Lessons to be learnt
21 Aug 2024
Following H2O AM Group agreeing to pay €250 million to investors, the industry must heed its warning
Image: nick/stock.adobe.com
H2O Asset Management Group (H2O) has agreed to pay €250 million to investors who have been unable to access their funds since 2020. The Financial Conduct Authority (FCA) announced that the asset management company agreed to pay the fee following an investigation into the company’s operations and, as a result, will not be hit with a penalty.
The investigation highlighted that between April 2015 and November 2019, H2O had not followed proper due diligence on a series of “high risk and hard to sell” investments related to the Tennor Group — a set of companies owned by German financier Lars Windhorst.
Windhorst, who rose to fame in the 1990s as a teenage business prodigy and was labelled the ‘German Bill Gates’, has been shrouded in controversy for a number of years. A Financial Times investigation in 2019 revealed H2O’s close ties to Windhorst and that the asset manager had made a significant number of poor investments in the debts of businesses linked with the financier. The investigation prompted investors to ask for their money back.
The FCA investigation into the company found over 50 occurrences where employees had received hospitality from Windhorst that had not been declared. These included a number of meetings between senior management figures at the time and Windhorst on the financier’s private jet, helicopter, and superyacht.
The FCA report continues to highlight how H2O “provided false and misleading statements and documentation to the regulator”. The report details how ‘Senior Manager A’ had “provided 23 documents purporting to be contemporaneous minutes of meetings of its Valuation Committee between January and July 2019, although no meetings of the Valuation Committee had taken place.”
The authority also pointed to four documents claimed to account for minutes for its Risk and Compliance Committee when there had been no meetings. Also, four minutes of meetings that had taken place were not recorded and instead were created retrospectively. Finally, four more meetings’ minutes had been taken, but were afterwards amended to include further evidence of due diligence that had not taken place.
On the investigation, Steve Smart, joint executive director of Enforcement and Market Oversight at the FCA, says: “H2O’s job was to manage its funds properly and protect investors. It failed to do this and, to make matters worse, it repeatedly provided misleading information to the FCA.”
The FCA says the investigation’s findings of serious failings in the asset management company warranted a fine and would have imposed such a penalty. However, after agreeing that €250 million will be made available for clients who had had their investments trapped, the company will not be fined.
The FCA added that H2O will apply to cancel its UK authorisation by the end of 2024 as well as waiving its rights to fees and investments worth €320 million.
Smart explains: “Through this settlement the FCA has secured money for affected investors and agreement that H2O will stop operating regulated business in the UK.”
A swift solution
H2O wants to, and has, changed. The firm states that in securing the €250 million, they will allow for an “accelerated and definitive exit from the side-pocketed funds”.
They explain how unitholders who sold their units on 14 October 2020 when the funds reopened will recover between 87 and 93 per cent of the value of their total investment at the time of suspension on 28 August 2020.
The group says that it has strengthened its internal control procedures in an attempt to ensure compliance with regulatory and industry standards and Loïc Guilloux, CEO of H2O, is determined to keep improving. He states: “With this settlement, we acknowledge the FCA’s findings relating to investments in private securities undertaken by H2O AM LLP between 2015 and 2019 and take a major step forward.”
Guilloux is also keen to stress the company has made significant progress in eradicating a previous culture that led to failings. “Over the last few years, we have significantly improved and consolidated our organisation and strengthened our risk management and compliance teams, governance and internal procedures,” he says. “These changes ensure that lessons from this period are embedded in our corporate culture.”
He concludes: “Today, this settlement enables us to provide a concrete and swift solution to all our unitholders and to look to the future, whilst remaining focused on our clients’ interests and meeting their needs. Our strengthened governance, resilience and passion for performance will continue to guide us in the years ahead.”
A warning shot
The H2O case has alerted the industry to what happens should they fall below standards required. “Any security that is linked to a controversial financier is clearly a red flag,” Matt Smith, CEO of SteelEye, states.
“This settlement is a stark reminder that the industry must relentlessly strive for better governance and accountability.”
For the industry to remain diligent against failings seen by H2O, Smith argues: “The opacity, not to mention complexity, of illiquid securities makes them much more susceptible to misrepresentation.
“This illiquidity risk must be thoroughly assessed and factored into the overall risk management strategy, ensuring there are no barriers between the trading and risk desks.”
Oliver Blower, CEO of VoxSmart, argues that the industry needs to change as a whole. That is the only way these failures can be stamped out.
He suggests: “The hefty penalty imposed on H2O is a symptom of a much larger problem: anyone who has worked in an asset management firm will attest to the fact that historically, the industry has tended not to pump the same level of investment into the less sexy areas of the business than the money-making front office functions.”
Blower believes that investment in regulatory risk mitigation or elimination technology “rarely tops the agenda” and that this “judgemental error can have real consequences.”
He continues to call on other members of the industry to improve their risk management practices. He believes that “the failures of H2O should serve as a warning shot to asset managers to recalibrate their risk strategies to account for the opaque nature of illiquid securities.”
Blower argues that this “underscores the urgency for a paradigm shift within the asset management industry.”
“It’s time to put a greater emphasis on effective supervision and risk management practices,” he emphasises.
“If the industry persists in sweeping the issue under the rug, the regulators could pull the rug out from under them.”
The investigation highlighted that between April 2015 and November 2019, H2O had not followed proper due diligence on a series of “high risk and hard to sell” investments related to the Tennor Group — a set of companies owned by German financier Lars Windhorst.
Windhorst, who rose to fame in the 1990s as a teenage business prodigy and was labelled the ‘German Bill Gates’, has been shrouded in controversy for a number of years. A Financial Times investigation in 2019 revealed H2O’s close ties to Windhorst and that the asset manager had made a significant number of poor investments in the debts of businesses linked with the financier. The investigation prompted investors to ask for their money back.
The FCA investigation into the company found over 50 occurrences where employees had received hospitality from Windhorst that had not been declared. These included a number of meetings between senior management figures at the time and Windhorst on the financier’s private jet, helicopter, and superyacht.
The FCA report continues to highlight how H2O “provided false and misleading statements and documentation to the regulator”. The report details how ‘Senior Manager A’ had “provided 23 documents purporting to be contemporaneous minutes of meetings of its Valuation Committee between January and July 2019, although no meetings of the Valuation Committee had taken place.”
The authority also pointed to four documents claimed to account for minutes for its Risk and Compliance Committee when there had been no meetings. Also, four minutes of meetings that had taken place were not recorded and instead were created retrospectively. Finally, four more meetings’ minutes had been taken, but were afterwards amended to include further evidence of due diligence that had not taken place.
On the investigation, Steve Smart, joint executive director of Enforcement and Market Oversight at the FCA, says: “H2O’s job was to manage its funds properly and protect investors. It failed to do this and, to make matters worse, it repeatedly provided misleading information to the FCA.”
The FCA says the investigation’s findings of serious failings in the asset management company warranted a fine and would have imposed such a penalty. However, after agreeing that €250 million will be made available for clients who had had their investments trapped, the company will not be fined.
The FCA added that H2O will apply to cancel its UK authorisation by the end of 2024 as well as waiving its rights to fees and investments worth €320 million.
Smart explains: “Through this settlement the FCA has secured money for affected investors and agreement that H2O will stop operating regulated business in the UK.”
A swift solution
H2O wants to, and has, changed. The firm states that in securing the €250 million, they will allow for an “accelerated and definitive exit from the side-pocketed funds”.
They explain how unitholders who sold their units on 14 October 2020 when the funds reopened will recover between 87 and 93 per cent of the value of their total investment at the time of suspension on 28 August 2020.
The group says that it has strengthened its internal control procedures in an attempt to ensure compliance with regulatory and industry standards and Loïc Guilloux, CEO of H2O, is determined to keep improving. He states: “With this settlement, we acknowledge the FCA’s findings relating to investments in private securities undertaken by H2O AM LLP between 2015 and 2019 and take a major step forward.”
Guilloux is also keen to stress the company has made significant progress in eradicating a previous culture that led to failings. “Over the last few years, we have significantly improved and consolidated our organisation and strengthened our risk management and compliance teams, governance and internal procedures,” he says. “These changes ensure that lessons from this period are embedded in our corporate culture.”
He concludes: “Today, this settlement enables us to provide a concrete and swift solution to all our unitholders and to look to the future, whilst remaining focused on our clients’ interests and meeting their needs. Our strengthened governance, resilience and passion for performance will continue to guide us in the years ahead.”
A warning shot
The H2O case has alerted the industry to what happens should they fall below standards required. “Any security that is linked to a controversial financier is clearly a red flag,” Matt Smith, CEO of SteelEye, states.
“This settlement is a stark reminder that the industry must relentlessly strive for better governance and accountability.”
For the industry to remain diligent against failings seen by H2O, Smith argues: “The opacity, not to mention complexity, of illiquid securities makes them much more susceptible to misrepresentation.
“This illiquidity risk must be thoroughly assessed and factored into the overall risk management strategy, ensuring there are no barriers between the trading and risk desks.”
Oliver Blower, CEO of VoxSmart, argues that the industry needs to change as a whole. That is the only way these failures can be stamped out.
He suggests: “The hefty penalty imposed on H2O is a symptom of a much larger problem: anyone who has worked in an asset management firm will attest to the fact that historically, the industry has tended not to pump the same level of investment into the less sexy areas of the business than the money-making front office functions.”
Blower believes that investment in regulatory risk mitigation or elimination technology “rarely tops the agenda” and that this “judgemental error can have real consequences.”
He continues to call on other members of the industry to improve their risk management practices. He believes that “the failures of H2O should serve as a warning shot to asset managers to recalibrate their risk strategies to account for the opaque nature of illiquid securities.”
Blower argues that this “underscores the urgency for a paradigm shift within the asset management industry.”
“It’s time to put a greater emphasis on effective supervision and risk management practices,” he emphasises.
“If the industry persists in sweeping the issue under the rug, the regulators could pull the rug out from under them.”
NO FEE, NO RISK
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
.jpg)