The Financial Services Authority (FSA) in the UK has fined Martin Currie £3.5 million (€4.4 million) for failing to manage a conflict of interest between two of its clients.
In a statement, the regulator said this was the largest fine it had ever imposed in a conflict of interest case. In addition, the Securities and Exchanges Commission is fining Martin Currie in the US.
The FSA said Martin Currie’s misconduct breached principles of skill, care and diligence, management and control, and conflicts of interest.
The conflict of interest arose when Martin Currie caused one client, referred to as “fund B”, to enter into an “ill-advised” transaction which rescued another client, referred to as “fund A”, from serious liquidity concerns. Both funds focused on investing 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, the FSA says, but failed to ensure that the bond’s valuation or the rationale behind the investment were properly scrutinised at the time of the transaction.
This turned out to be a “poor” investment for fund B, and lost half its value over two years. Meanwhile, the deal had significant advantages for fund A, averting significant liquidity problems.
“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,” said the FSA, adding that Martin Currie did not disclose the conflict to fund B.
“Many of Martin Currie’s failings resulted from weaknesses in its systems and controls around unlisted investments,” the statement said. “In particular, the firms lacked adequate oversight of the fund managers advising both Fund A and Fund B.”
Martin Currie settled early with the FSA and received a 30% discount on its fine, which would otherwise have been £5 million. The FSA said it took into account that Martin Currie had brought the breaches to the FSA’s attention, co-operated fully with the FSA’s investigation and compensated fund B for its investment losses.
Willie Watt, the chief executive of Martin Currie, said Martin Currie compensated the affected client and returned all related fees earned.
“Following our comprehensive reviews, significant improvements have been made to our business including reinforcements to our governance function, changes to our management team and closing the unit down,” Watt said. “It is good to reach the end of the regulatory process, and put this behind us allowing for the business to move forward.”
©2012 funds europe