Recent FCA enforcement action has highlighted the importance of fund managers having in place robust systems and controls around identifying and dealing with conflicts of interest which may arise between the fund manager, its personnel, third parties and investors in funds that it manages.
On 30 March 2022, the Financial Conduct Authority (FCA) fined the asset management firm GAM International Management (GAM) and one of its investment managers following an investigation into mismanagement of conflicts of interest.
Under Principles 2 and 8 of the FCA’s Principles for Businesses, asset managers are required to conduct their business with due care, skill and attention, as well as manage conflicts of interest fairly. GAM’s failure to do so between 2014 to 2018 has resulted in the imposition of a fine of £9,103,523.
In connection with these matters, Timothy Haywood, a former Investment Director at GAM, has also been subject to a fine of £230,037 for breaches of the Approved Persons regime in force at the time.
The enforcement action against GAM relates to three transactions, two of which were linked to Greensill Capital (UK) Ltd (Greensill), a business partner of GAM’s. GAM’s wider relationship with Greensill allowed GAM access to investments issued by Greensill entities on preferential terms (some of which were offered but not accepted). These included fee-ramp arrangements, warrants over Greensill shares and “first and last look” arrangements on new Greensill originated assets. The arrangements also made provision for the co-branding of funds as between GAM and Greensill.
During the relevant period, funds managed by GAM invested approximately £550m in Greensill originated assets, some of which were either purchased or managed on a basis that could be characterised as other than arm’s-length, sometimes generating substantial losses and all without appropriate oversight from a conflicts perspective. Individual GAM investment managers were in some cases permitted to personally co-invest in these assets.
The FCA found that GAM lacked appropriate systems and controls to deal with conflicts of interest arising from its relationship with Greensill, highlighting the following issues:
- GAM’s Conflicts of Interest Committee failed to meet for almost three years.
- The identities and roles of the Conflicts of Interest Officer and Committee, and the reporting lines between them, were not adequately promoted to GAM’s employees.
- GAM’s Board of Directors failed to spend sufficient time discussing conflicts of interest at their meetings.
- GAM’s staff lacked uniform, defined training on conflicts of interest.
- An insufficient number of audit reports were provided to GAM’s management in respect of conflicts of interest.
Timothy Haywood was one of GAM’s designated investment managers for the 21 funds invested in Greensill originated assets. By February 2018, he had invested significant sums of investors’ capital in Greensill originated assets. He did so without first checking that any conflicts of interest had been addressed and without documenting any due diligence undertaken. In light of Mr Haywood’s significant management role, the FCA found that he had not taken sufficient steps to ensure that GAM had managed its conflicts of interest.
Mr Haywood also failed to appropriately disclose and record gifts and entertainment provided to him by Greensill, valued at £22,437. This included attendance at a charity dinner at Buckingham Palace on the invitation of a Greensill employee and £15,000 for travel on a Greensill private aircraft for a personal trip to Sardinia. While Mr Haywood was not found to have made investment decisions due to such gifts, nonetheless there was a clear risk of influence and conflict.
The FCA has historically stressed the importance of asset managers responding appropriately to conflicts of interest. The FCA’s response here demonstrates the regulator’s heightened scrutiny on asset managers complying with conflicts of interest policies. The level of the fines, which take into account a 30 per cent early settlement discount, suggest the FCA is keen to provide a reminder to the market of the importance of managing conflicts of interest effectively.
We are regularly asked by fund managers to assist them in mapping potential conflicts of interest and developing appropriate policies and internal structures to ensure that they are properly managed. We consider that the key takeaways from this enforcement are:
- Any deal origination / co-investment arrangements must be carefully scrutinised to ensure that they do not give rise to inappropriate incentivisation for the fund manager or its personnel that may run counter to the interests of investors in the manager’s funds. Incentivisation taking the form of opportunities for either the fund manager or its personnel should be particular red flags.
- Fund managers should have in place conflicts of interest policies that are both specifically tailored to their business model such that they cover specific risks that may arise, and which are implemented in practice. Conflicts committees must actually meet and conflicts reporting lines must be explained to staff and function properly.
- The requirement to properly identify and deal with conflicts feeds through into the responsibilities of individuals under the regulatory regime, here under the old Approved Persons regime but also under the recently introduced SM&CR with its attendant COCON rules. This enforcement makes clear that the FCA is willing to take action against individuals on this issue, with Mark Steward of the FCA noting that “Mr Haywood’s disclosure failings are equally [as] serious”.
With many thanks to Tess Hulton, a current trainee, for her help with preparing this article.
If you require further information about anything covered in this briefing, please contact Andy Peterkin or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, May 2022