Regulators warns UK funds over US abuses

Callum McCarthy, chairman of the Financial Services Authority, has warned chief executives of fund managers they will be held personally responsible for investigating whether abuses in the US mutual fund industry have spread to the UK. Mr McCarthy yesterday met 25 chief executives in a sign of the market regulator's concern over the so-called market timing scandal that has rocked confidence in the US mutual fund industry.
"Although we are not driven by regulatory developments in the US, we are bound to ask whether there is scope for consumers to suffer detriment in the UK as a result of similar practices," he said.
He added: "We cannot conclude, on the basis of what we have discovered so far, that abuses are not a feature of the UK system."
Under the market timing scandal, some US companies allowed traders to buy into mutual funds at stale prices and trade excessively. Excessive trading can dilute returns for other investors as it forces funds to hold higher cash reserves and sell holdings at inconvenient times.
Mr McCarthy said he had explained that he expected the chief executives "to take personal and direct responsibility for ensuring there is a proper review of past trading practices". They also must keep non-executive directors and the FSA informed of the progress of reviews.
"I also reminded them that late trading, market timing and shortcomings in systems and controls could be grounds for enforcement action," he said.
Mr McCarthy said the FSA would be undertaking –further data analysis and visits to firms to assess whether and to what extent market timing and late trading took place.
Fund managers said Mr McCarthy had indicated that they should complete their investigations by Christmas and that they should look at activities over at least the past year.
One chief executive said: "We were told that we have to treat this seriously and that we should give full co-operation. It was kind of refreshing in a way. It was very much `let's work on this together'."