A unit of investment and employee benefits giant Mercer has been hit with a six-figure fine by the Central Bank over failures to tell customers that its funds were tracking stock market indices rather than being actively managed.
Mercer Global Investment Management Limited (MGIM) has been ordered to pay a fine of €117,600, a figure that includes a 30 per cent discount for agreeing to settle the case, after the regulator found that it had breached the rules on information it was obliged to disclose in prospectuses and key investor information documents for funds that it managed.
Over a six-and-a-half-year period from July 2011 to December 2018, Mercer failed to disclose that some of its funds relied on an index-tracking strategy – where the fund aims to track the performance of a particular market index – or provide the details of the index being tracked, the Central Bank said.
The enforcement action follows a Central Bank review into “closet indexing” at the 2,550 funds in Ireland that hold themselves out to be actively managed. Closet indexing occurs where a fund is passively managed by following a benchmark or an index but are held out by the fund managers as being actively managed, which requires the investment manager to be more actively involved in the management of the fund.
In general, because of the higher workload in actively managed funds, the charges to clients will be higher.
The Central Bank said its thematic review of actively managed funds identified issues around the effectiveness of investor disclosure, most significantly that investors “were not always given sufficient or accurate information about the fund’s investment strategy” in the prospectus and key investor information documents provided to them. It noted that failure to fully inform clients meant they might not be aware of the risks associated with particular investment choices among other things.
In a statement, MGIM said it had admitted the failures. It said the issue came to light in 2019 “and was rectified”.
“MGIM cooperated fully with the Central Bank’s investigation and has strengthened its practices in this regard since these omissions were first identified,” the company said. “MGIM recognises the importance of the accuracy of the offering documents both for the investor and the Central Bank and regrets these contraventions.”
“Transparency around the investment policy or strategy of a fund is a critical element in investor protection,” the regulator’s director of enforcement and anti-money laundering, Séana Cunningham said after the fine was announced.
“Fund management companies such as MGIM are responsible for ensuring prospectuses and key investor information documents issued in respect of funds they manage contain information necessary for investors to be able to make informed decisions regarding the investments proposed to them. The requirements for accurate prospectuses and key investor information documents are an essential part of the UCITS regulatory framework.
She said MGIM had failed in its obligations to both investors and the Central Bank.
“Compliance with the regulatory requirements placed on fund management companies is key to ensuring good governance, the protection of investors, the integrity of the market and systemic stability,” Ms Cunningham added.
The regulator said it was satisfied that MGIM had since put right the failings identified in its inspection.
It said the fine had been determined by the duration of the rule breaches over six and a half years and the fact that the breaches “constituted a significant departure from the standard required of MGIM”. However, it noted in mitigation that the company had not previously come to the adverse attention the regulator.
