The FCA has fined Henderson Investment Funds almost £2 million for unfairly charging customers active fees on two funds which were effectively tracking one another. It’s a case which demonstrates the importance of having effective control systems in place.
The Henderson fine relates to the treatment of customers before and after a strategy change which meant that two funds became closet trackers. The regulator said that 4,500 retail customers had been treated unfairly in two funds: Henderson Japan Enhanced Equity and Henderson North American Enhanced Equity.
In 2011, Henderson Investment Fund Limited’s investment manager, Henderson Global Investors Limited, reduced the level of active management on both the Japan and North American funds.
This should have meant they stopped charging their clients active fees, but their institutional and retail investors received very different treatment. While institutional clients were informed promptly, the company continued to charge retail investors active management fees.
Retail investors received no information either by the amendment of the prospectus or any other methods. For five long years, therefore, these retail investors were being charged the same active fees as their institutional counterparts.
In total, the FCA says retail investors were charged approximately £1.9 million more than if they had been in a passive fund.
“For retail clients, the Japan and North American funds were in effect operating as “closet trackers” as the fees charged to them were inappropriate given the diminished level of active management,” said the FCA executive director of enforcement and market oversight Mark, Steward. “The matter is aggravated by the length of time HIFL took to identify the harm being caused to the retail investors and to fix it.”
Henderson has accepted the financial penalty and has also informed and compensated all the affected customers. An HIFL spokesperson said: “Janus Henderson Investments accepts the FCA’s findings and the financial penalty and has co-operated fully throughout the process. Affected clients had already been separately contacted and fully compensated.”
Even so, the episode still has warnings over the management and governance of funds. The FCA stated that the case was exacerbated because it took so long for the issue to be rectified.
The regulator identified serious weaknesses in their systems and controls of oversight, governance and management. For this reason, it took years before they spotted the issue and resolved it. The company has taken steps but it will face questions about why one set of customers were informed but another was not, and why they failed to flag up the system.
Firms will have to update their controls and governance procedures to ensure issues such as these are identified as soon as possible. It is not just the initial issue of non compliance which creates problems for the FCA, but the lack of internal controls which ensured different customers received substantially different levels of service.