FCA Slaps Aviva Investors with $26 Mln Penalty

Aviva Investors was fined by the Financial Conduct Authority for systems and control failures. The investment management firm failed to

IMG_9357.GIFAviva Investors was fined by the UK’s financial watchdog for failing to manage conflicts of interests. The FCA found that during an eight-year period the multi-discipline financial services firm, operating in the insurance and fund management sectors, had system and control failures that treated investors and their investments unfairly. As a result, the firm is to pay over $230 million in fines and compensation.

The FCA’s investigation found that Aviva was operating a specific fund management procedure that allowed traders to give more attention to better forming funds. A practise the financial regulator termed as ‘cherry picking’.

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Georgina Philippou, pictured, Acting Director of Enforcement and Market Oversight at the FCA, commented in a statement: “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.”

Details outlined in the FCA notification show that between the 20th of August 2005 until the 30th of  June 2013, Aviva Investors implemented a specific strategy in its fixed income trading division, a side-by-side management strategy was deployed, meaning that funds paid for different levels of performance fees and commissions were supervised by the same desk.

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The desk operated in a manner whereby a proportion of these performance fees were paid to traders in Aviva Investors Fixed Income area which managed funds on a side-by-side basis. The FCA’s notice stated that this type of incentive structure created conflicts of interest as these traders had an incentive to favour one fund over another. Adding that the risk was particularly acute on desks where funds traded in the same instruments.

Commission Disclosure

A number of measures were introduced under the 2007 MiFID, with firms having to disclose charges to clients. In the forex and CFD markets, several firms introduced commission disclosure sheets which provided transparency on commissions and remunerations introducing brokers and affiliates receive.

The FCA carried out a thematic review on the matter in 2014, its findings show that conflicts of interests are ever-present in the financial services sector, however robust measures can prevent issues arising, the report states: “The failure to properly manage and mitigate conflicts of interest potentially increases the likelihood that individual broking and placement decisions are made in the interests of the firm rather than their customers.

This could result in some SME customers paying more for core insurance products than they need to, purchasing add-on insurances and services that they may not need or paying more for secondary products like premium finance.”

Since taking over from the FSA, the Financial Conduct Authority has created a more stringent environment for financial services to operate in. The value and number of fines have increased significantly, and most notably, the FX fixing rates scandal saw the watchdog issue one of the highest fines in its history.

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