Enforcement action on asset management firms "almost inevitable" following FCA thematic review, says expert

Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, was commenting on findings by the Financial Conduct Authority (FCA) that most of these firms did not have "comprehensive" risk management controls in place. The FCA reviewed the market abuse risk management policies of 19 firms as part of a 'thematic review' of the industry. It will now provide individual feedback to and follow up with those firms that did not meet its standards.

"The FCA's thematic review should set the alarm bells ringing for asset managers," said Ruck.

"Whilst the FCA acknowledges part of the industry appears to have put in place some systems and controls in relation to market abuse, it has identified clear areas where it expects to see widespread improvement. Woe betide any asset managers who fail to learn the lessons from this review as it is almost inevitable that enforcement action will be taken on these issues in the near future," he said.

Although the regulator found that firms had put "some" practices and procedures in place to control their potential exposure to market abuse, in most cases these only covered the most clear-cut cases. Practices to avoid insider information or to identify this information in situations where it was not expected were usually informal and inconsistently applied; for example, policies preventing meetings between fund managers and consultants likely to have insider information or ensuring that these meetings were properly documented, according to the report.

Although all 19 firms reviewed by the FCA had policies in place to limit the sharing of insider information to those who needed to know it, only a minority of firms monitored the effectiveness of this policy, the report found. Firms generally had good pre-trade controls in place to reduce the risk of market abuse, but only two firms in the sample had post-trade procedures in place to effectively highlight and properly investigate potentially suspicious trades. Investigations were also hindered by there not being enough documentary evidence of external meetings or front office research activity, the FCA said.

The FCA said that those firms that did not currently have sufficient controls in place would be expected to act on its feedback and make improvements to their practices. Senior management also needed to satisfy themselves that their firms' procedures were appropriate, the FCA said. It intends to use its routine supervisory work to ensure that the necessary changes are implemented, it said.

The review covered 19 asset management firms of various sizes, with assets under management ranging from £200 million to over £100 billion. Those reviewed included long-only asset managers, hedge fund managers and an occupational pension scheme, according to the report.

"Market abuse damages market integrity and undermines confidence in financial markets," the FCA said. "At a firm level, association with market abuse causes reputational damage and can lead to substantial financial loss. Our regime requires firms to have effective processes to identify, monitor and manage the risk of market abuse."