Transition Management (TM) is used by asset owners, like pension funds, to help move investment portfolios between different managers or markets while managing market risk and reducing transaction costs. The process usually involves the TM provider using hedging instruments to minimise exposure to market movements before selling the existing portfolio and buying a replacement portfolio through programme trades.

The FCA has now published Thematic Review 14/1: Transition management review (TR14/1). TR14/1 sets out the FCA’s findings following a thematic review which examined the level of oversight, governance and controls within TM providers.

In TR14/1, the FCA sets out its findings under the following headings:

  • clarity of role. The FCA believes that this is an area where TM providers can improve. For example, the FCA found that several firms were found to be issuing materials to clients stating that they would act as a ‘fiduciary’ during the transition process, even though the standard legal agreement governing transition arrangements at those firms had expressly excluded the existence of a fiduciary relationship;
  • TM providers’ oversight and governance. The FCA found that all TM providers reviewed were aware of the conduct risks that might crystallise through insufficient oversight. However, the relatively small scale of TM at many firms means that it is easy for senior managers and control functions to underplay oversight of TM in the belief that it is low-risk, quasi-project management business; and
  • accountability. TM providers seek to demonstrate their level of control over risks by providing disclosures, management information and data during the course of a given TM mandate. Pre and post-implementation reports are an important element for the provision of transparency for TM clients. The FCA, however, found that such reports vary in the level of detail and clarity provided.

At the end of TR14/1, the FCA states that in the normal course of its supervisory work it will focus on:

  • management of conflicts of interest. The FCA will continue to pay close attention to how TM providers manage and mitigate conflicts;
  • oversight, governance and controls at TM providers. The complexity of TM services requires the senior management of a TM provider to ensure that there are appropriate controls and oversight;
  • transparency and communication. The FCA’s supervisory work will include requiring firms to demonstrate appropriate communications and effective performance reporting; and
  • client understanding. The FCA will look to see if firms better understand the information requirements of their clients and expect clients also to consider what assistance, education or guidance might best prepare them to carry out their obligations to underlying investors.

View TR14/1: Transition management review, 10 February 2014

View The Financial Conduct Authority publishes its findings on transition management, 10 February 2014

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