FCA fines Henderson £1.9m over ‘closet trackers’

Anna Federova reports...

The Financial Conduct Authority (FCA) has fined Henderson Investment Funds Limited (HIFL) nearly £1.9m for overcharging retail investors in its Henderson Japan Enhanced Equity and the Henderson North American Enhanced Equity funds.

The total fine of £1,867,900 was issued for failing to treat fairly some 4,500 retail customers invested in the two funds, which breached Principle 6 of the FCA’s Principles for Business.

The fine relates to a decision taken by Henderson Global Investors, the investment manager appointed to run the funds, to reduce the level of active management in its Japan and North American vehicles.

The regulator said “the subsequent treatment of retail investors in these funds was substantially different from its treatment of the institutional investors in the same funds”.

Nearly all the institutional investors in the two vehicles were informed of the change and the firm offered to run the two funds for those investors without charge, according to the FCA.

The retail investors, however, were not told of the changes to the strategy, with no changes made to the prospectus. These retail investors were charged the same level of fees “for nearly five years” as they paid originally, even though they were no longer receiving the same level of active management.

Mark Steward, executive director of enforcement and market oversight at the FCA, said: “The FCA requires firms to treat all its customers fairly, not just some customers. In this case, retail investors paid fees for active investment management they did not receive.

“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.

“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.”

According to the FCA, HIFL charged investors £1,784,465.32 more than if they had invested in a passive fund. HIFL has now disclosed the matter to all affected customers and compensated them for the additional costs they incurred.

The FCA said the incident revealed “serious weaknesses” in HIFL’s oversight and governance of the particular area of the business affected. However, since the company agreed to resolve the matter the FCA gave a 30% discount on the fine, which would have been £2.7m otherwise.

In total, 4,713 direct retail investors, 75 intermediary companies with underlying non-retail investors and two institutional investors in the funds were affected by this issue.