The FSA has issued a ‘Dear CEO’ Paper “Conflicts of interest between asset managers and their customers: Identifying and mitigating the risks”. The Paper summarises the outcome of a themed review of asset managers’ arrangements for managing conflicts of interest.
The Paper has been posted on the website as a general FSA document. However, those firms which receive a hard copy of the 'Dear CEO' covering letter to the Paper are expected to attest to the FSA by 28 February 2013 as follows:
“The Paper has been considered at a board meeting held on (date). Following an assessment of the firm’s arrangements in light of the Paper’s findings, the board resolved that the firm’s arrangements are sufficient to ensure that the firm manages conflicts of interest effectively and in compliance with FSA rules.”
Managers who do not receive this letter are not being required to attest at this stage. However, senior management of such firms should read and consider the document's findings, review their operations against them and ensure that their firm's arrangements comply with the FSA's rules.
Managers subject to the requirement should ensure that this work is put in hand and that they are in a position to make the attestation by the deadline.
The Paper contains some detailed guidance and best practice advice on the following areas:
- The purchase of research and trade execution services from commission funded by clients.
- Accepting gifts and entertainment.
- The firm’s policy for allocating orders between clients and cross trading between clients.
- The firm’s employees’ personal dealing policy.
- The allocation of investment research ideas between customers.
- How firms allocate the cost of errors between themselves and clients.
The Paper also makes some significant points on firm culture and awareness of conflicts, on who should be responsible for setting the conflicts monitoring framework, and on overall governance:
- Firm culture should ensure that all relevant staff outside the legal and compliance function are able to recognise conflicts of interest – for instance, by ensuring that new product approval is subject to a conflicts check, and conducting reviews of operations to look for evidence of new conflicts.
- Business line management together with legal and compliance should be responsible for designing conflict management controls.
- Compliance staff should not be the only staff to monitor conflicts. Management should do their own independent review.
- A governance committee or firm working group involving independent business staff, as well as compliance staff, should review conflict identification controls and procedures.
- A governance committee of the board should review and challenge conflict identification controls and standards. The FSA gives some specific commentary on the position of UK firms which are subsidiaries of overseas parents.
The Paper contains much detailed guidance on best practice, and highlights some particularly bad practices which the FSA uncovered. There is much material in the Paper which firms will wish to use to review both their conflicts policies and the review process for their policies.