The Financial Conduct Authority has recently released an advisory stating that it is encouraging service providers to be sure that oversight, governance, and controls are up to standard across the board. This announcement comes after a review of the transition management sector. The “wake-up call” given out by the FCA last month comes on the heels of fines that totaled 22 million pounds that were issued to State Street transitions managers for overcharging clients deliberately.
The announcement was meant as a warning and has not been coupled with mandatory guidelines or new rules for managers dealing with asset holders and pension funds. These investment portfolios must be regularly transferred and traded to maintain and increase value. The Director of Supervision for the FCA, Clive Adamson, claimed that the failure of transition managers to conduct business with high standards that are in the interest of clients would result in further action. He is quoted saying that “ transition management often flies below the radar but it does have ramifications for individual investors, the ultimate holders of assets.”
This industry has suffered from a lack of transparency traditionally, despite the fact that it dealt with financial portfolios that totaled more than 165 billion pounds on an annual basis over the last three years. This industry in the United Kingdom is very concentrated, putting most assets into the hands of very few firms. Between 2010 and 2012, only 13 providers claimed close to 700 mandates. Of these 13 providers, five of the most popular providers were handling close to 80 percent of the money. According to the FCA, it is the responsibility of the transition managers to disclose, manage, and record all possible conflicting interests. Additionally, they must take the necessary steps to gain the best results when consulting clients.
Six clients were affected by the recent fraud, one of which was Ireland’s National Treasury Management Agency. After the FCA action and the infractions with State Street, it ended a 650 million Euro mandate with the company. The United States financial group, State Street, was accused of conducting business with “complete disregard for its customers” by the FCA. The clandestine overcharges also impacted private pension funds, the Royal Mail, and the Kuwait Investment Authority.