The UK financial regulator has fined Threadneedle Asset Management (TAML) more than £6 million for failings in its fixed income processes that helped facilitate an attempted fraud and for not correcting inaccurate information it submitted for four months.
The Financial Conduct Authority (FCA) said Threadneedle, which merged with US firm Columbia last year, had breached two of the regulator’s main principles and allowed a fund manager to erroneously place a trade that could have exposed clients to a £70 million loss.
Additionally, after investigative visits and recommendations made by the FCA’s precursor, the Financial Services Authority (FSA), the company failed to adequately act—but also failed to say it had not done so, the regulator said.
“In April 2011, the FSA wrote to TAML and asked TAML to address specific concerns about the fixed income area of its front office, including the emerging markets debt desk,” the regulator said today in a special note on the matter. “The FSA was concerned about, among other things, the number of errors occurring in that area as well as the risks of fund managers initiating, booking, and executing their own trades.”
On 29 June 2011, Threadneedle responded to the FSA stating that it had appointed individuals to be responsible for all aspects of dealing on the relevant desks—including the emerging markets debt desk—and that the individuals had taken on those responsibilities.
“This overstated the position,” said the FCA. “In fact, the individuals had not taken on all the responsibilities outlined in TAML’s response and consequently, the FSA’s concerns had not been fully addressed.”
In August 2011, shortly after Threadneedle submitted its response, a fund manager on the emerging markets debt desk initiated, executed, and booked a $150 million trade on behalf of the company’s funds at four times its market value.
The fund manager was neither the manager of the funds, nor did he have the authority to make the trade. The company’s outsourced back office identified the problem and did not settle it, the FCA said in its report, preventing a potential £70 million loss to client funds.
This event was subject to high court proceedings as agents outside of Threadneedle were involved and the company could be identified as a potential victim in this case.
Following this forfeited trade, the company was asked by the regulator to submit a report identifying the processes and controls in place at the time. Some four months later, in October 2011, Threadneedle informed the FCA that its initial response in June “did not fully reflect” the actual dealing practice on the emerging market and high yield desk and “apologised unreservedly for this.”
The FCA fined Threadneedle for not meeting appropriate standards on trading issues, which therefore failed to mitigate “the risk of erroneous trading highlighted by the authority and the firm’s own report”, the regulator said. And for not accurately describing to the regulator its processes on the emerging market and high yield desks.
Additionally, the firm failed to ensure the regulatory requirement of best execution had been made on eight trades, which caused it to make a provision of £595,000 to cover losses to client funds. Should the erroneous trade have been settled, the firm may have had to call on its insurance to cover the loss.
The authority highlighted that by refusing to comply with some of its principles, regulatory requirements—and failing to admit it—its actions had a substantial impact on the industry as a whole.
“TAML’s reporting failures were serious and they breached Principle 11 because they risked undermining the effectiveness of this important supervisory tool,” the FCA’s report said. “Unauthorised trading risks undermining trust and confidence in the UK financial markets and exposes investors to the risk of loss. Consequently, it is important for firms to put in place adequate controls to mitigate the risk of unauthorised trading.”
By 2013, a report from the firm to the FCA said it had improved its overall procedures and addressed the weaknesses originally identified in 2011. This was confirmed by the authority.
Threadneedle issued a response to the fine and report today, confirming there had been no loss to either itself or any client and the employee who had attempted the fraudulent trade had been dismissed.
“A subsequent review of systems and processes in Threadneedle’s fixed income front office trading area identified areas for improvement,” the company said. “Threadneedle has since implemented a comprehensive upgrade of our fixed income systems and controls… As a result we are confident that our controls meet or exceed regulatory expectations and industry standards.”
TAML received a 20% Stage Two settlement discount, without which the fine of £6,038,504 would have been £7,548,130.
As of June 2014, the Threadneedle Group controlled £92.8 billion in client money.