Does the buy side generally get away with flouting the rules more than investment banks do? Tim examines the latest evidence with the Aviva enforcement action in the UK.
It's accepted in 2015 that when an investment bank comes under fire from a regulator—whether for rate fixing, rogue trading, or persistent anti-money laundering, bribery, or other know-your-client violations—the whole mess is going to end in a fine with nine digits behind it, if not 10.
As our sibling publication Risk and other mainstream publications have reported, these gaudy penalties are now exceeding some firms' entire operational risk budget.
But not so much on the buy side. Of course, only a small handful of firms in this group can genuinely claim to have as much systemic impact or responsibility for market stability as the banks do. It therefore makes plain sense that when they're discovered in violation, the enforcement action reflects that relatively lesser impact.
For the bigger giants like BlackRock and Fidelity among that handful, well, they've been incredibly mindful and unapologetic about bolstering their relationships on K Street, as well, arguably even more than the banks have.
It seems like this is the story we frequently hear when an investment manager has a mess on its hands: Come clean, blame the tech, do right by the aggrieved clients (in this case, parent funds), make puppy eyes at the regulators, and hope they don't poke around your shop too much.
But what about the firms that fall somewhere in the middle—not small enough to brush off or make excuses for, though not big enough to really go after, either?
Here we find the Aviva Investors situation as it has unfolded since 2013 and was ultimately sorted this week in London.
On Tuesday, the Financial Conduct Authority (FCA) announced £132 million ($204.6 million) in compensation payments to eight different funds—all linked to Aviva's insurance parent—which were financially disadvantaged by the operational issues that incentivized intraday price "cherry-picking"─which is, essentially, delayed trade booking─on Aviva's fixed income desks.
But the fine itself? That landed at £17.6 million─or approximately $27.3 million─for violations that occurred for nearly five years.
Aviva is global investment manager. It manages $372 billion in assets. When one googles it, three of the comparables that show up are Schroeders, Aberdeen, and, yes, BlackRock. In other words: that's an amazingly small amount of money.
Following the Gameplan
So why is this sum so very paltry?
I would argue it comes back to two things. One is that great scapegoat, technology, or as we euphemistically say these days in enforcement parlance, "insufficient controls".
Blaming those combines nicely with the second thing, and a common characteristic of these buy-side situations, as well: adamant contrition.
As the FCA said in its statement, "While Aviva Investors' failings were serious, the FCA has recognized that its actions since reporting its failings were exceptional." Better yet, it self-reported and the two traders most responsible for delaying their trades are long gone from the firm, while its leadership has turned over as well.
Indeed, you can charge a rogue trader like Jerome Kerviel or Kweku Adoboli, go after rate fixers or banking executives looking the other way on laundering criminal money. Generally, when these glory-seeking individuals at banks are found out, though, they tend to fight tooth and nail, litigiously and in the media. Regulatory consideration for good behavior quickly goes out the window.
Little wonder Kerviel decided to visit the Pope instead.
What you can't indict, though, is crappy technology. And even if you could, it wouldn't exactly fight you in court. It seems like this is the story we frequently hear when an investment manager has a mess on its hands: Come clean, blame the tech, do right by the aggrieved clients (in this case, parent funds), make puppy eyes at the regulators, and hope they don't poke around your shop too much.
Oh, and fix the problem. After the billion-dollar fines, we've seen banks close certain businesses—Citi's dubious Banamex operations in Mexico come to mind. The problems uncovered on the sell side are usually endemic; the reputational risk too damaged; the cost to get it all turned around too great.
Contrast that to Aviva, which I'm sure will continue trading in fixed income after this, and apparently has improved its systems (or at least convinced the FCA it has) without too much coercion.
There is a whole cottage industry around soft-landing enforcement for financial services, tailored to the buy side especially. This isn't a bad thing on its own, and helps affected parties move on from such problems smoothly.
But proof of the model working should lay in less—not more—of these five-years-long problems occurring to begin with.
So far, the verdict on that isn't so clear.
Anthony and James delve into how the systematic internalizer regime is shaping up, and then examine the regtech sector.Subscribe to Weekly Wrap emails