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The FCA has issued warning notices to GAM and an ex-employee for failures to manage conflicts of interest. The fines – of £9m and £230k respectively – serve as a stark reminder of the importance of robust systems and controls around conflicts of interest.
The investigation found that the Swiss asset manager, GAM International Management Limited breached both Principle 2 and 8 of the FCA’s Principles for Business. In its warning notice the FCA concluded that GAM had failed to conduct its business with due care, skill and diligence and failed to ensure that its systems and controls for the identification, management and prevention of conflicts of interest operated effectively.
The ex-employee – Timothy Haywood – had been the head of GAM’s absolute return bond fund unit. As a director (CF1) who held a significant influence function the FCA found that he failed to take reasonable steps to ensure that the business of the firm for which he was responsible, complied with the relevant regulatory rules requiring that conflicts of interest were managed fairly.
The FCA stated breaches of Statement of Principle 7 were observed in the investments which were made by GAM’s Absolute Return and Long-Only team. Additionally, it observed breaches of Statement of Principle 2 by failure of the employee to comply with the Gifts and Entertainment Policy of his employer.
The financial penalties would have been £13m and £319k respectively, had both parties not agreed to resolve the case. As such the fines were discounted by 30%.
Lessons from the conflicts of interest notice
Although it’s unclear from the FCA’s communication how these issues were discovered, it is clear the firm did not have adequate systems and controls. So, what do good systems and controls typically include, what can your firm do to protect itself and what questions should you ask yourself as a senior manager?
Conflicts of interest policy
All regulated firms should have a formally approved conflicts of interest policy which is available on their website.
Conflicts of interest register
This should be a live document which is regularly reviewed. It should include potential and actual conflicts of interests, mitigating controls/actions taken, ratings and details of when the conflict of interest was last reviewed. Your register should map out the firm’s structural conflicts as well as individuals’ conflicts. SYSC 10 provides some examples, which can be used as a base to work from.
Corresponding policies and procedures
These should provide clear guidance on areas which are not covered in your policy and what practical measures should be taken. Examples would include a gifts and hospitality policy, personal account dealing, order execution policy and so on.
Committees’ terms of references
Your firm should have a senior committee which has oversight of conflicts, with the Board maintaining oversight of material conflicts. The terms of reference should state the relevant committee will review conflicts of interest as standing agenda item, including reviewing the conflicts of interest register. Committee minutes should show the discussion of conflicts of interest and challenges from senior managers. This should include new and existing conflicts, how these are managed, mitigated and declared where necessary.
Management information
What MI is reported to your committee overseeing conflicts, what reports are required from the business and the second line functions. Do senior managers receive sufficient MI to evidence they are meeting the Senior Manager Conduct Rules?
First and second line monitoring
Consider how the first line of defence monitors conflicts of interest. Does it have the necessary assurance that its mitigating controls listed in its register are adequate or are followed? Does the compliance team include conflicts of interest management as part of their compliance monitoring plan?
Training
Your training records should show all staff have been trained on conflicts of interest. Where there is a new policy, ‘gap fill’ training should be carried out, so employees understand any policy requirement changes. Individuals holding SMF and Certificated functions should be prioritised.
How we can help
Our dedicated sector teams understand the FCAs expectations in your area. We have worked with numerous firms both in assessing and strengthening their conflicts of interest framework. If you want to talk about these issues or need independent expertise for a particular issue, please get in touch.
