The FCA has imposed a financial penalty of £1,867,900 on Henderson Investment Funds Limited (HIFL) for breaches of Principle 3 (management and control) and Principle 6 (customers' interests).
In November 2011, HIFL's investment manager, Henderson Global Investors Limited (HGIL), acting as HIFL's agent, reduced the level of active management of two funds, the Henderson Japan Enhanced Equity Fund and the Henderson North American Enhanced Equity Fund (together, the EE Funds). The changes meant that the EE Funds became akin to passively managed index or tracker funds.
HGIL informed the majority of the institutional investors impacted by this change, and offered to manage the EE Funds without charge. However, HGIL did not inform any of the retail customers who were invested in the EE Funds and continued to charge the same level of fees as if the EE Funds were under active management. In the period between November 2011 and August 2016, those retail customers, 75 intermediary companies with underlying retail customers, and two institutional investors were charged fees of c. £1.7 million more than if they had been invested in passive funds.
Both HIFL and HGIL were subsidiaries of Henderson Group Plc (Henderson) (now Janus Henderson Group Plc following a 2017 merger). HIFL, using a governance structure common to other Henderson subsidiaries, oversaw the activities of HGIL via a governance structure established by Henderson. In September 2014, the issue was referred to a sub-committee of Henderson's Executive Committee (Henderson ExCo). However, that sub-committee (which met on a monthly basis) took nine months to consider the matter and took no substantive action. In 2015, a second sub-committee of Henderson ExCo considered plans to 're-enhance' the EE Funds, but those plans were abandoned. It was not until March 2016 that the second sub-committee concluded that the fees for retail customers should be reduced in line with passive funds. An investigation was immediately launched and the matter reported to the FCA. Affected investors were subsequently fully compensated.
The FCA found that HFIL had failed to take reasonable care to organise and control the management of the EE Funds. In particular, there had been a lack of oversight of the decisions of its investment manager, HGIL. Additionally, the FCA pointed to the following failings:
- the decision to reduce the level of management was not considered by any governing committee, and was made without consulting Compliance;
- there was no on-going monitoring of performance against the EE Funds' objectives;
- there was no framework in place to assess the suitability / level of the fees charged; and
- the harm to retail investors was only identified after a period of more than four years.
This case highlights the importance of oversight of any delegated functions. In this case, it appears that, whilst there were governance systems in place, they were complex and the responsibilities of each of Henderson, HFIL and HGIL were not adequately defined - the length of time it took for this issue to come to light and to be resolved appears symptomatic of this. Whilst the failings identified by the FCA may, in part, have been the result of failings in Henderson's governance structure, the FCA considered that HIFL had ultimate responsibility for ensuring that there were effective controls in place, including how HFIL delegated decision making functions to HGIL and to Henderson committees. It is also interesting that there are a number of comments in the Final Notice that point to a lack of evidence in support of steps taken, including discussions with Compliance. This serves as a reminder to firms, committees and individuals to keep records of decision making.
Finally, despite investors having been compensated, the figure produced for penalty by applying steps 1 to 3 of the FCA's five-step framework was deemed by the FCA to be too low, as it was substantially less than the amount of fees HIFL had refunded as compensation. The FCA therefore applied a multiplier of four to the figure produced at step 3 in order to achieve "credible deterrence". That approximately £2.7m figure, was then reduced by 30% by way of settlement discount.