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FSA: Asset managers are failing to protect clients from conflicts of interest

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The FSA has sent a Dear CEO letter to asset managers warning firms are failing to properly manage conflicts of interest that could impact on their clients.

The letter says the regulator conducted a thematic review of 15 asset management firms of varying sizes between June 2011 and February 2012 to assess their arrangements for managing conflicts of interest.

This was prompted by evidence from other supervisory work that some firms no longer saw conflicts of interest as a key source of potential detriment to their customers and had relaxed controls.

The FSA found many firms have failed to establish an adequate framework for identifying and managing conflicts of interests.

It says too few adequately control spending on research and execution services. The FSA says few firms regularly reviewed whether the products and services purchased using client commissions were eligible to be paid for with customers’ funds. In particular, various firms were using commissions to pay for market data services and were unable to demonstrate how these met all its evidential standards for research services. Firms were also unable to demonstrate how brokers arranging for access to company management or providing preferential access to IPOs constituted research or execution services.

The regulator says most of the firms visited applied limited thinking to how accepting gifts and entertainment could compromise their duty to act in their customers’ best interests.

It adds some firms could not show that cross trading between customers was always in the interests of both customers. The FSA says it has taken enforcement action against a firm which traded for one fund to ease the liquidity problems faced by another fund.

The FSA says in most cases, senior management failed to demonstrate they understood their duty to act in the best interest of customers and employees often lacked awareness of situations where short-term business goals conflicted with the long-term interests of customers.

The regulator says some firms involved in the thematic review are being forced to take remedial action and some will face enforcement action.

It says: “We concluded that most of the firms visited could not demonstrate that customers avoid inappropriate costs and have fair access to all suitable investment opportunities.”

“We therefore expect the board of each asset management firm to discuss this document and each firm’s chief executive to complete and return the ‘attestation’ in Appendix 1 by 28 February.

“We plan a second round of thematic visits on conflicts of interest and will use the responses received to inform our selection of firms for follow-up assessment visits.”


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