Aviva Investors has been fined £17.6 million ($27.2 million) by the UK’s Financial Conduct Authority (FCA) for conflicts of interest on its fixed income trading desk.
The FCA’s report detailed how traders were given a greater share of performance fees from long/short hedge funds than for long-only products, resulting in a bias from some traders towards higher-paying strategies through “cherry-picking” securities.
“There were significant deficiencies in responsibilities, policies and procedures, systems, management information, [and] culture.” —FCA“Weaknesses in Aviva Investors’ systems and processes meant traders could delay recording the allocation of executed trades for several hours,” the FCA said. “By delaying the allocation of trades, side-by-side traders 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.”
The trades fitted with the investment mandates and strategies for each product, but the discretion given to traders when buying specific instruments led to the conflicts of interest, the regulator said.
In addition, the FCA reported that there was “no segregation of investment decision-making, order placement, trade execution, allocation and booking of trades”.
“Where firms do not segregate dealing,” the watchdog said, “it is essential that they implement adequate systems and controls to ensure that a compliant order process is followed… Despite this, there were significant deficiencies in responsibilities, policies and procedures, systems, management information, [and] culture.”
In the period covered by the FCA’s investigation, August 2005 to June 2013, £27.4 million was paid out to Aviva Investors’ traders through performance fees—although only two traders were involved in the malpractice. Both traders no longer work for Aviva Investors, and not all of the fees paid out were affected.
Upon discovering the practice in May 2013, Aviva Investors reported itself to the FCA and paid out £132 million to the affected funds in compensation for lost performance.
Euan Munro, Aviva Investors’ CEO, said the company accepted the regulator’s decision.
“We have fixed the issues, improved our systems and controls, and ensured no customers have been disadvantaged,” he said in a statement. “We have also made substantial changes to the management team which is leading the turnaround of Aviva Investors.
“We have a clear focus on simple and specific investment outcomes for clients and we are delivering strong levels of investment performance within a robust control environment.”
Aviva Investors’ co-operation with the FCA resulted in a 30% discount on the fine, which otherwise would have been £25.2 million.
Related Content:Are You Paying Too Much for Your Trades?