UK Funds Exposed To Risk, Survey Finds

LONDON--A recent survey conducted jointly by London-based Latchly Management and Global Investor concluded that UK fund managers are dangerously exposed to the risk of failed trades and unauthorized trading.

According to the survey, released February 15, all 30 fund managers polled run the risk of huge losses due to a combination of human error and stale portfolio information resulting from failure to automate elements of their operational infrastructure. As such, one to five percent of trades fail at broker confirmation and a further one to five percent fail at settlement, with the most damaging mistakes between the front and back office.

According to John Campbell, Latchkey's managing director, "Whenever a trade fails, adverse market movements can give rise to significant costs. But in more volatile markets the potential losses are commensurately greater. Indeed, for some companies there is a risk that such losses could exceed their capital reserves."

Straight through processing (STP) is the automated processing of transactions from the fund manager's investment decision right through to trade settlement, reconciliation and client reporting.

According to the survey, fund management companies run two major risks without STP: the first is both management and the fund managers themselves are unable to maintain a complete and up-to-date view of portfolio activity. The second is the risk of human error while entering data into different systems; moreover, the potential for human error can be heightened by employing temporary personnel.

Despite the substantial risk involved when using manual processes (i.e. paper tickets and faxes) and the growing popularity (and necessity) of STP worldwide, none of the companies surveyed had true STP. John Flood, principal consultant in the investment management consulting group at KPMG attributes this lack of technology to the industry's focus on the euro and Y2K compliance issues: "Straight through processing has been perceived as a nice-to-have rather than a have-to-have."

The survey demonstrates that STP -- an acknowledged solution to problems of both risk and inefficiency in investment operations -- remains an elusive goal. Campbell believes that fund management companies are hesitant to make the capital investment required to achieve STP because they cannot foresee it delivering any positive impact on their earnings.

"But the risks they are taking as a result cannot be justified," says Campbell. The survey concludes that "UK fund management industry is already under serious strain due to out of date information, failed trades and fallible managerial control. These problems can and will get worse, unless they are addressed swiftly, decisively, and most importantly, technologically."