H2O Asset Management has agreed to pay €250 million to investors and exit the UK market following a damning investigation by the UK's Financial Conduct Authority (FCA). The regulator uncovered significant failures in the firm's investment practices, governance, and communications with authorities between April 2015 and November 2019.

H2O's €250 Million Settlement Caps Years-Long Regulatory Saga

The FCA's investigation revealed that H2O failed to conduct proper due diligence on high-risk, illiquid investments related to Lars Windhorst's Tennor Group of companies and other entities he introduced. These investments, totaling approximately €1.643 billion by August 2020, proved difficult to sell, leading to the freezing of investor funds in 2020.

“H2O's job was to manage its funds properly and protect investors,” Steve Smart, joint Executive Director of Enforcement and Market Oversight at the FCA, stated. “It failed to do this and, to make matters worse, it repeatedly provided misleading information to the FCA.”

The regulator found that H2O breached multiple rules of the FCA's Principles for Businesses, including failing to conduct business with due skill, care, and diligence, inadequate organization and control of its affairs, and failing to be open and cooperative with the regulator.

In a particularly serious breach, H2O provided false and misleading statements and documentation to the regulator, including fabricated records and meeting minutes. The FCA discovered that H2O had created multiple records of governance and oversight committee meetings that had never taken place, and provided numerous misleading due diligence reports that were prepared retrospectively rather than at the time of investment decisions.

The Fine Could Be Higher

While the FCA would typically impose a substantial fine for such serious breaches, it has instead agreed to H2O's €250 million payment to affected investors. A significant portion of this sum comes from a voluntary contribution by the H2O Group. Additionally, H2O has waived its rights to fees and investments totaling €320 million.

“Through this settlement the FCA has secured money for affected investors and agreement that H2O will stop operating regulated business in the UK,” Smart added.

As part of the settlement, H2O will apply to cancel its UK authorization by December 31, 2024, effectively ceasing its regulated business operations in the country. The firm has also agreed to implement significant enhancements to its governance, systems, and controls to prevent similar misconduct in the future.

The French financial services regulator, Autorité des marchés financiers (AMF), which oversees the collective investments managed by H2O on a cross-border basis under the UCITS Directive, had previously issued a penalty to H2O, which is currently under appeal.

Investors in H2O's funds, particularly those with assets in the side-pocketed funds created in 2020 to hold the illiquid investments, will be watching closely to see how quickly they can recover their trapped funds. The €250 million payment, along with any future recoveries, offers some hope of recompense for affected investors.

The 2^nd Highest Penalty Imposed by the FCA

It's worth noting that the penalty imposed on H2O is one of the highest in the history of the regulator. Until now, the record fine was £284 million, which Barclays received in 2015. As for the highest penalties imposed this year, both occurred in May.

Citigroup had to pay £61.6 million for a trading mistake that cost much more, amounting to £1.4 million. At the same time, HSBC received a £6.28 million penalty for failures in customer treatment. From June 2017 to October 2018, HSBC's actions resulted in insufficient consideration of customers' circumstances.