Regulator Tightens Screw on Transition Management

(February 10, 2014) — The UK financial regulator has set out how it intends to keep a tighter grip on transition management practices after scandals hit the industry and undermined “market integrity”.

The Financial Conduct Authority (FCA) today issued its final review on transition management, which was launched in the wake of an overcharging scandal by major player State Street in 2011.

At the end of January, the FCA announced it had fined State Street almost £23 million for acting “with complete disregard for the interest of its customers”.

Released February 10, the regulator’s 13-page report said “poor conduct in transition management can have a major impact on underlying clients… while undermining market integrity”.

The report laid out the concerns the FCA had with the industry and identified areas upon which it would be making closer scrutiny. A source within the sector told aiCIO the report was akin to a “yellow card” and the next company to fall below the standards the regulator expected would feel the full strength of its force.

The FCA said that some senior management within firms that carried out transition management did not consider it as a key part of their business and had therefore often failed to have sufficient oversight of these units’ practices.

Clive Adamson, director of supervision at the FCA, said the review found firms “broadly met our requirements; however the quality and effectiveness of controls, marketing materials, governance and transparency varied”.

Adamson said: “Transition management often flies below the radar, but done properly, helps to ensure that investors get the best returns on their assets.”

The FCA report said that existing guidelines and regulations were sufficient to keep the industry in line, but practitioners needed to be more aware, with senior management becoming more vigilant and strict with implementation.

From now on, the FCA is to focus on four main areas on its supervisory work: Management of conflict of interest; oversight, governance, and controls at transition management firms; transparency and communication; and client understanding.

“By taking a proactive look across the sector, we’ve acted to ensure that standards are high and the consequences of failing to meet our expectations are clear,” said Adamson.

Last year, when setting out the FCA’s vision for the asset management sector—which included transition management—Adamson said: “When things go significantly wrong in a firm, it is not because it hasn’t complied with a set of narrow regulatory rules, but because there is a fundamental flaw in the business model, in the culture, or business practices.”

To read the full FCA review of transition management, click here.    

Related content: Ex-Employee Claims Overcharging Was “Accepted Business Practice” at State Street & Reluctant Voices