Some UK transition management businesses are not adequately supervised or sufficiently transparent, according to a review by the Financial Conduct Authority (FCA), published in the wake of a £23 million fine levied on State Street.
The FCA report found that assets worth £165 billion are transferred annually by 13 specialist providers, with the top five accounting for around 80% of business by volume. Providers are typically custodians, investment banks or asset managers, which provide a range of services to clients, typically pension funds or other institutional investors when they wish to restructure or move a large portfolio between providers.
In January, the UK financial markets watchdog fined US custody and trust bank State Street £22.9 million for overcharging clients for transition management services.
While the FCA found that most firms met its requirements, “the quality and effectiveness of controls, marketing materials governance and transparency varied”.
At firms where transition management played a small role in a much larger business, the FCA identified risks that senior managers and control functions could “underplay oversight” of the service, considering it as low-risk project management. Basic shortcomings in oversight cited by the FCA included failure of the legal function to oversee the contractual processes and failure to ensure appropriate segregation of duties.
The watchdog added that clients were often unfamiliar with aspects of transition management services, lacking awareness of potential conflicts of interest or the impact of transactions on the value of their assets. The FCA highlighted a number of risks inherent in transaction management businesses, including the temptation for the provider to offer an “unrealistically low estimate” of costs to win business and the mis-use of information when conducting a large volume of trading over a short period. It also cited the use of execution venues to transact orders in which the transition manager has a financial stake.
The FCA has advised all UK providers of transition management services of the need to ensure that controls, oversight and governance arrangements meet the regulator’s requirements. In particular, firms should ensure all potential conflicts of interest are “understood, managed and mitigated”, while senior management should ensure appropriate controls and oversight. However, it said that existing rules and guidance already set high standards and no further changes were needed in light of the review.