Business Irish

Friday 19 January 2018

Aviva fined €2.45m over scheme to lend shares

Peter Flanagan

Peter Flanagan

INSURANCE giant Aviva has been forced to pay one of the biggest fines in Irish history after repeated failures to monitor a share-lending scheme popular with hedge funds.

Aviva Insurance Europe and Aviva Life & Pensions Ireland were forced to pay the Central Bank €1.225m each for a catalogue of failures around the lending programme.

The Central Bank imposed the combined €2.45m penalty after discovering "administrative procedures and internal control mechanisms, which were not adequate in respect of its stock-lending activity".

Stock lending is a common practice in the US and UK, which allows a company, usually an insurer or pension fund, to lend shares to an investment bank or hedge fund.

The hedge can then trade the shares but must return them to the lender on a fixed date. In return, the hedge fund pays the lender collateral worth about 105pc of the shares, giving the lender a profit on the deal.

The lender keeps receiving dividends and other benefits of owning the shares, but the hedge fund holds the voting rights for as long as they have borrowed the shares.

Stock lending was not a common practice in Ireland until the early part of this century, and grew rapidly in the boom. It has fallen out of favour since the financial crisis.

The damning reports from the Central Bank accuse Aviva of repeated failure to control its stock-lending business.

The issues date back to 2002, when both Aviva units outsourced their stock-lending schemes to other Aviva businesses.

Among the issues the regulator found from that point on until January this year were that Aviva:

• Failed to adopt adequate investment policy for stock lending.

• Did not impose sufficient parameters for lending on its fund managers.

• Failed to have adequate reporting and internal control systems to monitor the business.

• Did not monitor investment managers' performance.

• Did not review its investment policies annually.

• Did not set adequate risk limits.

• Management did not receive regular updates on the exposure the firm had to stock lending.

Aviva stopped stock lending once it became aware of the problems in the business.

The regulator's director of credit institutions and insurance supervision, Fiona Muldoon, and its director of enforcement, Peter Oakes, said firms must maintain control of all its business, even when outsourced.

"It is inadequate and unacceptable for firms to [just] rely on group controls or group limits," they said.

The pursuit of enforcement actions in respect of systems and controls failings is a Central Bank Enforcement Priority for 2012.

"Where serious breaches of these regulatory requirements occur, regulated entities and their management can expect vigorous investigation and follow-up by the Central Bank," they added.

Aviva, meanwhile, took full responsibility for the problems but emphasised client funds were never in danger.

"We accept the Central Bank's finding that its systems and controls in respect of stock lending, which date back to 2002, were inadequate," a spokesman said.

"When these inadequacies were identified, Aviva took prompt action and has now ceased stock lending.

"Aviva would point out that no money was lost by its companies or by its customers as a result of stock lending. In some cases, policy holders benefited because the fees raised were attributed to their policies," the insurer added.

Analysis, Page 2

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