More than three-quarters of fiduciary managers endured control failures in 2020, despite “widespread claims” to the contrary, according to a new report from IC Select.
Seventy-seven per cent of these companies saw increased instances of operational controls and processes going wrong at the start of the pandemic, with the total number of failures up by 174 per cent when compared with 2019’s figure.
IC Select surveyed 15 fiduciary managers and looked at “every aspect” of their operational capabilities, from the way it executes securities trades on behalf of a scheme to its handling of data, systems integration and approach to managing risk.
A ‘control failure’ was defined as an instance where a statement of operational control report contained an exception or qualification that described a case of a process going wrong, such as temporary IT outages or delays processing a transaction.
We believe that fiduciary managers should have been more transparent about the operational challenges of rapidly moving to remote working at the start of Covid-19
Peter Dorward, IC Select
IC Select’s report found that 64 per cent of fiduciary managers failed between 2 per cent and 5 per cent of the tests carried out in the SOC report, while 29 per cent failed fewer than 2 per cent, and just 7 per cent failed more than 5 per cent of tests.
Additionally, it found that half the qualifications and exceptions arose due to IT access and control issues.
Andy Clarkson, operations specialist at IC Select, told Pensions Expert: “Respective examples in these categories could be failure or delay to removing, restricting or amending the systems access of an employee who has left the firm or changed roles, or failure to evidence completion or sign-off of process steps — such as sending a daily trade log to a client.
“In terms of severity, we’re pleased to report that in management responses there were no actual severe consequences highlighted. However, the potential severity of such exceptions is high,” he explained.
“Whether accidental or malicious, inappropriate systems access has potential for financial loss and data breach, whereas insufficient oversight in transactional process can result in incorrect transactions that can distort client valuations and cost the manager significant sums to rectify.
“When it comes to lessons learnt, we may find that they already have been. The pandemic and the move to homeworking has been the most comprehensive business continuity test ever conducted. If fiduciary managers look on last year’s SOC reports as a post-recovery damage assessment, and permanently repair that damage with updated control frameworks, then that can only be a good thing.”
Transparency is an issue
Elsewhere, the report found that 36 per cent of fiduciary managers had developed a “proprietary execution framework” for carrying out trades in underlying assets, which can reduce transaction costs and increase transparency.
A fifth have in-house specialist transition teams and provide transition services to third-party fund managers, and IC Select said that these companies tend to have “better resources and expertise for carrying out transactions”, as well as being “able to manage ‘out-of-market’ risk more effectively”.
However, less than a third (29 per cent) of managers have a “robust and prominent” risk management framework, while there is a lack of transparency “around the disclosure of operational losses and payments made in compensation”, with only 31 per cent providing those figures.
“Persistent errors, whether they be in trading, settlement or corporate actions, erode an organisation’s reputation in the market. Disclosing compensation increases confidence in a manager and facilitates a dialogue that improves processes,” the report explained.
“Two-thirds of managers will still not disclose this information. The primary reason they give is that the information is confidential.
“However, a growing number now feel that this information is pertinent to their clients and are happy to disclose it. Given the increased emphasis on transparency, clients should expect their fiduciary manager to provide it.”
It added that trustees should be “concerned” where their fiduciary manager refuses to disclose this information, as it is possible that their reluctance stems from “particularly high” compensation payments that could suggest “failings within the organisation”.
Big schemes turn to fiduciary managers during pandemic
The average size of a pension scheme taking on a fiduciary manager rose by around 80 per cent during the Covid-19 pandemic, suggesting the flexibility afforded by the model was particularly attractive in turbulent market conditions, according to research from IC Select.
While 80 per cent of managers who disclosed this information either made small compensation payments or made none at all, 20 per cent of managers paid compensation of more than £20 per £1m of assets under management.
Peter Dorward, managing director at IC Select, said: “Broadly, our survey found that the operational capabilities of fiduciary managers are in good shape, with a few specific exceptions.
“We think that the sharp increase in specific control failures in 2020 is understandable given the disruptions caused by the pandemic. However, we believe that fiduciary managers should have been more transparent about the operational challenges of rapidly moving to remote working at the start of Covid-19.”
