The FCA has fined Invesco Perpetual £18.6m for fund management failings and exposing investors in 15 funds, including its giant income funds previously run by Neil Woodford, to greater levels of risk than they expected.
The FCA found that Invesco, which managed £71bn in assets as at 31 December 2013, breached Ucits investment limits designed to ensure diversification and to limit the risk consumers are exposed to.
The regulator found the company broke diversification rules on limiting risk 33 times across 15 funds, which had £35bn invested and represented 70 per cent of the group’s
assets. The failings occurred between May 2008 and November 2012. Losses of £5.3m were incurred by three funds from 11 of the trades, including the Invesco Perpetual High Income and Income funds previously run by Neil Woodford. Also affected was Nick Mustoe’s Invesco Perpetual Managed Income. Compensation has been paid to the funds.
The FCA final notice also shows Invesco used derivatives to add £1bn in leverage across an unspecified number of its funds, amounting to 5 per cent of net asset value. The firm did not declare its use of derivatives nor associated risks in simplified prospectuses and investor disclosure documents.
The regulator also says fixed income trades were recorded late on the firm’s computer systems, after intially being recorded on pen and paper. In 2010 and 2011 at least 9 per cent of the firm’s fixed income fund trades were not documented on the day they were executed, meaning fund managers could have made poor decisions based on inaccurate valuations of their portfolios.
The FCA says the delayed recording could also have caused the funds’ units to have been mispriced, while inadequate controls for the allocation of partially executed aggregated trades across participating funds could have “prejudiced investors”.
FCA director of enforcement and financial crime Tracey McDermott says: “In this case, investors of all sizes trusted Invesco Perpetual to manage their money. They signed up for a certain level of risk but we found Invesco Perpetual’s actions were at odds with investors’ reasonable expectations.”
The FCA says the failings were not deliberate or reckless and Invesco acted quickly to improve its systems.
Invesco chief executive Mark Armour says: “We are confident our systems and controls are strong and compliant. The small number of impacted funds were fully reimbursed. In this instance, we clearly fell short of the high standards we consistently strive to deliver.”
The FCA’s key findings
- Broke the FCA’s rules designed to limit the risks to investors on 33 occasions. These breaches occurred across 15 of the Invesco Perpetual branded funds range
- Did not communicate clearly or fairly with investors because it failed to disclose the use of derivatives in the relevant simplified prospectuses. It also incorrectly described the impact of using derivatives in the key investor information documents
- Failed to monitor if trades were allocated fairly between funds
Examples of failings:
- In 2010 and 2011 almost one in ten fixed income trades were not transferred from pen and paper to electronic fund accounting on the day of execution. Of those, 17 per cent were booked two or more days after execution
- One fund breached diversification rules in Nov 2010 when a FTSE 100 firm’s share price pushed up the holding’s weighting, tipping the number of high conviction holdings (over 5 per cent) over the 40 per cent limit. Rather than correcting the breach, the fund bought more shares the next day.