FSA will claim scalps following its "Dear CEO" letter, warns investor

InvestorsLegalOperational RiskRegulation
06 Dec, 2012

The UK Financial Services Authority (FSA) is likely to claim several scalps in the asset management industry following its “Dear CEO” letter last month, a senior operational due diligence expert warned, speaking under Chatham House Rules at a hedge fund ops conference in London.

The letter was sent in November 2012 following the agency’s thematic review of the asset management industry. In it, the FSA expressed concerns about conflicts of interests at asset managers, and demanded a response from all CEOs attesting they would meet new standards by February 28, 2013. The FSA said it would analyse the responses and visit managers where they suspected issues had not been dealt with.

“Asset managers, including hedge funds, need to ensure they bolster their internal standards. There is a high risk the FSA is looking to make examples of managers it views as having substandard controls around conflicts of interest,” said the operational due diligence expert.

One of the FSA’s biggest concerns lies around charging broker research and execution services to the fund. It also cited gift and entertainment policies as areas where conflict of interest issues might arise.

“The FSA wants managers to start building up internal procedures to ensure conflict of interest issues do not arise. One way managers can do this is by installing internal governance controls separate from the board of directors at the manager. It should be comprised of senior staff from the front office, middle office and back office, and should work to provide safeguards against conflict of interest,” he continued.

The FSA is to embark on another thematic review of asset managers focusing on bribery, corruption and money laundering. The review is due to be published in Q3 of 2013, and managers have been advised to ensure their compliance procedures are in solid shape.

The UK Bribery Act, passed in July 2011, and considered to be one of the toughest pieces of anti-corruption legislation in the world, has given managers a fresh onus to ensure their systems and checks are up to speed.

However, asset managers appear to be behind curve, according to a survey conducted in January 2012 by Ernst & Young. The survey warned major discrepancies existed among managers surrounding compliance with the Bribery Act, with a number of firms not having clarified cost thresholds for entertainment and gifts. According to E&Y, these thresholds on gifts and entertainment varied from £25 to £500.

AMLBribery Actconflicts of interestcorruptionErnst & YoungFSAgovernance