UK-based fund managers must take the initiative ahead of an impending wave of compensation claims against them from disgruntled investors, according to risk consultancy and internal aud
UK-based fund managers must take the initiative ahead of an impending wave of compensation claims against them from disgruntled investors, according to risk consultancy and internal audit firm Protiviti.
The firm believes investors could claim that fund managers failed in their due diligence or advice, or that they provided them with inaccurate or misleading information that resulted in them suffering a financial loss.
Protiviti is aware of a number of claims against fund managers and financial advisers that are being researched and says that many of these could result in litigation cases being filed during the second half of this year.
It has identified over 20 specific areas across the operational and supervisory practices of fund managers that should be reviewed and, where found to show vulnerability, addressed.
Any weaknesses that are not addressed could increase the risks of financial loss or regulatory action from potential complaints, claims or litigation.
Weaknesses include: design issues with products; allegations of mis-selling to clients; speed and nature of response to plunging asset values in the circumstances of particular mandates; potentially misleading marketing material; scope and evidence of due diligence on investments or managers; and ineffective risk/exposure monitoring and weaknesses in valuation policies, procedures or transparency.
Gavin Benson, director of Protiviti, says: ‘Fund managers, financial advisers and distributors of their products should be reviewing their policies, procedures and systems now to identify areas of potential weakness in preparation for any potential complaints or investigations that could eventually give rise to compensation claims, regulatory action (particularly in relation to treating customers fairly principles) or even litigation.
‘Through undertaking such a review now, they can identify any areas of vulnerability and address these urgently. As well as tightening up their current operations such a process may also make it possible for firms to remediate some issues that originated in a prior period.
‘Clients and regulators may well see such an initiative positively and this should mitigate client reputational and regulatory risk and may well also reduce the risk of them suffering financial losses, or the extent of those losses, in the future.’
Protiviti says that even if any potential litigation is successful, there is a significant question mark over who will ultimately pay.
Benson says: ‘The potential cases will involve a whole variety of relationships and issues and will take some time to work through. Since many parties have suffered significant losses, claimants are likely to be advised to think carefully about who they should best claim against before launching their claims. At some point these cases are also likely to involve indemnity insurers.’
Protiviti, which serve clients in the Americas, Asia-Pacific, Europe and the Middle East, has designed a modular diagnostic review that can be used by clients as a preventative or risk mitigation measure before claims or litigation begin to compare some or all aspects of their existing processes, policies, procedures, systems and records against internal standards and good industry practice.