"Transition management" – possible notifications from FCA investigations

It has been reported in the FT overnight that the FCA is swooping on the London offices of the world’s biggest banks and asset managers in a new probe aimed at a widespread (and reportedly lucrative) type of business known in the industry as "transition management".

The FCA's site visits have been commissioned to investigate the process that occurs when asset managers hire a large custodian bank to help it liquidate or move a large portfolio of securities, which often occurs when two funds are combined or a pension manager changes providers.

This latest move by the FCA is another indicator that the City's financial institutions are facing increasing scrutiny into their practices. The FCA apparently sent requests for detailed information nearly two months ago to a variety of financial institutions that offer these services. These include investment banks (who conduct the business through trading), large asset managers, custodians and depository banks (who safeguard fund assets). If they have not already, we expect that many financial institutions will attempt to notify this as a circumstance and it is certainly something that financial institutions underwriters will be interested in at renewal.

By one estimate, the FT report that regulators will hit roughly 90% of the market for transition management services, including many, if not all, the big banks.

This is not first indicator we have seen that the FCA is interested in this area. The FCA's 2013/4 business plan first raised concerns that “the level of transparency and market conduct among transition management participants is not to the standard we require”. In particular, the FCA cited “unclear fee structures”, poor documentation and the use of affiliates and warned that they could “result in poor customer outcomes [and] cause a deterioration in market confidence”.

The issue of poor documentation raises concerns that client assets could be left unprotected if a market crisis hit during a transition, while the fee structures and use of affiliates could lead to unnecessary costs and hit investor returns.

From our recent experience, the transition management probe is indicative of the FCA’s approach to spend less time visiting each financial institution in turn, choosing instead to hit a swath of groups with questions about a specific business line, financial product or potential problem.

Following on from the PPI, IRHP mis-selling and LIBOR manipulation scandals, and the regulators' increasingly tough approach to enforcement, this latest probe will need to be carefully monitored by the financial institutions market and more thematic reviews can be expected in the next six months.

We will be monitoring this issue closely and continue to monitor the developments in relation to IRHP mis-selling, which is predicted by many to overtake PPI in terms of the financial impact to UK banks.

If you would like to discuss further please do not hesitate to contact us.