UK regulator fines Aviva Investors $34.2 million over fee failings

The regulator found that from August 2005 to June 2013, Aviva Investors employed a side-by-side management strategy on certain fixed-income desks that saw funds that paid differing levels of performance fees managed by the same desk. The FCA says that the incentive structure created conflicts of interest, as these traders had an incentive to favour one fund over another.

“The conflicts of interest and risks inherent in the side-by-side management of funds require robust risk management systems and controls,” it says. “However the FCA found that there were significant weaknesses in Aviva Investors’ risk management framework and the systems and controls that operated in the fixed income area.”

The FCA also found that a lack of controls allowed traders to delay recording the allocation of executed trades for several hours, which allowed them to cherry pick certain trades. After the firm found that two former traders had been delaying, and improperly allocating, trades, the firm paid compensation to eight affected funds.

“Ensuring that conflicts of interest are properly managed is central to the relationship of trust that must exist between asset managers and their customers. It is also a fundamental regulatory requirement. This case serves as an important reminder to firms of the importance of managing conflicts of interest effectively by implementing a robust control environment with effective systems to manage the risks. Not doing so risks customers’ interests being overlooked in favour of commercial or personal interests,” said Georgina Philippou, acting director of enforcement and market oversight at the FCA.

“We fully accept the conclusions of this investigation. We have fixed the issues, improved our systems and controls, and ensured no customers have been disadvantaged. We have also made substantial changes to the management team which is leading the turnaround of Aviva Investors,” said Euan Munro, CEO of Aviva Investors. “We have a clear focus on simple and specific investment outcomes for clients and we are delivering strong levels of investment performance within a robust control environment.”

By settling at an early stage, the firm qualified for a 30% discount on its fine, which otherwise would have been £25.2 million ($49 million). “While Aviva Investors’ failings were serious, the FCA has recognised that its actions since reporting its failings were exceptional. The level of co-operation during the investigation and commitment to ensuring no customers were adversely impacted meant it qualified for a substantial reduction in the penalty,” Phillippou added.