Home ListingOctober 31, 2013

Transition Management Must Change, Says Regulator

<em>Some improvements have been made by transition managers, but they must try harder, the UK’s FCA has said.</em>

Reported by Featured Author

(October 31, 2013) — “Poor transparency and opaque legal documentation could lead to poor consumer outcomes in the provision of this service.” So said the director of supervision at the UK’s fiscal regulator this week reporting on the agency’s examination of transition management.

Clive Adamson told attendees at the Financial Conduct Authority (FCA) asset management conference on October 30 that the agency had been probing the sector after complaints of malpractice were discovered in October 2011.

The agency announced in March 2013 that it was undertaking a close examination into the sector, but it had been widely understood that the regulator’s predecessor, the Financial Services Authority, had begun looking into practices soon after malpractices were unveiled.

“What we found is that the asymmetry of knowledge between providers and customers, combined with the potential for conflicts of interest to arise on such complex and fast moving transitions mandates may lead to adverse outcomes,” Adamson said.

The industry has come out of the scrutiny with relatively good marks.

“While transparency remains a problem within transitions management,” Adamson said, “we believe the provision of more data and greater customer understanding is empowering customer decision-making and will be working with providers and customer groups to ensure improvements continue to be made.”

More broadly, however, custodians were found to be providing an acceptable level of service to their clients, Adamson said.

The FCA “assessed the importance of ancillary services to the business models of the custody banks in the UK; and, second, considered whether their reliance on these, and an apparent lack of transparency, might lead to inappropriate behaviours”.

Adamson said this was an important task given that for some of these banks, ancillary services represent some 40% of their revenues, “without which it is likely that their core offering of custody and fund administration would be unsustainable at current prices”.

Earlier this year, rating agency Moody’s placed a trio of custodian banks on a watch list, saying poor incomes from core custody products threatened their profitability.

The FCA, however, found custodians to be treating their customers fairly, said Adamson: “I am pleased to say that we did not find inappropriate behaviour taking place and have concluded that standards and transparency across the industry have improved over the past few years. This has been primarily driven by competitive pressures leading to improvements in services, and by clients being better informed about the potential risks and having better data.”

He urged their customers—both asset owners and asset managers—to keep pressing their suppliers on charges and transparency.