On 22 December 2021, the FCA set out its decision to fine BlueCrest Capital Management (UK) LLP (BCMUK) £40,806,700 for having inadequate arrangements to manage conflicts of interest. It also decided to impose a requirement on BCMUK to pay redress to clients who have suffered loss as a result of its failings.
BCMUK did not make representations in response to its Warning Notice, instead leapfrogging the RDC stage by referring the case directly to the Upper Tribunal. The FCA's findings in the Decision Notice are provisional. The Decision Notice can be found here.
Facts
Between 1 October 2011 and 31 December 2015, BlueCrest managed both internal fund and external funds. The Decision Notice relates only to one particular fund of each type. In relation to these, the internal fund was open only to partners and employees, whereas the external fund was open to investors outside the business.
BlueCrest also operated a trading system (RMT). RMT was designed to replicate trades made by BlueCrest’s internal fund portfolio managers for the external fund. However, RMT did not perform in the same way as the portfolio managers and, at times, underperformed in comparison.
During the relevant period, a significant number of portfolio managers were reallocated from the external fund to the internal fund. Furthermore, despite losses generated by RMT, the external fund continued to allocate significant capital to it.
BCMUK recognised that the allocation of portfolio managers gave rise to a conflict of interest. The primary control relied on by it to manage conflicts between the funds was that the allocation of portfolio managers was decided by senior individuals, whose regulatory and fiduciary duties required them to act in the interests of the investors and the funds.
However, decisions concerning the allocation of portfolio managers were made exclusively by senior staff invested in the internal fund, which, the FCA stated "placed them in a situation where they stood to benefit from these decisions personally, in conflict with the duties they owed to investors in the external fund." This was an ineffective control, in fact making the conflict worse. The FCA considered that this arrangement was reckless (and not deliberate), and was inappropriate.
Further, the FCA considered that "BCMUK's disclosures to its investors regarding the existence of the internal fund, and the conflicts arising, were entirely insufficient and, at times, misleading." The inadequate disclosure included the failure to inform external fund investors that a significant amount of capital for the external fund had been allocated to RMT and that a number of portfolio managers had been reallocated to the internal fund. Notably, BCMUK's Sales and Marketing team, which was responsible for communicating with external fund investors, were told to "avoid" the internal fund as a topic of conversation unless "absolutely necessary". This resulted in a "lack of transparency" about the internal fund and how conflicts were being managed.
As a result of the above, the FCA decided that BCMUK were in breach of Principle 8 (conflicts of interest). Further, the FCA decided to impose a redress programme on BCMUK.
US proceedings
At the end of 2020, the SEC announced that BlueCrest had agreed to distribute $170m to harmed investors to settle charges arising from inadequate disclosures, material misstatements, and misleading omissions concerning its transfer of top traders from its flagship client fund to a proprietary fund, and the replacement of those traders with RMT. BlueCrest did not admit or deny the SEC's findings.
Comment
BlueCrest have stated that they "intend to vigorously defend against the FCA’s allegations" and have elected to challenge the Decision Notice and the redress requirement in the Upper Tribunal. This means that they bypass the FCA's internal decision-making process through the RDC.
This decision might be surprising to some – making representations to the RDC before referring the matter to the Tribunal (if the outcome of the RDC stage is unsatisfactory) effectively gives subjects two opportunities to challenge an FCA decision. Further, an RDC hearing is in private, whereas a Tribunal hearing is generally held in public.
We can only speculate why BlueCrest has chosen to do so. Perhaps they did not want to take their chances at the RDC, an organ of the FCA, as against their chances in front of the Tribunal, an independent judicial body - especially in light of the assistance the FCA had given the SEC. Perhaps they felt the need to have their case heard without the delay of going through the RDC process? We may never know. But it is interesting that they are following this relatively new procedure, and we shall watch the outcome with interest.
As to the seriousness of this matter in the view of the FCA, the FCA clearly considered it to be a serious case. In setting the financial penalty, it assessed the matter as level 4 of 5 on a scale of seriousness. We shall have to wait and see what findings the Tribunal makes.