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The Financial Services Authority (FSA) has fined Martin Currie Investment Management Limited and Martin Currie Inc (together, Martin Currie) £3.5 million for failing to manage a conflict of interest between two of its clients. This is the largest fine ever imposed by the FSA in a conflict of interest case. In addition to the fine issued by the FSA, the Securities and Exchanges Commission (SEC) is also fining Martin Currie in the US.
The firms’ misconduct breached FSA Principle 2 (skill, care and diligence), Principle 3 (management and control) and Principle 8 (conflicts of interest).
The conflict of interest arose when Martin Currie caused one client (Fund B) to enter into an ill-advised transaction which rescued another client (Fund A) from serious liquidity concerns. Both Fund A and Fund B focused on making investments in the China market, and were managed by Martin Currie from its Shanghai office.
In April 2009, Martin Currie caused Fund B to invest around £15 million in an unlisted bond issued by an offshore Chinese firm. Martin Currie failed to ensure that the bond’s valuation or the rationale behind the investment were properly scrutinised at the time of the transaction, and it proved to be a poor investment for Fund B, halving in value over the next two years.
While the investment was detrimental to Fund B, it had significant advantages for Fund A. In 2009, Fund A was facing serious liquidity concerns due in part to its exposure to illiquid investments in a single offshore Chinese entity. Fund A’s liquidity problems were solved by Fund B’s investment, because nearly half of the proceeds of the bond issue were used to repay these illiquid investments. This in turn helped Martin Currie to avoid any reputational damage which may have arisen if Fund A’s liquidity problems had continued and it had been unable to meet pending redemptions by investors.
The transaction gave rise to a clear conflict of interest between Fund A and Fund B. Martin Currie was slow to identify this point and failed to manage the conflict fairly. Martin Currie did not disclose the conflict to Fund B and failed to ensure that Fund B understood that the transaction proceeds would be used to repay an investment made by one of Martin Currie’s other clients.
Many of Martin Currie’s failings resulted from weaknesses in its systems and controls around unlisted investments. In particular, the firms lacked adequate oversight of the fund managers advising both Fund A and Fund B.
Tracey McDermott, acting director of enforcement and financial crime, said:
“Effective identification and management of potential conflicts of interest between clients is a core requirement for asset managers. This transaction gave rise to an obvious risk of a conflict which 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. The primary responsibility for ensuring compliance with a firm’s regulatory obligations rests with the firm, and senior management must ensure that there are adequate systems and controls in place to manage conflicts and to oversee the actions of employees. The action taken by both ourselves and the SEC should leave firms in no doubt about the serious consequences of this type of failure.”
Martin Currie settled early with the FSA and received a 30% discount on its fine. Without the settlement discount the fine would have been £5 million. The FSA also took into account that Martin Currie brought the breaches to the FSA’s attention and has co-operated fully with the FSA’s investigation, compensated Fund B for its investment losses after the Fund raised concerns, and has spent considerable time and money investigating the issues itself and addressing the concerns raised by the FSA.
The FSA would like to acknowledge the co-operation it received from the SEC in this case. The SEC has taken its own enforcement action against Martin Currie for similar failings, imposing a penalty of US$8.3 million (around £5.1 million).
Background
- The Final Notice can be found on the FSA website.
2. The SEC Order can be found on the SEC website.
3. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
4. The FSA will be replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013. The Financial Services Bill currently undergoing parliamentary scrutiny is expected to receive Royal Assent by the end of 2012.
