By Simon Jessop and Maiya Keidan
LONDON (Reuters) - Swiss-based GAM's (S:GAMH) stringent response to suspected rule breaches by one of its top fund managers has cost it dear - leaving an asset management industry, facing ever tighter regulation, at pains to avoid the same fate.
The extent of recent and planned Europe-wide and UK rule changes and the new culture of whistle-blowing they engender, however, could leave more asset managers facing similar crises and the dilemma of how to handle them.
GAM shocked markets in July when it suspended top money manager Tim Haywood for suspected breaches of risk management and record keeping procedures. In August it said it would liquidate his funds, worth around $7 billion.
A month later, GAM said Haywood may have breached the company's policy on the number of signatures required on documents, used his personal email for work, and violated the company's gifts and entertainment policy.
Its decision to suspend Haywood, which has triggered huge outflows and a share price slump, was prompted by a tip from an internal whistleblower, it said.
"When a popular manager is suspended by a fund group it's no surprise to see assets walking out of the door, as investors no longer have the same pair of hands running their money," Laith Khalaf, senior analyst at Hargreaves Lansdown (LON:HRGV) said.
"There are many risks investors can tolerate, but conduct is not one of them," he added.
Haywood has not publicly commented and was not available to comment when contacted by Reuters on Tuesday. GAM has said Haywood remains an employee "and was currently engaged in the firm's internal disciplinary processes".
GAM said on Tuesday assets had fallen 10.8 percent in the three months to the end of September, as the impact of Haywood's suspension was compounded by weaker markets. Its shares have fallen to nine-year lows.
Of 8.5 billion Swiss francs in total net outflows, 5.3 billion came from funds not connected to Haywood.
One recent GAM investor contacted by Reuters, said he was "astounded" by the company's handling of the situation and would have preferred a warning be given, while a second said the breaches were "blown out of proportion".
Chris Egbunike, managing consultant at regulatory consultant Bovill said the tougher regulatory oversight and increased focus on an individual's personal accountability meant companies did not want to be accused of not doing enough.
"People are still not sure what is minor or not. It's almost a case of disclose everything; that way no one can ever fault you for not doing your job."
For its part, GAM has sought to be transparent with investors by setting up a website answering a number of questions and it said this was bearing fruit.
"Our engagement with clients showed a marked improvement as we moved into October," the firm said on the website.
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GAM's action came almost a decade after the financial crisis that spurred regulators globally into toughening up rules on the behavior of companies and individuals in the financial services sector, and which have increasingly focused on money managers.
New rules around insider trading and other forms of market abuse went live in Britain in 2017, and January saw the launch of the EU's Markets in Financial Instruments Directive II (MiFID II).
Britain's top regulator next year plans to extend rules aimed at making individuals more accountable for their actions from banks to most other financial institutions.
Britain's Financial Conduct Authority (FCA) said improving culture and governance is a priority for the coming year and it is in the process of reviewing firms' processes and controls, which include rules to help whistleblowers come forward.
The increasing amount of data being collected was also spurring companies to be proactive and be seen to be taking the initiative instead of brushing breaches under the carpet, aided by bigger compliance teams and increased spend on technology.
"The FCA has a lot of information about you and your firm," a leading industry consultant said. "You want to be able to find your own issues before the FCA phones up and asks you about something, so your systems and controls have to be tighter."
($1 = 0.9945 Swiss francs)