The Financial Services Authority (FSA) has written to fund group chief executives outlining its concerns over conflicts of interest policies and is considering taking enforcement action after a review of industry practices.
The review found that some firms had breached rules regarding the use of customer commissions and the fair allocation of trades between customers, and identified that "many firms" had failed to establish an adequate framework for identifying and managing conflicts of interest.
The regulator sent out letters this morning and is requiring recipients to review their conflict of interest policies in the coming months.
"We concluded that most of the firms visited could not demonstrate that customers avoid inappropriate costs and have fair access to all suitable investment opportunities," the FSA said.
The FSA said it is "considering enforcement action" against firms in more serious cases where groups have not complied with relevant principles or rules.
Problem areas identified by the review included firms failing to adequately control the amount of customer money spent on research and execution services, and a failure to regularly review whether services were eligible to be paid for using customers' commission.
The review discovered one firm allowed fund managers to delay allocating trades until several hours after execution, thereby enabling managers to favour some customers over others.
The FSA said it took enforcement action against a firm which traded for one fund to ease liquidity problems faced by another.
Most groups also "applied limited thinking" to how accepting gifts and entertainment could compromise their duty to act in customers' best interests.
CEOs who receive hard copies of the letter will be required to discuss their firm's conflict of interest policy with their board, and report back to the FSA by 28 February 2013 at the latest.
"In most cases senior management failed to show us they understood and communicated [a] sense of duty to customers or even that they had reviewed or updated their arrangements for conflicts management since 2007.
"In these firms, employees too often lacked awareness of situations where short-term business goals conflicted with the long-term interests of customers."
Groups who do not receive a copy of the letter will not be required to attest to their policies, but senior management should "receive and consider the findings" of the review, an FSA spokeswoman said.
The thematic review took place between June 2011 and February 2012, encompassing 15 groups from across the asset management industry. The regulator said it is now planning a second round of industry visits.
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