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Is the FMA looking in right places?

Ever since news broke that the FMA was investigating Milford Asset Management over market manipulation allegations I’ve said there can’t be smoke without fire.

Friday, June 19th 2015, 9:29AM 4 Comments

by Philip Macalister

Turns out that was right. There was a fire and it burnt up $1.5 million of Milford money and no doubt a hell of a lot more when lawyers’ fees and management time are added to the bill.

Mind you that is small change when you see that Milford has pocketed $31.90 million in performance fees over the past two years.

Milford have agreed to a settlement with the FMA, and accepted its systems weren’t up to scratch. The FMA, though, is still considering action against Milford’s “trader” at the centre of the manipulation claims. As an aside the odd thing here is that Milford have never labeled any staff as “traders”.   Portfolio managers yes. Traders no.

I can’t help thinking that the FMA has dropped the ball on this one. It seems totally fixated on other areas of the market, such as AFA monitoring, where it has gathered no scalps. (I’ll leave the Ross ponzi scheme out of this programme).

Or put it this way it seems to make much more noise about parts of the market other than teh big-end of town.

Yet, arguably, one of the much bigger risks in the market is what trading organisations, like sharebrokers and fund managers, get up to.

Milford is one example. Another recent one was Craigs Investment Partners. Craigs got whacked $30,000 and censured by the NZ Markets Disciplinary Tribunal for not recording retail client orders correctly in the NZX trading system for two years.

Surely the FMA should be spending far more time on monitoring these big organisations that play significant roles in the market place, rather than the little guys.

One of questions I wanted to pose to the FMA yesterday was what it is now doing in the area of monitoring trading firms. Unfortunately the conference call system didn’t work for me and my request wasn’t added to the message queue.

However, FMA chief executive Rob Everett did make the comment that he would not discuss any other conversations going on in the market. Reading between the lines there probably are some going on.

My other question (each journalist was only allowed two questions) was about what Milford’s actions meant for investors.

Thankfully Rob Stock from the Sunday Star Times took this line.

The answer is the FMA doesn’t know and had decided not to find out.

Rather it was more interested in what market manipulation meant for “impact of confidence in (New Zealand’s capital) markets.”

When it comes to Milford’s actions in this case one can only marvel at the irony of a firm that holds itself out to be whiter-than-white, is actually a bit grey.

The truth is it’s a company hell-bent on growth ($3 billion in FUM) and its controls and systems haven’t kept up with this rapid growth.

Milford executive director Brian Gaynor regularly castigates other firms for their less-than-desirable behavior.  The FMA was clear that Milford’s systems and processes weren’t up to scratch. Milford acknowledged this and was already working to fix them.

I hope Mr Gaynor has a mirror. We all look forward to reading his article in the NZ Herald on Saturday.

Earlier this year I wrote that this “incident” throws the spotlight on the major Achilles heel of funds management.

It’s the constant search to be a top performer against your peers and it is brought about through handsome incentives to people like portfolio managers (or are they traders?)

There is something rotten about this set up. Investors are not the main beneficiaries of these arrangements. It’s the fund management companies and some employees.

Everett is right to call it a “wake up call” to the industry.

You can read Philip's blog here: http://www.goodreturns.co.nz/blog/

Tags: FMA Market Manipulation Milford Asset Management

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Comments from our readers

On 19 June 2015 at 11:59 am Brent Sheather said:
Nice comment Philip but I can’t help but think that Milford are no worse than anyone else. It’s quite easy to reconcile the FMA’s focus and indeed much of the bad regulation post the finance company debenture meltdown; if the next step in your career move is back into industry it’s a very bad career move to be seen to be biting the hand that feeds. Look at where regulators have been and where they go but there is a glimmer of hope. In Switzerland the other day they legislated a two year stand-down for regulators defecting to industry and Senator Elizabeth Warren in the US is the point woman in a move to make things better over there.

We need a Senator Warren in NZ but until then we are stuck with an unhealthy political/finance/regulatory nexus that guarantees “putting clients interests first” is rarely going to happen.
On 19 June 2015 at 12:52 pm Pragmatic said:
Thanks for your insights Phil

I am confused how the entity (Milford) can be found guilty by the investigator (FMA), when the individual (Trader) remains under investigation. This suggests that all details of the investigation have not been released. It smells.

I am confused why the various fees & performance fees received by Milford for the “manipulated” performance have not been offered / repaid back to investors.

Like yourself, I am confused why the Regulator spends a disproportionate amount of time sweating over the small stuff, when the Milford enquiry represented a fantastic opportunity to auger confidence from the investing public. Instead, the Regulator has fired out a “wake up” warning to the industry, insinuating that other industry participants are not performing to expectations.

I am confused why NZ Super suspended their mandate with Milford (presumably they discovered something that we are unaware of), and look forward to their next actions. Confirmation of the re-employment / termination of Milford by NZ Super will provide more substance than this recent release by the Regulator

Ultimately the investing public will be the jury over this recent discovery. Whilst I suspect that sophisticated investors will look elsewhere, sadly the investing public are blessed with apathy, celebrity investment enthusiasm and short memories.
On 19 June 2015 at 12:53 pm winstonkey said:
So if the FMA is confident that market manipulation occurred, how can Milford and the FMA then agree there was no impact on portfolios? Isn't ignoring that that just a bit too convenient?

We can all rest easy now that Milford has been fined less than 5% of the performance fees they have generated over the last 2 years. That'll learn them, and other big end of town players.

If this was a small company or an AFA guilty of similar conduct, but without the ability to engage high priced QC's, would the "wet bus ticket wrist slap" of a minimal fine (with respect to firm profitability) be available? I suspect not, but it is impossible to know without some proper transparency.


On 3 July 2015 at 4:46 pm Chatterbox said:
The real joke is how when large players in the market manage to get the regulator to look away, or to undertake a 'enforceable undertaking' where the fox in the hen house does its own plucking to remedy the fault or unlawful practices by appointing a so called independent to undertake the work internally - all under silence and secrecy. Then it can continue to operate as normal. No damages claims, and minimal restitution. I find it all very much like the US bankers who get off with a little penalty despite having stolen so much that anyone else goes straight to jail not get out of free card.

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