10 December 2015
At the end of last year, Threadneedle Asset Management Limited was fined just over £6m for breaches of Principle 3 (risk management systems and controls) and Principle 11 (relations with regulators). The £6m fine takes into account a 20% Stage 2 settlement discount.
In June 2010, Threadneedle identified a number of weaknesses in the fixed income area of its front office. Later, on 5 April 2011, following an ARROW visit, the FSA wrote to Threadneedle, also identifying concerns in relation to the Firm's fixed income area, including fund managers initiating, booking and executing their own trades. The FSA set out a risk mitigation programme (RMP) and required a response by 30 June 2011. In responding to the RMP (the RMP Response) on 29 June 2011, Threadneedle advised the FSA that it had appointed "Specified Individuals" to be responsible for "all aspects of dealing" on the relevant desks and that those "Specified Individuals" had taken on those responsibilities. In fact, those individuals had not taken on all of the responsibilities set out in the RMP Response and fund managers continued to initiate, book and execute their own trades.
Approximately one month after submission of the RMP Response, a fund manager on the Emerging Markets desk initiated, executed and booked a $150m trade on behalf of three Threadneedle funds at four times their market value – the fund manager was not the manager of the relevant funds and did not have authority to make the trades. Whilst Threadneedle's back office function prevented the transaction from settling, the transaction could have exposed the funds to a £70m loss. In reporting the transaction to the FSA, Threadneedle noted that its RMP Response had not accurately reflected the dealing practices on the Emerging Markets and High Yield desks.
The FCA found:
- in breach of Principle 3, between June 2010 and February 2012, Threadneedle failed to take reasonable care to organise and control its affairs responsibly and effectively by failing to put in place adequate preventative and detective controls to mitigate the risk of erroneous trading that had been highlighted by Threadneedle's internal report, the FSA's findings following its ARROW visit and the RMP.
- in breach of Principle 11, between 30 June 2011 and 28 October 2011, Threadneedle did not accurately describe the trading practices in place on the Emerging Markets and High Yields desks and the steps that had been taken in its RMP Response, and had failed to correct its response. These failures risked undermining the effectiveness of the ARROW/RMP process (now known as the Firm Systematic Framework).
You can read the Final Notice here.
Perhaps the most interesting aspect of the Notice relates to the stage at which it was settled. The matter settled at Stage 2, which is the stage that covers the period up to the expiry of the period for making written representations to the RDC. This is an unusually late stage for a Firm to settle a disciplinary action and suggests that there were some significant points of difference between the FCA and Threadneedle that hampered discussions. One possibility is that this related to the Principle 11 breach, where it is notable that the Notice states that the conduct was not deliberate. The Principle 11 breach accounted for just over £2m of the fine.