There is little evidence of illegal late trading in the UK funds market, but there seems to be slight evidence of market timing abuse of UK authorised collective investment schemes, suggests the Financial Services Authority.
Information just released by the FSA indicates there is no evidence of widespread market timing abuse – where investors use the "stale" or out-of-date closing price of a fund to buy into or sell it a slightly better return at the next valuation point – and therefore no evidence to suggest long-term investor returns are in any way being harmed.
That said, this is in stark contrast to the US market, which has recently seen large sums of money being invested in mutual funds but targeted to gain the best possible rate through use of delayed data.
In rare cases where fund managers have found abuse of the system, CIS fund managers discovered the activity in the UK to be of a different nature to those uncovered in the US, but fund managers have taken swift action to terminate relationships with such clients.
The FSA also points out, however, there is a small complication in its search for marketing timing usage as any abuse could be disguised by order aggregation.
Order aggregators – such as fund supermarkets – can place combined deals for several customers, suggests the FSA which may hide market timing activity on bespoke accounts within the supermarket set-up.
Standard Life was the most recent company to suggest one of its unit trusts had been manipulated by market timing, and had a minimal impact on investors.
Fund managers who may have been affected are now being asked to calculate the impact of any market timing, so funds can be compensated at some point, albeit the potential compensation is likely to be less than £5m, says Michael Foot, FSA managing director.
"The picture we have uncovered is generally quite an encouraging one. Although there is evidence of market timing having occurred within our authorised funds, looking at all the evidence we have amassed, we can find no sign either that market timing is widespread or that it has been a major source of detriment to long term investors."
Of the 9,620 transactions assessed as part of the FSA’s UK investigation, only 118 transactions eventually required some sort of follow-up.
It could be partly as a result of the UK fund market’s control functions by trustees that abuse has been kept to a minimum, as deals are placed with fund managers before valuation points are taken, and can be refused by the fund manager in cases where they suspect market timers are trying to buy or sell units.
However, adoption of new rules – as set out in CP185 – concerning use of fair pricing or best estimates, where there seems to have been significant shift in the price of a unit, may also cut the potential misuse of market timing further.IFAonline
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