FINAL NOTICE

Address:


No. 1 Poultry

1.
ACTION

1.1.
For the reasons given in this notice, the Authority hereby imposes a financial

penalty of £17,607,000 on Aviva Investors Global Services Limited (“Aviva

Investors” or “the Firm”).

1.2.
Aviva Investors agreed to settle at an early stage of the Authority’s investigation

and therefore qualified for a 30% (Stage 1) discount under the Authority’s

executive settlement procedures. Were it not for this discount, the Authority

would have imposed a financial penalty of £25,152,900 on Aviva Investors.

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2.
SUMMARY OF REASONS

2.1.
Asset managers act as agents for their customers, making investment decisions

in financial markets on their behalf. Confidence that asset managers will conduct

themselves properly when acting on behalf of customers is central to the

relationship of trust between the industry and its customers, particularly where

because of a lack of information customers are unable to judge for themselves

whether they are being treated fairly. This means that when making investment

decisions for customers, asset managers should not let conflicts of interest

interfere with their obligations to customers.

2.2.
The Authority has stressed the importance of asset managers managing conflicts

of interest effectively, including by way of a thematic review report and a Dear

CEO letter in November 2012. This will continue to be an area of focus for the

Authority.

2.3.
The Authority expects an asset manager to ensure that it:

a) takes reasonable care to organise and control its affairs responsibly and

effectively with adequate risk management systems; and

b) manages conflicts of interest fairly, both between itself and its customers

and between customers and other clients.

2.4.
Aviva Investors failed to do so. From 20 August 2005 to 30 June 2013 (“the

Relevant Period”) it failed to control the conflicts inherent in the management of

funds that paid differing levels of performance fees on the same desk within its

Fixed Income business. Managing funds together in this way is referred to as

‘Side-by-Side’ management.

2.5.
Aviva Investors had an incentive structure that created conflicts of interest

whereby Side-by-Side traders had an incentive to favour funds paying higher

performance fees. This incentive was higher on desks where hedge funds were

managed alongside long-only funds that paid lower or no performance fees.

2.6.
In addition, Aviva Investors had a poor control environment meaning that Fixed

Income traders could delay recording the allocation of executed trades for several

hours without being detected. Aviva Investors found that two former Fixed

Income traders had taken advantage of these weaknesses.

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2.7.
The combination of a poor control environment and an incentive for Side-by-Side

traders to prefer their interests over those of customers led to an increased risk

that they would seek to increase incentive payments by allocating trades that

benefited from favourable intraday price movements to some funds and allocating

trades that did not to other funds. This practice is commonly known as ‘Cherry

Picking’.

2.8.
In May 2013, Aviva Investors found evidence of delayed booking and improper

allocation of trades, including Cherry Picking, by two former Fixed Income traders

between August 2005 and November 2012. Compensation of £132,000,000 was

paid to eight funds managed on behalf of other companies within the Aviva Group

that may have been adversely impacted as a result of Aviva Investors’ poor

control environment.

2.9.
As a consequence, during the Relevant Period Aviva Investors breached Principle

3 (Management and control) and Principle 8 (Conflicts of interest) of the

Authority’s Principles for Businesses (“the Principles”) and related Rules.

2.10. Aviva Investors breached Principle 3 by failing to exercise adequate and effective

control over its Side-by-Side management of funds. Aviva Investors operated a

‘three lines of defence model’ of risk management. Aviva Investors primarily

relied upon the first line of defence, the business, to identify, assess and manage

risk. The business failed to do so in relation to the inherent conflicts of interest

and risks associated with the Side-by-Side management of funds. Weaknesses in

compliance oversight and monitoring, along with flaws in the approach to closing

audit issues meant that the business’s failure to address the risks went

unaddressed.

2.11. Aviva Investors breached Principle 8 by failing to manage fairly the inherent

conflicts of interest between itself and its customers, and between customers and

other clients, that arose from managing funds that paid differing levels of

performance fees on a Side-by-Side basis.

2.12. Details of the Relevant Principles and Rules breached by Aviva Investors (and

other relevant regulatory provisions) are set out in Annex A to this Notice.

2.13. The Authority has taken into account that:

a) the
weaknesses
in
Aviva
Investors’
systems
and
controls
went

unaddressed for almost eight years and created an unacceptable risk of

trader misconduct;

b) the
failings
revealed
systemic
weaknesses
in
Aviva
Investors’

management, systems and controls in the Fixed Income business;

c) the failings caused an unacceptable risk of significant loss to certain long-

only funds managed on a Side-by-Side basis, a risk Aviva Investors found

had crystallised and may have caused detriment to eight long-only funds;

d) Aviva Investors’ Internal Audit function identified the systems and controls

weaknesses, but the steps taken by the Firm failed to adequately address

them;

e) it does not consider that the Firm’s failings were deliberate or reckless;

f) Aviva Investors promptly notified the Authority of the breaches before it

ascertained the full extent of the breaches;

g) since discovering the failings, Aviva Investors and its senior management

have worked in an open and cooperative manner with the Authority, far

above and beyond the level expected;

h) since February 2012 Aviva Investors has committed significant resources

to investigating and addressing the weaknesses in its control environment

making significant improvements, which include enhancing governance,

strengthening its control framework and seeking to embed an appropriate

culture under the leadership of a new management team;

i) prompt compensation was made to the eight funds Aviva Investors

identified may have been adversely affected by its breaches, ensuring that

they were not adversely impacted by its failings. While the amount of

compensation paid was significant, because of the size, structure and

nature of each of the funds and the large number of consumers with an

interest in each of them, the risk of loss to each individual retail consumer

was relatively small; and

j) this action supports the Authority’s operational objectives of securing an

appropriate degree of protection for consumers and protecting and

enhancing the integrity of the UK financial system.

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2.14. The Authority therefore imposes a financial penalty on Aviva Investors in the

amount of £17,607,000 pursuant to section 206 of the Act.

3.
DEFINITIONS

3.1.
The definitions below are used in this Final Notice.

‘the Act’ means the Financial Services and Markets Act 2000

‘the Authority’ means the corporate entity previously known as the Financial

Services Authority and renamed on 1 April 2013 as the Financial Conduct

‘Aviva Group’ means the group of entities owned by Aviva plc

‘Aviva Investors’ or ‘the Firm’ means Aviva Investors Global Services Limited

‘Cherry Picking’ refers to the practice of delaying the allocation of trades in order

to assess their performance before allocating trades to particular funds

‘COBS’ means the Conduct of Business Sourcebook

‘Conflict Log’ means the log that Aviva Investors kept of identified conflicts of

interest and the measures taken to mitigate them

‘DEPP’ means the part of the Authority’s Handbook entitled ‘Decisions Procedure

‘Hedge Funds’ means Aviva Investors’ funds that employed trading strategies that

took long and short positions with the aim of maximising returns

‘Impacted Funds’ means the Long-Only Funds that were compensated

‘Long-Only Funds’ means funds managed with the strategy of only taking long,

rather than short, positions

‘MI’ refers to Management Information

‘Principle’ or ‘Principles’ means the Authority’s Principles for Businesses

‘Relevant Period’ means 20 August 2005 to 30 June 2013

‘Side-by-Side management’ is the practice of having the same individuals manage

funds with different strategies and investment structures

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‘Side-by-Side Traders’ means Traders who managed funds on a Side-by-Side

basis

‘Traders’ means fund managers and other employees of Aviva Investors, who had

authority to decide on trades, place orders, execute, book and allocate trades on

behalf of funds managed by Aviva Investors

‘the Tribunal’ means the Upper Tribunal (Tax and Chancery Chamber)

4.
FACTS AND MATTERS

4.1.
Aviva Investors is an asset management company and part of the Aviva Group. It

has global assets under management of £234 billion in fixed income, equities,

real estate and multi-asset solutions. Of this, approximately 80% are managed

for Aviva Group customers, which in turn provide investments, insurance and

pensions to their retail customers. Each of Aviva Investors’ customers has a

specific investment objective and the Firm follows investment strategies designed

to meet these objectives.

Side-by-Side fund management

4.2.
During
the
Relevant
Period,
Aviva
Investors
employed
a
Side-by-Side

management strategy on certain desks within its Fixed Income area whereby

funds that paid differing levels of performance fees were managed on a Side-by-

Side basis.

4.3.
For example, a Hedge Fund, which paid a 20% outperformance fee, was managed

alongside Long-Only Funds that paid lower or no performance fees. A significant

proportion (50-60%) of these performance fees were paid to Side-by-Side

Traders in Aviva Investors’ Fixed Income area based on their role and contribution

to the Hedge Fund’s performance.

4.4.
This type of incentive structure created conflicts of interest as these Traders had

an incentive to favour one fund over another. This risk was particularly acute on

desks where funds traded in the same instruments, creating the opportunity for

misconduct, including Cherry Picking.

4.5.
The conflicts of interest and risks inherent in the Side-by-Side management of

funds require robust risk management systems and controls. Aviva Investors

identified this and recorded in its Conflict Log that in its Fixed Income business ‘…

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fund managers manage both long only and hedge funds. Remuneration on hedge

funds is likely to be higher and it is possible this will incentivise to give priority

over long funds.’ Despite this, throughout the Relevant Period there were

significant weaknesses in Aviva Investors’ risk management framework and the

systems and controls that operated in the Fixed Income area. This meant that it

failed to adequately manage the inherent conflict in its Side-by-Side management

arrangements and the risk Side-by-Side Traders would put their interests ahead

of customers’ interests.

4.6.
Aviva Investors’ various desks would decide on the overall trading strategy for the

funds they managed, including Hedge Funds and Long-Only Funds. Individual

Traders then implemented these strategies, but had discretion to pick specific

instruments within the strategy as long as those trades complied with the

investment mandates of the specific fund for which they were trading. Aviva

Investors had a system in place to check compliance with investment mandates;

however, this was not able to identify whether specific instruments had been

cherry picked.

4.7.
Aviva Investors’ policy required trades to be allocated to specific funds at the time

of, or immediately after, the order. However weaknesses in Aviva Investors’

systems and processes (see paragraphs 4.16 - 4.17 below) meant Traders could

delay recording the allocation of executed trades for several hours. By delaying

the allocation of trades, Side-by-Side Traders could assess a trade’s performance

during the course of the day and, when it was recorded, allocate trades that

benefitted from favourable intraday price movements to one fund and trades that

did not to other funds. For example, a Side-by-Side Trader could buy an

instrument at 9 am intending to allocate it to the Hedge Fund, but by 3 pm,

seeing that the instrument had fallen in value, allocate it to a Long-Only fund.

This is commonly known as Cherry Picking.

4.8.
By Cherry Picking trades, Side-by-Side Traders could enhance the performance of

Hedge Funds so that they benefitted from favourable intraday price movements

and avoided the consequences of adverse price movements. The effect of this

could be increased performance fees paid to Aviva Investors and thus increased

incentive payments paid to Side-by-Side Traders within Fixed Income. During the

Relevant Period, £27.4m was paid to certain traders as a result of Hedge Fund

performance.

4.9.
In May 2013, Aviva Investors found evidence to suggest that two former Fixed

Income Traders had been delaying the booking of, and improperly allocating,

trades. Aviva Investors sought to ensure that none of the funds it managed were

adversely impacted by this conduct and compensation of £132,000,000 was paid

to eight Impacted Funds.

Weaknesses in Aviva Investors’ first line of defence – systems and

controls

4.10. Aviva Investors operated a ‘three lines of defence’ model of risk management.

The first line of defence, the business, was meant to have primary responsibility

for the identification and management of risks.

4.11. On certain desks within Aviva Investors’ Fixed Income business there was no

segregation of investment decision-making, order placement, trade execution,

allocation and booking of trades during the Relevant Period. Instead, Traders on

these desks were responsible for all of the above. Where firms do not segregate

dealing, it is essential that they implement adequate systems and controls to

ensure that a compliant order process is followed. This was particularly important

where employing a strategy of Side-by-Side management. Despite this, there

were significant deficiencies in:

a) Responsibilities;

b) Policies and procedures;

c) Systems;

d) Management Information; and

e) Culture.

4.12. The combination of these deficiencies meant that the first line of defence, which

had primary responsibility for the identification and management of risks, failed to

adequately manage the risks associated with Side-by-Side management.

a) Responsibilities

4.13. During the Relevant Period, the division of risk management responsibilities

between the first and second line of defence lacked clarity. For part of the

Relevant Period, Compliance sat within the first line of defence, thereby

combining what are normally separate lines of risk management.

4.14. In addition, the accountability and ownership of oversight and monitoring over

Fixed Income was not clearly defined. There were a number of structural and risk

management changes at Aviva Investors during the Relevant Period, which meant

that responsibilities, reporting lines and personnel frequently changed. This

resulted in a lack of clarity within Fixed Income as to who had responsibility for

oversight of the area. Further, the roles and responsibilities of those with direct-

line management responsibility of Fixed Income Traders were not documented.

This resulted in a lack of accountability and oversight on individual desks, with the

consequence that oversight of Fixed Income Traders was informal and not

recorded.

b) Policies and procedures

4.15. Despite acknowledging the inherent conflicts of interest in the Side-by-Side

management of funds in its Conflict Log, Aviva Investors failed to implement

controls within the first line of defence to specifically manage the risks associated

with this strategy. There were a number of general policies relating to order

placement, execution, allocation and booking of trades; none of these addressed

the specific risks associated with the Side-by-Side management of funds.

c) Systems

4.16. Trades for the Long-Only Funds were processed through an order management

system, while details of executed Hedge Fund trades were emailed to the middle

office. Neither process required Traders to record the intended allocation of a

trade on the system or with Aviva Investors’ middle office prior to booking the

trade. This meant that there was no contemporaneous record of the intended

allocation when an order was placed. Where funds were managed on a Side-by-

Side basis this increased the risk of Cherry Picking and that it would go

undetected.

4.17. In addition, both systems were potentially open to abuse in that Traders, when

booking trades on the system or with Aviva Investors’ middle office, could

misreport the time they had been executed. Because data relating to when trades

were executed was not readily available, Aviva Investors’ ability to monitor

compliance with the requirement for prompt recording and allocation of trades

was impaired. Delays would only be apparent should trades not be executed and

allocated in the same day; this meant that exception reports could only be

produced to show trades booked across days and widespread delays in the

booking and allocation of trades intraday could go undetected.

d) Management Information

4.18. There were significant weaknesses in the MI provided to, and produced by, the

business. There was little MI to enable line managers to gain comfort that Traders

were following processes and that the controls that existed were operating

effectively. MI that was produced was not timely, which meant that it was of

limited utility in managing risk or checking compliance with process.

4.19. Further, MI about funds tended to focus on financial performance, which, in turn,

meant that there was limited MI on trading in funds that customers intended to

be passively managed, including the Impacted Funds. Certain quarterly reports or

turnover reports were not provided for these funds and positions were only

reported on an exception basis when a change in maturity profile occurred. As

such, there was limited oversight of trading within these funds by the first line of

defence.

4.20. The culture within the Fixed Income business was heavily focused on

performance. Risk and controls were wrongly perceived by some as hindering

performance. Risk awareness or compliance with regulatory obligations was not

adequately promoted, which meant that compliance training was not viewed as a

mandatory obligation.

4.21. Performance management also often overlooked the importance of risk and

control. Promotions tended to be based on reported investment performance and

insufficient consideration was given to wider risk management skills.

4.22. This culture contributed to the poor control environment. Parts of the business

were naïve, relying on a culture of assumed trust rather than control. This meant

that they were slow to remedy control weaknesses identified in audit or

compliance reports, often relying on strategic change projects to remedy

weaknesses.

Weaknesses in Aviva Investors’ second line of defence - monitoring and

oversight

4.23. The second line of defence at Aviva Investors was meant to act as a safety net to

catch issues that were not prevented or detected by the first line policies,

systems and controls. However, during the Relevant Period there were significant

weaknesses in Aviva Investors’ second line of defence which meant that it did not

operate effectively as an independent check on the business.

a) Inadequate compliance monitoring

4.24. The significant weaknesses in the first line of defence’s systems and controls

impacted the second line’s ability to act as an independent check on the business.

Trade compliance monitoring, such as monitoring the timely recording and fair

allocation of trades, was largely manual, as a consequence of which, sample sizes

were often limited. This was not adequate for the Fixed Income area which

executed a large volume of high value trades on a daily basis. Further, monitoring

of the Side-by-Side management of Hedge Funds and other funds was

complicated because trading data was held on different systems.

4.25. In addition, the only specific control over the Side-by-Side management of funds

listed on Aviva Investors’ Conflict Log, enhanced compliance monitoring, rarely

took place.

4.26. The weaknesses in compliance monitoring were compounded by the lack of

investment risk monitoring, which included assessing fund activities against

benchmarks. Where certain funds had no benchmarks against which to assess

performance, Aviva Investors excluded them from investment risk monitoring.

This decision, when combined with weaknesses in compliance monitoring, meant

that there was little, if any, monitoring of such funds by the second line of

defence.

b) Inadequate compliance resource and capability

4.27. Compliance was under-resourced and lacked the necessary skills and experience

to challenge business practices. This, in turn, meant that Compliance lacked the

credibility and respect within Aviva Investors to robustly challenge decisions made

by the business or engender a risk-aware culture.

Weaknesses in Aviva Investors’ third line of defence – independent

assurance

4.28. Internal Audit, as part of the third line of defence within Aviva Investors, was

meant to provide independent assurance on the overall governance of risk within

the Firm. However, weaknesses in Internal Audit’s approach to closing audit

issues meant that it failed to provide adequate assurance during the Relevant

Period.

4.29. Aviva Investors’ Internal Audit conducted at least four audits, which raised issues

directly relevant to the significant control weaknesses highlighted in this Notice.

Despite this, flaws in the approach to closing audit issues were present until 2011

and included:

a) an unclear process in relation to decisions by the business to ‘risk accept’

control weaknesses;

b) a high dependency on strategic change projects to address issues without

adequate consideration of whether the projects would adequately address

the issue or operational testing to support closure of the issue; and

c) a lack of and/or gaps in testing of the closure of audit issues, which meant

that, on occasion, issues were closed with no independent assessment of

whether controls would cover off the specific risk that had been identified.

4.30. This meant that significant control weaknesses highlighted in reports were not

addressed in a timely or effective manner. Aviva Investors’ trading business

therefore continued with inadequate risk management systems meaning that poor

trading practices remained unchallenged.

Remediation of weaknesses

4.31. The Authority recognises that, by the end of June 2013, Aviva Investors had

taken steps to address the deficiencies in its risk management framework. These

steps included: ending the Side-by-Side management of Hedge Funds and Long-

Only Funds on the same desk, introducing segregated dealing on all desks within

Fixed Income, instituting a system that enforced a compliant trade process,

refocusing and increasing compliance resource and increasing the level of

management scrutiny over the Fixed Income business.

5.
FAILINGS

5.1.
Based on the facts and matters described above, the Authority concludes that

Aviva Investors has breached Principle 3 and 8. The regulatory provisions

relevant to the Notice are referred to in Annex A.

5.2.
Aviva Investors breached Principle 3 by failing to organise its affairs responsibly

and effectively with adequate risk management systems. This included a failure to

have effective controls in place over the actions of Traders within its Fixed Income

business who were involved in the Side-by-Side management of funds and to

undertake adequate compliance monitoring, as well as a failure to effectively

close audit issues.

5.3.
Aviva Investors breached Principle 8 by failing to manage fairly the inherent

conflicts of interest between itself and its customers, and customers and other

clients, that arose from managing funds that paid differing levels of performance

fees on a Side-by-Side basis. In particular, Aviva Investors failed to implement

any specific controls within the first line of defence to manage these conflicts.

Further, enhanced compliance monitoring by the second line of defence often did

not take place.

5.4.
In addition, Aviva Investors breached COBS 11.3.2 and COBS 11.5.2 by failing to

ensure that orders executed on behalf of clients were promptly and accurately

recorded and allocated.

5.5.
Having regard to the issues above, the Authority considers it appropriate and

proportionate in all the circumstances to take disciplinary action against Aviva

Investors for its breaches of the Principles and associated Rules during the

Relevant Period.

6.
SANCTION

6.1.
The Authority has considered the disciplinary and other options available to it and

has concluded that a financial penalty is the appropriate sanction in the

circumstances of this particular case.

6.2.
The Authority’s policy on the imposition of financial penalties is set out in Chapter

6 of DEPP. In determining the financial penalty, the Authority has had regard to

this guidance.

6.3.
Aviva Investors’ failings occurred before and after 6 March 2010. As set out in

paragraph 2.7 of the Authority’s Policy Statement 10/4, when calculating a

financial penalty where the misconduct occurred under both penalty regimes, the

Authority will consider both the penalty regime that was effective before 6 March

2010 (the “old penalty regime”) and the penalty regime that was effective after 6

March 2010 (the “current penalty regime”).

6.4.
The Authority has:

a) calculated the financial penalty for Aviva Investors’ failings from 20 August

2005 to 5 March 2010 by applying the old penalty regime to that

misconduct;

b) calculated the financial penalty for Aviva Investors’ misconduct from 6

March 2010 to 30 June 2013 by applying the current penalty regime to

that misconduct; and

c) added the penalties calculated under both regimes together to produce the

total penalty.

Financial penalty calculation under the old regime

6.5.
All references to DEPP under this heading are to the version of DEPP in force prior

to 6 March 2010.

6.6.
In determining what financial penalty is appropriate and proportionate to the

breaches, the Authority is required to consider all the relevant circumstances of

the case. DEPP 6.5.2G identifies a non-exhaustive list of factors that may be

relevant in determining the level of financial penalty. The Authority considers that

the following factors are particularly relevant in this case.

Deterrence (DEPP 6.5.2G (1))

6.7.
The principal purpose of a financial penalty is to promote high standards of

regulatory conduct by deterring firms that have breached regulatory requirements

from committing further breaches, helping to deter other firms from committing

contraventions and demonstrating generally to firms the benefits of compliant

behaviour. The Authority considers that the need for deterrence means that a

significant fine on Aviva Investors is appropriate.

Nature, seriousness and impact of the breach (DEPP 6.5.2G (2))

6.8.
The Authority has had regard to the seriousness of the breaches, including the

nature of the requirements breached and the number and duration of the

breaches. For the reasons set out in paragraph 2.13(a) to (i) above, the Authority

considers that Aviva Investors’ breaches are of a serious nature.

Extent to which the failings were deliberate or reckless (DEPP 6.5.2G (3))

6.9.
The Authority does not consider that the Firm’s failings were deliberate or

reckless.

The size, financial resources and other circumstances of the Firm (DEPP 6.5.2G

(5))

6.10. The Authority has considered Aviva Investors’ size and its financial resources.

There is no evidence to suggest that it is unable to pay a significant financial

penalty.

The amount of benefit gained or loss avoided (DEPP 6.5.2G (6))

6.11. Aviva Investors profited as a result of its failings, in the form of enhanced

performance fees. However, the Authority is satisfied that the adversely Impacted

Funds were compensated and the Firm has foregone any financial benefit.

Conduct following the breach (DEPP 6.5.2G (8))

6.12. Aviva Investors promptly brought the breaches to the attention of the Authority

and has worked in an open and cooperative manner with the Authority, far above

and beyond the level expected.

6.13. As outlined in paragraph 6.31a, prompt and comprehensive action was taken to

compensate any funds which may have been adversely impacted as a result of

the breaches.

6.14. Since identifying the systems and controls failings, Aviva Investors has committed

significant resources to remediating the weaknesses in its systems and controls

and restructured its business to reduce risks associated with conflicts of interest.

Disciplinary record and compliance history (DEPP 6.5.2G (9))

6.15. The Authority has taken into account the fact that Aviva Investors has not been

the subject of previous disciplinary action.

Other actions taken by the authority (DEPP 6.5.2G (10))

6.16. In determining whether and what financial penalty to impose on Aviva Investors,

the Authority has taken into account action taken by the Authority in relation to

other authorised persons for comparable behaviour.

Conclusions in relation to the old penalty regime

6.17. Taking the above factors into consideration, the Authority imposes a financial

penalty under the old penalty regime of £12,000,000.

6.18. The Authority and Aviva Investors reached agreement at Stage 1 and so a 30%

discount applies. Therefore, the penalty for the misconduct under the old penalty

regime is £8,400,000.

Financial penalty calculation under the new regime

6.19. All references to DEPP under this heading are to the version of DEPP implemented

on 6 March 2010 and currently in force.

6.20. Under the current penalty regime, the Authority applies the five-step framework

outlined in DEPP 6.5A to determine the appropriate level of financial penalty.

Step 1: disgorgement

6.21. Pursuant to DEPP 6.5A.1G, at Step 1, the Authority first deprives the firm of the

financial benefit derived directly from the breach where it can be quantified

practicably. Given that substantial compensation was paid to Aviva Investors’

customers, the Authority has not identified any financial benefit that Aviva

Investors derived directly from its failings.

6.22. Step 1 is therefore £0.

Step 2: the seriousness of the breach

6.23. Pursuant to DEPP 6.5A.2G, at Step 2 the Authority determines a figure that

reflects the seriousness of the breach. Where the amount of revenue generated

by a firm from a particular product line or business area is indicative of the harm

or potential harm that its breach may cause, that figure will be based on a

percentage of the firm’s revenue from the relevant products or business area.

6.24. The Authority considers that in this case revenue is indicative of the harm or

potential harm caused by its failings. The Authority considers Aviva Investors’

relevant revenue for this period to be £146,143,838.

6.25. In deciding the percentage of the revenue that forms the basis of the Step 2

figure, the Authority considers the seriousness of the breach and chooses a

percentage between 0% and 20%. This range is divided into five fixed levels

which represent, on a sliding scale, the seriousness of the failings; the more

serious the breaches, the higher the level. For penalties imposed on firms there

are the following five levels:

Level 1 – 0%

Level 2 – 5%

Level 3 – 10%

Level 5 – 20%

6.26. In assessing the seriousness level, the Authority takes into account various

factors that reflect the impact and nature of the breach and considers whether the

firm committed the breach deliberately or recklessly. DEPP 6.5A.2G (11) lists

factors likely to be considered Level 4 or Level 5. Of these, the Authority

considers the following to be relevant:

a) Serious/systemic weakness: Aviva Investors’ failings revealed systemic

weaknesses in its management systems and controls in an area of its

business;

b) Risk of loss to clients: the failings caused an unacceptable risk of

significant loss to Long-Only Funds. A risk which Aviva Investors found had

crystallised and may have caused detriment to eight Impacted Funds.

6.27. DEPP 6.5A.2G (12) lists factors likely to be considered ‘level 1, 2 or 3 factors’. Of

these, the Authority considers that the breach had no effect on the orderliness of,

or confidence in, financial markets (in that there is no evidence to suggest that

there was any manipulation or wider impact on the markets) and that they were

committed negligently rather than intentionally or recklessly.

6.28. Taking these factors into account, the Authority considers the seriousness of the

breaches to be Level 4.

6.29. Step 2 is therefore 15% of £146,143,838 which equals £21,921,575.

Step 3: mitigating and aggravating factors

6.30. Pursuant to DEPP 6.5A.3G, at Step 3 the Authority may increase or decrease the

amount of the financial penalty arrived at after Step 2 but not including any

amount to be disgorged as set out in Step 1 to take into account factors which

aggravate or mitigate the breach.

6.31. The Authority considers that the following factors mitigate the breach.

a) The Authority recognises that the Firm commenced its compensation

exercise promptly, devoted significant resources to it and, in calculating

redress, adopted factual assumptions that ensured that appropriate

compensation was made.

b) The Authority expects regulated firms and individuals to work with the

Authority in an open and cooperative manner at all times. The Authority

considers that Aviva Investors’ cooperation was exceptional from the point

it identified and self-reported the failings and throughout the investigation.

Senior management were fully engaged from the start of the investigation,

seeking to assist where ever possible, saving the Authority significant time

and resource.

6.32. Having taken into account these factors, the Authority has concluded that the

Step 2 figure should be decreased by 40%.

6.33. Step 3 is therefore £21,921,576 less 40% equals £13,152,945.

Step 4: adjustment for deterrence

6.34. Pursuant to DEPP 6.5A.4G, if the Authority considers the figure arrived at after

Step 3 insufficient to deter the firm that committed the breach, or others, from

committing further or similar breaches, then the Authority may increase the

penalty.

6.35. The Authority considers the Step 3 figure of £13,152,945 a sufficient deterrent to

Aviva Investors and others and has not increased the penalty at Step 4.

6.36. Step 4 is therefore £13,152,945.

Step 5: settlement discount

6.37. Pursuant to DEPP 6.5A.5G, if the Authority and the firm on whom a penalty is to

be imposed agree to the amount of the financial penalty and other terms, DEPP

6.7G provides that the amount of the financial penalty, which might otherwise

have been payable, will be reduced to reflect the stage at which the Authority and

the firm reached agreement.

6.38. The Authority and Aviva Investors reached agreement at Stage 1 and so a 30%

discount applies to the Step 4 figure.

6.39. Step 5 is therefore £9,207,062.

Conclusion as to the financial penalty

6.40. The Authority imposes a total penalty under both the old and new penalty

regimes of £17,607,000 (pre-discount £25,152,900).

7.
PROCEDURAL MATTERS

Decision maker

7.1.
The decision which gave rise to the obligation to give this Notice was made by the

Settlement Decision Makers.

7.2.
This Final Notice is given under, and in accordance with, section 390 of the Act.

Manner of and time for payment

7.3.
The financial penalty must be paid in full by Aviva Investors to the Authority by

no later than 10 March 2015, 14 days from the date of the Final Notice.

If the financial penalty is not paid

7.4.
If all or any of the financial penalty is outstanding on 11 March 2015, the

Authority may recover the outstanding amount as a debt owed by Aviva Investors

and due to the Authority.

7.5.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of

information about the matter to which this notice relates. Under those provisions,

the Authority must publish such information about the matter to which this notice

relates as the Authority considers appropriate. The information may be published

in such manner as the Authority considers appropriate. However, the Authority

may not publish information if such publication would, in the opinion of the

Authority, be unfair to you or prejudicial to the interests of consumers or

detrimental to the stability of the UK financial system.

Authority contacts

7.6.
For more information concerning this matter generally, contact Laura Dawes

(direct line: 020 7066 1994) of the Enforcement and Market Oversight Division of

the Authority.

Guy Wilkes

Financial Conduct Authority, Enforcement and Market Oversight Division

ANNEX A

RELEVANT STATUTORY AND REGULATORY PROVISIONS

1
RELEVANT STATUTORY PROVISIONS

1.1
The Authority’s operational objectives are set out in section 1B (3) of the Act and

include the objectives of securing an appropriate degree of protection for

consumers; and protecting and enhancing the integrity of the UK financial system.

1.2
Section 206(1) of the Act provides:

“If the [Authority] considers that an authorised person has contravened a relevant

requirement imposed on the person, it may impose on him a penalty, in respect of

the contravention, of such amount as it considers appropriate."

2
RELEVANT REGULATORY PROVISIONS

Principles for Businesses (“Principles”)

2.1
The Principles are a general statement of the fundamental obligations of firms

under the regulatory system and are set out in the Authority’s Handbook. They

derive their authority from the Authority’s rule-making powers set out in the Act.

The relevant Principles are as follows.

2.2
Principle 3 (Management and control) states that:

‘A firm must take reasonable care to organise and control its affairs responsibly

and effectively, with adequate risk management systems.’

2.3
Principle 8 (Conflicts of interest) states that:

‘A firm must manage conflicts of interest fairly, both between itself and its

customers and between a customer and another client.’

Conduct of Business (“COBS”)

2.4
COBS is the part of the Authority’s Handbook which sets out the Authority’s

requirements in relation to the conduct of designated investment business and

connected activities.

2.5
COBS 11.3.2 states that:

‘A firm must satisfy the following conditions when carrying out client orders:

(1) it must ensure that orders executed on behalf of clients are promptly and

accurately recorded and allocated;

(2) it must carry out otherwise comparable orders sequentially and promptly

unless the characteristics of the order or prevailing market conditions make this

impracticable, or the interests of the client require otherwise; and

(3) it must inform a retail client about any material difficulty relevant to the

proper carrying out of orders promptly upon becoming aware of the difficulty.’

2.6
COBS 11.5.2 states that:

‘Immediately after executing a client order, or, in the case of investment firms that

transmit orders to another person for execution, immediately after receiving

confirmation that an order has been executed, investment firms shall record the

following details of the transaction in question:

(1) the name or other designation of the client;

(2) the details specified in points 2, 3, 4, 6, and in points 16 to 21, of Table 1 of

Annex I;

(3) the total price, being the product of the unit price and the quantity;

(4) the nature of the transaction if other than buy or sell;

(5) the natural person who executed the transaction or who is responsible for the

execution.’

Decision Procedure and Penalties Manual (“DEPP”)

2.7
Chapter 6 of DEPP, which forms part of the Authority’s Handbook, sets out the

Authority’s statement of policy with respect to the imposition and amount of

financial penalties under the Act.

The Enforcement Guide

2.8
The Enforcement Guide sets out the Authority’s approach to exercising its main

enforcement powers under the Act.

2.9
Chapter 7 of the Enforcement Guide sets out the Authority’s approach to exercising

its power to impose a financial penalty.