THE FINANCIAL Services Authority has begun its crackdown on “market timing” in the UK fund management industry, swooping on Henderson Global Investors and a number of other firms to interrogate themabout their procedures for combating the abuse.
The City watchdog is thought to have given Henderson only 24 hours’ notice before visiting its offices nearly two weeks ago, as part of its plan to trawl through the British investment industry to find out whether companies have carried out the same dubious practices as several mutual fund managers in the United States.
A person familiar with the situation said of the FSA’s interview with Henderson: “It was an aggressive meeting in which the FSA wanted to know about what monitoring processes were in place.”
The FSA called Britain’s 25 largest fund managers to a meeting on 10 December to discuss market timing. This is where investors quickly buy and sell shares in unit trusts, taking advantage of the time it takes for the trust to update its share price to reflect changes in its underlying asset value.
While not illegal, the practice is usually pursued by hedge funds and disadvantages long term investors – usually private individuals.
In America the regulatory authorities are waging a high-profile campaign to clamp down on companies which have employed market timing, leading to a series of resignations from institutions, including that of the chief executive of Putnam Investments.
Callum McCarthy, the chairman of the FSA, gave the group of UK fund managers until Christmas Eve to report to the regulator any evidence of market timing at their own firms and in the market generally. He also warned that the FSA would visit firms to examine in detail their processes for identifying potential deals which would involve market timing.
Henderson, which is part of the newly-floated HHG – the business split off from Australia’s AMP last week – is one of about 13 companies which have been visited so far, with the remainder scheduled to be seen early in the new year.
A spokesperson for Henderson said: “We have been co-operating fully with the FSA like everybody else.” Henderson has already hit the headlines this year, after The Independent revealed in August that an internal audit had shown up widespread compliance failures.
On market timing, the FSA is keen to come to a conclusion before the end of January about whether there is a significant problem in Britain.
A number of companies such as Standard Life have admitted they have been approached by hedge funds wanting to commit market timing in the past two years. Most have spent a considerable amount of time beefing up their systems to detect parties which might want to carry out arbitrage rather than hold the shares for the long term. However, some have expressed fears privately that the systems in place will not satisfy the FSA, which they feel has given them very little time after announcing its campaign against the practice to improve their processes further before starting its round of intensive visits to their offices.
The FSA has made clear it expects companies to pass on any evidence of employees who might have collaborated in dubious trades as well as details of any parties which might have made approaches about market timing.
