Some transition management (TM) providers need to improve transparency and oversight levels, according to the UK Financial Services Authority’s (FSA) long-awaited review into the business.

The regulator found deficiencies in transparency and communication by some providers with their clients and differences in the level of control around reporting on performance.

The review also found that a number of conflicts of interest can arise in TM, which are not necessarily obvious to firms’ clients.
Worryingly, the regulator said the small size of TM at many firms can lead to senior managers underestimating the risk weight of the business, perceiving it to be a “low-risk, quasi-project management business”.

“Before our review, some TM desks appeared to have had limited contact with their control functions or senior management.”

The business is far from small given that more than £165bn of assets in legacy portfolios were transitioned annually between 2010 and 2012 by 13 providers, while some 700 transition mandates were executed.

The FCA said that transition management is an important business as it enables asset owners to move investment portfolios between different managers or markets while managing market risk and reducing transaction costs.

The FCA said it would continue to supervise firms, which will involve requiring firms to prove they have appropriate communications and effective performance reporting in place. Supervisors will also continue to closely watch how TM providers manage and mitigate conflicts of interest.

The regulator will consider if firms better understand their clients’ information requirements and expect clients also to consider what assistance, education or guidance might best prepare them to carry out their obligations to underlying investors.

However the FCA said that its rules and guidance currently in place were an “appropriate standard”.