Wholesale Small Firms Briefings
Private Equity 23rd October 2008
Wholesale Small Firms Strategy
To improve the compliance of and increase the engagement with Wholesale Small Firms
Agenda
• Introduction – John King • Thematic Work, Conflict of Interest – Matt Fann • Market Conduct – Don Groves • Enforcement – David Blunt • Sector Risks – Stephane Blais • Q & A – You! • 11.00 – Coffee, Further discussion
Wholesale Small Firms Population
• Private Equity • Investment Managers • Wholesale Brokers • Corporate Finance • Other • Total
300 1100 400 500 150 2450
Work to Date
• MiFID/CRD Classification • Thematic Work – Conflict of Interest, TCF, Financial Crime • FRO Letter – Business Models, Controls, Financial Crime • Visits – 16 firms • Cases • s165 Information Request • GABRIEL – regulatory Reporting • More Principles Based Regulating
Findings from the FSA’s Thematic Review of the Management of Conflicts of Interest within Private Equity Firms
Matthew Fann Alternative Investments Team, Wholesale Banks & Investment Firms Department
Scope & Objectives
• Objectives: • Identify and communicate prevailing industry standards • Promote “good practice” and address areas of potential weakness • Scope: focus on key conflicts between private equity firms and underlying investors (e.g. LPs) • Key elements of analysis: • Extent of alignment between private equity business model and interests of fund investors (e.g. LPs) • Assess whether standards for conflict identification, management and mitigation are sufficiently formalised
Summary of key findings
Alignment of interests with fund investors?
• Nature and degree of the FSA’s supervisory oversight did not appear to be a significant factor • Majority of firms visited demonstrate a high degree of alignment interests with fund investors (e.g. LPs) • A small percentage of firms undertake certain practices that may undermine that inherent alignment of interests • Conflicts more likely in broad-based firms, particularly investment banks, where private equity is not the primary focus
Summary of key findings
Areas giving rise to potential conflicts of interest?
• Investment allocation – between investors (e.g. LPs) in separate funds operated by the same fund manager • Preferential terms – where the firm, or affiliated parties, are permitted to co-invest in transactions alongside the fund on a deal by deal basis • Financial incentives – where firms receive financial incentives which are not rebated back to the fund or clearly disclosed to fund investors (e.g. LPs)
Summary of key findings
Formalisation of approach towards conflict management?
• • • Analysis shows size influences degree of formalisation of CoI management within firms Most firms visited had a broadly adequate approach to conflict management Key concerns relate to: • Fewer than 80% of firms surveyed maintain formal CoI policies and procedures • • Fewer than 50% of firms surveyed use of proactive compliance monitoring measures to address CoIs Fewer than 45% of firms surveyed provide staff with formalised conflict training or refreshers
• Firms placing over reliance upon:
• • • Investment process and fund documentation to mitigate potential business conflicts Close working relationships as a means of establishing an effective control environment Reputation and culture as a means to influence staff behaviour
Summary of key findings
Examples of good practice
• Active senior management involvement • Personal responsibility declarations • ‘Chinese wall’ letters • Proactive investor disclosure of CoIs • Separate and distinct committee structures • Formalised compliance monitoring mechanisms • Deal conflict check-lists • Formalised business line mandates & allocation policies
Summary of key findings
Further steps by firms
Recommend all firms undertake a benchmarking exercise against the findings of this thematic review – focusing upon: • Staff training programmes with refreshers • Formal policies and procedures to address potential CoIs • Controls subject to formal review • Compliance with SYSC 10 Common Platform requirements • Proactive compliance monitoring measures • Investor disclosure
Coming up - regulatory agenda
• All firms can expect conflict management to remain on the supervisory agenda • Extension of the Common Platform requirements – coming into force in 1 April 2009 • For further details see PS08/9: Organisational systems and controls extending the common platform - feedback on CP07/23 and final rules • “All firms must now take all reasonable steps to identify conflicts between themselves and their client(s)…” • “All firms must maintain and operate effective organisational and arrangements with a view to preventing conflicts from giving rise to material risk of damage to the interests of their clients…”
Market Conduct Don Groves
Market Abuse: Strategic Objectives
• Prevention • Detection
– Surveillance systems
• Disruption • Prosecution A “Partnership Approach” between the FSA and the Industry
M&A Thematic Work – Handling Sensitive Information
• Published good practices in July 2007:
http://www.fsa.gov.uk/pubs/newsletters/mw_newsletter21.pdf
• Published our follow-up work in June 2008
http://www.fsa.gov.uk/pubs/newsletters/mw_newsletter27.pdf
– FSA-regulated firms • Discussion of findings and good practice points and the steps firms are taking to reduce the risk • Industry roundtable discussions – Non FSA regulated firms • Not one size fits all • Industry-led voluntary Principles of Good Practice
Enforcement
David Blunt
Agenda • Enforcement as part of the FSA • What cases are referred to Enforcement? • Enforcement powers • Enforcement processes • Issues for firms
Start of the process • Enforcement as part of the FSA
– Supporting the FSA’s strategic objectives
• Eg systems and controls, SIF individuals
• What cases are referred to Enforcement?
– Referral criteria – Changing behaviours – Probability of success
• Practicalities
Powers and processes • Information gathering • Interviews • Decision-making
– Settlement – Regulatory Decisions Committee – FSM Tribunal
Issues for Firms
• Issue discovery
– Identify, assess, raise with the FSA
• Potential next steps
– Internal investigation or help from advisors?
• Supervision and Enforcement • Openness and communications • Market conditions
Private Equity Risks
Stéphane R. Blais
Asset Management Sector Team
Agenda • High level statistics • What is the Asset Management Sector • Team • How do we work with the supervisors of Private Equity firms • What are some the risks we currently have on our radar
Industry statistics • Increased investments (UK): – £22bn in 2006 – £37bn in 2007 (BVCA) • 45% increase (37% adjusted)
Asset Management Sector Team • Identify, analyse and mitigate risks in the asset management sector • Published in the Financial Risk Outlook (FRO) • ‘Operationalise’ the risks through supervision and thematic work
Working with Supervisors • Firms not funds – senior management responsibility • Top-down – systems and controls • Higher impact: more frequent risk assessments • Lower impact: case work and review of returns • All firms: thematic work, particularly for non-relationship managed firms • Greater reliance on data from IRR and ICAAP submissions
Working with Supervisors
• Private Equity Managers:
– Wholesale Small Firms – Alternative Investment Team – Other supervisors (WIB, MRGD, RFD)
Risks on the Radar • Some of the key risks: – Significant growth in capital inflows – Level of leverage – Unclear ownership of economic risk – Secondary market liquidity for the assets – Conflicts of interest – Market standards/Market abuse • Working with Expert Group to develop issues that can be used in firm assessments and thematic work
Q&A Session