Callum McCarthy, the chairman of the Financial Services Authority, warned the heads of leading fund management firms yesterday that they were personally responsible for rooting out trading practicesthat can discriminate against private investors.
At a meeting with the chief executives of 25 of Britain’s largest unit trust firms, Mr McCarthy warned that the discovery of “market timing” and “late trading” could lead to fines and public reprimands by its enforcement team.
Mr McCarthy took the unusual step of summoning the executives to the regulator’s Canary Wharf headquarters as part of an investigation into market timing – where hedge funds trade in and out of unit trusts to make a quick profit.
The issue of market timing and late trading – where professional traders take advantage of stale prices of unit trusts (the price for these investments is set only once a day) – was first exposed in the US when New York attorney general Eliot Spitzer launched a high- profile investigation.
The focus on the subject in America prompted Mr McCarthy, who took over as FSA chairman four months ago, to ask if similar practices could be taking place in the UK.
He made it clear yesterday that such practices could not be ruled out after an initial survey of fund managers.
“We have already conducted a survey of fund managers in the UK, the results of which we are still analysing. But we cannot conclude, on the basis of what we have discovered so far, that abuses are not a feature of the UK system,” Mr McCarthy said.
He said he had used yester day’s meeting with the unit trust executives to request new surveys of trading activities in their unit trusts and remind them of their personal responsibility for ensuring such reviews are conducted thoroughly.
He told them that he expected them “to take personal and direct responsibility for ensuring there is a proper review of past trading practices and that they must keep their non-executive directors and the FSA fully informed of the progress of those reviews.
“I also reminded them that late trading, market timing and shortcomings in the sys tems in controls could be grounds for enforcement action,” Mr McCarthy said.
Leading unit trust providers have already admitted that they believe they have been targeted by sophisticated traders looking to make a quick profit from the quirky way unit trusts are priced.
Unlike the shares in which they invest, the fact that unit trusts are only priced once a day allows professional traders to make profits on changes in the prices of the underlying shares after the unit has been priced.
Among the firms which have admitted to having uncovered such potential trading abuses are Standard Life Investments and Schroders. Standard Life has said it had been approached “a number of times by US-based hedge funds” while Schroders had concerns about the way its Luxembourg-domiciled funds were being used by market timers.
The practice of market timing and late trading by hedge funds and other professional investors is not, in itself, a breach of any rules. But it is the responsibility of unit trust firms to ensure that their funds are not subjected to any trades that can discriminate against investors.
