24th Feb 2015 11:39
LONDON (Alliance News) - Aviva PLC's asset management business was Tuesday fined GBP17.6 million by a UK financial regulator due to systems and controls failings that meant it failed to manage conflicts of interest on its fixed income fund desks fairly.
In a statement, the Financial Conduct Authority said the failings led to GBP132.0 million of compensation being paid to ensure that none of the funds Aviva Investors managed was hit.
"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," Georgina Philippou, the FCA's acting director of enforcement and market oversight, said in a statement.
Nevertheless, Philippou said that Aviva qualified for a 30% discount on the fine because of its cooperation during the investigation and commitment to ensuring no customers were hurt by the failings.
Aviva Investors Chief Executive Euan Munro said: "We fully accept the conclusions of this investigation. We have fixed the issues, improved our systems and controls, and ensured no customers have been disadvantaged. We have also made substantial changes to the management team which is leading the turnaround of Aviva Investors."
From August 20, 2005 and June 30, 2013, Aviva Investors employed a "side-by-side management strategy" on some desks within its fixed income area, under which funds that paid different levels of performance fees were managed by the same desk, the regulator said.
Part of those fees was paid to trades in Aviva Investors' fixed income area who managed funds on a side-by-side basis, the FCA said.
"This type of incentive structure created conflicts of interest as these traders had an incentive to favour one fund over another. This risk was particularly acute on desks where funds traded in the same instruments," the FCA said.
Although Aviva Investors logged the conflict of interest risk, the FCA found that there were "significant weaknesses" in Aviva Investors' risk management framework and the systems and controls that operated in the fixed income area.
"In May 2013, Aviva Investors found evidence to suggest that two former fixed income traders had been delaying the booking of, and improperly allocating, trades," the FCA said.
Under the "cherry picking" practice, traders could delay recording the allocation of executed trades for several hours. This meant that traders who managed funds on a side-by-side basis 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.
"Aviva Investors operated a ?three lines of defence? model of risk management, which, had the firm ensured it was operating effectively, could have mitigated the inherent conflicts of interest associated with side-by-side asset management," the FCA said.
The regulator added that Aviva Investors has improved governance and controls since the failings were uncovered.
Aviva shares were down 0.3% at 546.50 pence on Tuesday.
By Samuel Agini; [email protected]; @samuelagini
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