IRELAND – The head of Ireland's national debt office has raised concerns over State Street's internal governance as he gave evidence to a parliamentary committee.
John Corrigan, the National Pensions Reserve Fund's (NPRF) investment director until he was promoted to chief executive of the National Treasury Management Agency (NTMA) in 2009, was responding to questions from the Oireachtas joint committee on finance, public expenditure and reform on State Street's recent termination as transition manager after charging millions in non-contractual fees.
The reserve fund has since tendered to replace the company, but Corrigan said they had not yet decided whether to remove State Street as one of its passive managers.
"The indexed funds, which are managed in a separate business within State Street, we have no issue there," he said.
"But we would be concerned with the quality of governance within State Street and other issues, and, to date, we only have the company's account to rely on."
He added: "Before we make any decision on the future basis of the relationship – if any – with State Street, we would wish to see the report from the regulator in the UK."
Corrigan said the NTMA had written to the UK's Financial Services Authority and been told that the agency was investigating the matter that had led to transition manager clients being overcharged.
He added that the British authority was "following it up as quickly as they could and would be reporting on it", which would then influence the NPRF's future involvement with State Street.
However, Corrigan stressed that State Street had "successfully" overseen mandates in the past and that it made "sense", as the NPRF did not currently have any issues with the mandates, to await the FSA's findings to decide on further action.
The chief executive added that while State Street had paid the NPRF €2.6m after the charge was discovered, the payment was "not on the basis of a full and final settlement".
"The thing is still open in terms of seeking further remedies," he added.
Commenting on the overcharging of clients by the transition management team, State Street told IPE that it "self-reported" the matter to the FSA in September 2011.
It added that an internal investigation found "certain employees failed to comply" with its standards of conduct and transparency that were expected and that the employees had since departed.
"The actions of these former employees and their interaction with a limited number of clients do not reflect the high standards of conduct, communications and transparency that State Street expects," it said, adding that it had since "enhanced" its controls.
According to the NPRF's 2011 accounts, State Street Global Advisors' Irish division oversaw a total of €750m, spread out over passive equity in the euro-zone and Europe excluding the single currency area.
It additionally was responsible for the entirety of the fund's infrastructure investment, again through a passive solution.
As with almost all of the reserve fund's external managers, it saw a significant reduction in mandate size since Ireland's bailout, as the NPRF discretionary portfolio was further diverted to assist Ireland's banks.
The reduction, €2.6bn for State Street alone between 2010 and 2011, is likely to continue as the fund redirects its assets towards Ireland.
Corrigan said in yesterday's hearing that the requirement was now to refocus the fund "entirely" into Ireland over the coming years.
This redeployment of assets recently got underway with the commitment of €500m to three funds targeting Ireland's small and medium-sized enterprises (SMEs).
The Irish finance minister said earlier this month that the three funds would likely be joined by several others, allowing for a "suite" of SME funds targeting all the sector's needs.
However, a spokeswoman for the Department of Finance was unable to confirm to IPE if the remaining €6.1bn discretionary portfolio would remain within the purview of the NPRF.