Both UK and US financial services regulators have been coming down hard on firms and individuals who fail to manage conflicts of interests between their clients. It came as no surprise then that fund manager Martin Currie was slapped with a huge fine of £8.6 million in the wake of an investigation into misconduct. Between 2007 and 2009, it is alleged that the company offered unwise advice to one of its clients. The FSA found that an unknown hedge fund was running low on cash, and so they convinced The China Fund to invest an astonishing £5 million.
After no less than two years, the investors lost 50% of their money. That led to the FSA handing out a fine much larger than any presented in the past for similar incidences. Their fine totaled £3.5 million, but the American SEC also fined the fund manager an additional £5.1 million for their involvement in the matter. The investment in question took place in three unlisted bonds and was deemed to have involved a serious conflict of interest by the FSA. They said that Martin Currie failed to scrutinise both the reasoning behind the investment, and the valuation of the bond. That led to it becoming a bad move for all involved.
At the time, Martin Currie was experiencing vast liquidity issues, and the transactions are thought to have been a step towards rectifying the problem. However, it is clear that any continuation of that strategy would have had negative effects on the company’s reputation. In a somewhat surprising turn of events, it appears the issue was first highlighted to the FSA by management at the firm. Since that time, the fund manager has seen their assets fall from a whopping £11 billion to just £5 billion. That suggests the markets have become wary of doing business with companies that have been fined by the FSA.
The losses experienced by those less than honest transactions have been underwritten as arranged by chief executive Willie Watt. Even so, both US and UK regulators are far from satisfied. Tracey Dermott from the FSA released a statement to the press in which she said:
“The transactions in question gave rise to an obvious risk of conflict. Martin Currie was slow to identify and then failed to manage adequately. It is no excuse that some of Martin Currie’s failings resulted from the actions of individual fund managers.”
Settling the fine early allowed Martin Currie to gain a 30% reduction in their payment. That is standard procedure when firms hold their hands up to mistakes. The FSA were quick to say they had no intention of bringing companies to their knees for such errors of judgment. However, they felt the fine accurately represented the seriousness of the event. It is hoped the substantial fine will act as a deterrent to stop other businesses in the financial service industry from repeating actions of that nature.
Martin Currie soon sent out a message to investors in the hope of controlling the damage. It said the chain of events had exposed certain weaknesses in their systems and controls. The message went on to state that they do not expect more sanctions in the future as a result of the issues publicised in the international press. The drop is assets managed over the following months made it clear that some investors didn’t want to take the risk.
That isn’t the first or last time we’ve seen the FSA handing out substantial fines for misconduct though. Their efforts in the short-term loan industry have received criticism from both consumers, and the companies involved. It was accepted that some dishonest lenders were charging exceptionally high-interest rates. However, doing so meant that more people could benefit from their services. Since the FSA has focused their time on that market, many of the big names have disappeared.
However, there is no getting away from the fact payday loan providers required more regulation. While some of the big names might have shifted, that paved the way for affordable lenders and responsible lenders to make some headway. It is now much easier for those in need of short-term loans to get affordable cash from a provider that ensures they can make repayments. That has helped to reduce the amount of people who get themselves into bad financial situations.
In one final statement, Martin Currie said the settlements did not negatively impact on their ability to manage client’s assets or global businesses. That was seen as a last-ditch attempt to keep their investors on-board. However, the figures show that more than half of their assets were taken to alternative fund management firms in the following months. So, it seems, their efforts were in vain.
While the FSA successfully investigated and fined a number of businesses and individuals in 2012, this case set a precedent for all others that followed. The Financial Services Authority is far from being a perfect regulator. They have a number of issues to face before it is possible to improve their processes and bring their operation up to standard. For instance, it currently takes more than a year for them to seek out the details in misconduct cases and present their report. During that time, it is possible that evidence could be destroyed or hidden by guilty parties.
The only viable ways of making improvements will involve further cash injections. Either that or the regulator must look towards implementing rules and guidelines that limit the opportunity for such instances to arise. Employing a regulatory representative to sit on the boards of some high-risk companies could help to remedy the situation. However, that would be a costly endeavour. With no funding from central government, it is difficult to see how the similar bodies of the future will increase their effectiveness. We all agree they should remain impartial, but it is hard to make a dent in the problem without the right resources.