Protecting clients against conflicts of interest has now become one of the key priorities for the FSA. Its mission to restore investor confidence continues with its most recent ‘Dear CEO Letter’, which looks at how asset management firms recognise, control and manage conflicts of interest, having uncovered a number of failings during its review of a number of firms over the past two years. We set out a detailed summary of the report here.
Although there are well established FSA rules and guidance regarding the systems a firm should have in place to deal with conflicts, the review, which was prompted by evidence from the FSA’s other supervisory work, found that firms “no longer saw conflicts of interest as a key detriment to their customers and had relaxed controls previously considered to be well-established market norms”. The FSA’s report communicates the findings of the review to the wider asset management sector and asks CEOs of recipient firms to reply to the report, confirming they have reviewed the report and that their firm is in compliance with the obligations of the FSA Handbook concerning conflicts of interest.
Firms should be very careful before providing this confirmation – which is effectively a warranty of their compliance. The FSA followed a very similar course of action in respects of its client assets and money (CASS) compliance review, where it required firms to provide a written confirmation that the firm was in compliance with its CASS obligations. Having received the replies, the FSA followed up with further reviews, and where a firm was found to have wrongly confirmed they were in compliance with its CASS obligations, the FSA took significant enforcement action.
The FSA have stated here that they will carry out follow up assessment visits. Where a firm has replied stating they are in full compliance with the obligations on conflicts, and are subsequently found to be in breach, the FSA is likely to argue that, despite being on notice, the firm’s governance and supervisory systems and controls are inadequate.
We encourage firms who have received the report to examine their internal controls and systems in light of the examples the FSA has given of both poor and positive practices. Prior to signing the response to the FSA, senior management should fully engage with the process of review and assure themselves that they can evidence their commitment to acting in their customers’ best interests. Where failings are identified the firm should work closely with its front-line business staff, compliance teams and legal advisors to ensure that adequate frameworks are put in place to identify, manage and resolve conflicts of interest in an efficient and practical way.