The asset management arm of Britain’s biggest insurer has been fined £17.6m by the City watchdog for “systems and controls” failures and has paid £132m in compensation to eight funds it managed.
Its asset management arm, Aviva Investors, stressed that it had identified and reported the breaches, and had promptly notified the FCA.
In May 2013, the company found evidence that two former fixed income traders, who have since left, had been delaying the booking of, and improperly allocating, trades – a practice known as cherrypicking. Aviva Investors sought to ensure that none of the funds it managed were adversely impacted and paid compensation of £132m to eight funds.
This reduced the group’s 2013 operating profit, but no customers have been disadvantaged by this, the insurer said.
On certain desks at Aviva Investors, including fixed income, funds that paid differing levels of performance fees were managed by the same desk. The FCA said this type of incentive structure created conflicts of interest as these traders had an incentive to favour one fund over another. This risk was particularly acute on desks where funds were traded in the same assets.
By delaying the allocation of trades, traders who managed funds on a side-by-side basis could assess a trade’s performance during the course of the day and, when it was recorded, allocate trades that benefited from favourable intraday price movements to one fund and those that did not to other funds, the FCA said. “This is an abusive practice commonly known as cherrypicking.”
Georgina Philippou of the FCA said: “Ensuring that conflicts of interest are properly managed is central to the relationship of trust that must exist between asset managers and their customers. It is also a fundamental regulatory requirement.
“This case serves as an important reminder to firms of the importance of managing conflicts of interest effectively by implementing a robust control environment with effective systems to manage the risks
… While Aviva Investors’ failings were serious, the FCA has recognised that its actions since reporting its failings were exceptional. The level of co-operation during the investigation and commitment to ensuring no customers were adversely impacted meant it qualified for a substantial reduction in the penalty.”
After former AIA boss Mark Wilson became chief executive of Aviva in 2013, replacing Andy Moss who was ousted after an investor revolt, he overhauled the whole business. He gave Jason Windsor executive responsibility for Aviva Investors with a focus on improving risk management and control and appointed a new management team led by Euan Munro, as well as bringing in new non-executive directors.
Munro, head of Aviva Investors, said: “We fully accept the conclusions of this investigation. We have fixed the issues, improved our systems and controls, and ensured no customers have been disadvantaged. We have also made substantial changes to the management team which is leading the turnaround of Aviva Investors.”
This article was written by Julia Kollewe, for theguardian.com on Tuesday 24th February 2015 13.17 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010