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£17m fine for Aviva Investors

Wednesday 25th February 2015

Written by Conor Shilling

Aviva Investors has been fined £17.6m by the Financial Conduct Authority (FCA) for systems and controls failings.
 
The FCA says these failings led to Aviva Investors’ failure to manage conflicts of interest fairly.
 
These ‘weaknesses’ led to compensation of £132,000,000 being paid to ensure that none of the funds managed by Aviva Investors were adversely impacted.
 
Between 2005 and 2013, the firm employed a management strategy on certain desks within its fixed income area whereby funds that paid differing levels of performance fees were managed by the same desk. 
 
A proportion of these performance fees were paid to traders in Aviva Investors Fixed Income area who managed funds on a side-by-side basis, which the FCA says, causes a conflict of interest.
 
While Aviva Investors’ policy required trades to be allocated in a timely manner, weaknesses in systems and processes meant traders could delay recording the allocation of executed trades for several hours. 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 benefitted from favourable intraday price movements to one fund and trades that did not to other funds. This is an abusive practice commonly known as cherry picking.
 
In May 2013, Aviva Investors found evidence to suggest that two former Fixed Income traders had been delaying the booking of, and improperly allocating, trades. Aviva Investors sought to ensure that none of the funds it managed were adversely impacted by this conduct and compensation of £132,000,000 was paid to eight impacted funds. 
 
Aviva Investors operated a ‘three lines of defence’ model of risk management, which, had the firm ensured it was operating effectively, could have mitigated the inherent conflicts of interest associated with side-by-side asset management. Its failure to implement robust systems and controls in this area where there were clear conflicts of interest led to an unacceptable risk that these weaknesses could be exploited for personal gain.
 
The FCA concluded that Aviva Investors failed to take reasonable care to organise and control its affairs responsibly and effectively with adequate risk management systems and failed to manage conflicts of interest fairly, both between itself and its customers and between customers and other clients.
 
Since discovering the failings, Aviva Investors and its senior management have worked with the FCA in what the authority described at an ‘exceptionally open and cooperative manner’.
 
The FCA also confirmed that prompt compensation was made to the eight funds Aviva Investors identified may have been adversely affected by its breaches, ensuring that they were not adversely impacted by Aviva Investors’ failings.
 
Georgina Philippou, acting director of enforcement and market oversight at the FCA, commented: “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.  Not doing so risks customers’ interests being overlooked in favour of commercial or personal interests. “ 
 
“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,” she added.
 





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Editorial Contact Details - Conor Shilling
conor.shilling@angelsmedia.co.uk
0845 672 6000
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