of supervision Clive Adamson says: “Since 2011, a number of incidents have occurred that have raised questions about the role played by transition management providers. We have seen failures to manage conflicts of interest, poor governance and insufficient oversight.

“As a result, we conducted a high-level review to look at standards across the industry. While the firms visited in our review were able on the whole to demonstrate the existence of broadly appropriate controls and an understanding of the risks, the quality and effectiveness of controls varied.

“Transition management often flies below the radar, but done properly, helps to ensure that investors get the best returns on their assets. By taking a proactive look across the sector, we have acted to ensure that standards are high and the consequences of failing to meet our expectations are clear.”  


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