Asset managers aren’t doing enough to manage conflicts of interest with their clients, says a new report from the UK Financial Services Authority (FSA).

The FSA reported Friday that, between June 2011 and February 2012, it conducted a review of asset management firms in order to assess their arrangements for managing conflicts of interest. “The review was prompted by evidence from our other supervisory work that some firms no longer saw conflicts of interest as a key source of potential detriment to their customers and had relaxed controls that we had considered to be well-established market norms,” it says.

Indeed, the report indicates that the FSA found that “many firms had failed to establish an adequate framework for identifying and managing conflicts of interests”. It also says that it identified breaches of its rules governing the use of customers’ commissions and the fair allocation of trades between customers.

“We concluded that most of the firms visited could not demonstrate that customers avoid inappropriate costs and have fair access to all suitable investment opportunities,” it says.

The FSA also found that the attitude of senior management towards customers best explained why some firms managed conflicts well and others badly. “A few boards had defined and embedded in their business a credible, long-term commitment to serve their customers’ best interests and had established robust arrangements to identify and manage existing and new conflicts of interest. But in most cases senior management failed to show us they understood and communicated this sense of duty to customers or even that they had reviewed or updated their arrangements for conflicts management since 2007,” it says.

And, in firms where senior management didn’t pay much attention to conflicts, employees often lacked awareness of situations where short-term business goals conflicted with the long-term interests of customers, it notes.

The FSA is demanding firms that aren’t complying with its principles or rules, must either justify their approach or take remedial action. In serious cases, it’s considering enforcement action against firms, it notes.

“We have concluded that the findings from this thematic review need to be communicated to the wider asset management sector,” the FSA says. And, it also expects the board of each asset management firm to discuss its findings, and for each firm’s CEO to attest to that by the end of February 2013. “We plan a second round of thematic visits on conflicts of interest and will use the responses received to inform our selection of firms for follow up assessment visits,” it adds.