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Loïc Guilloux is desperate to draw a line under the past. The boss of French asset manager H2O this month oversaw a final notice agreement with the UK’s Financial Conduct Authority, ending a years-long investigation into the group’s dealings with controversial German financier Lars Windhorst.
The FCA imposed no regulatory fine on H2O (in contrast to France’s Autorité des Marchés Financiers, which last year levied a €93mn penalty over related issues). It took the view that a fine would deprive out-of-pocket investors of funds that could be used to reimburse them, and so mediated instead the creation of a €250mn compensation pot (which investors can tap quickly only if they agree not to sue). The FCA also allowed H2O to “voluntarily apply to cancel” its UK regulatory licence, rather than stripping it forcibly.
This is the same H2O that was once a star European investment manager, overseeing more than €30bn. And the same H2O that then lost more than €1bn of investors’ money (the precise amount is disputed) after the group, under former chief executive Bruno Crastes, breached investment rules, short-circuited due diligence norms and struck an extraordinarily close relationship with Windhorst, detailed in a series of FT articles.
Despite the FCA’s ultimate leniency, it says H2O “failed to carry out proper due diligence” and failed to declare hospitality connected to the close family friendship between Crastes and Windhorst. H2O provided the regulator with “false and misleading statements and documentation”, including “fabricated records and minutes of meetings”.
But Guilloux, who is understood to have proposed the voluntary compensation pot, clearly charmed the regulator. The final notice praises H2O’s “measures to significantly enhance its governance, systems and controls to ensure that similar misconduct will not occur in future”. The rationale is logical enough: a clean-up CEO (Guilloux replaced Crastes at the start of last year) should be given a fair chance to move on.
Except there are some glaring reasons why H2O cannot credibly be seen to be moving on.
Chief among them is that Crastes, a co-founder of H2O, is still employed in a senior capacity — overseeing market strategy — at the group. Not only that. There is apparently a desire for him to return to active fund management, once a five-year AMF ban on him managing money has expired. Such a scenario would be unthinkable in many jurisdictions.
Vincent Chailley, who was H2O’s chief investment officer when the scandal took place, remains in that role. He may have expressed repeated discomfort with the Windhorst investments, but he was ineffectual in obstructing them. (Only one top-ranking executive has left, due to risk and compliance failures.)
Guilloux himself is not exactly a wholly new broom, either. He was co-CEO with Crastes for a period before the AMF action, and had been a senior executive at H2O since Crastes hired him in 2016.
And then there is the role of Natixis, the large French bank that was majority owner of the asset manager when the scandal occurred. In the wake of the FT’s reporting, Natixis claimed the Windhorst-linked investments were “quite diversified” and dismissed conflict of interest claims as “groundless”. It still owns a quarter of the business and has suffered little obvious fallout.
There is a large financial question mark hanging over H2O, too. A group of 9,000 aggrieved investors are pursuing a class action law suit, seeking more than €800mn. The extent of H2O’s financial reserves, or its capacity to fund further investor compensation, is unclear. It is understood to have described the €250mn settlement pot as the maximum it could afford if it was to maintain going concern status with its auditors.
Of the nearly €10bn of funds frozen in 2020 when the AMF intervened, more than 90 per cent would have been returned to investors after factoring in the new compensation scheme, according to people close to H2O — a calculation disputed by investors who are suing the group.
Meanwhile the group’s assets under management are understood to have shrunk to a little over €6bn. Guilloux’s hopes of reviving the franchise rest on its investment record, particularly its €1.4bn Multibonds macro fund, which has performed well in the period since the Windhorst-related losses, averaging nearly 20 per cent a year.
Financial scandals happen. Regulators must sometimes show pragmatism as well as toughness. But for the FCA to play legal mediator, rather than policeman in this case, looks odd and risks undermining all-important regulatory deterrence. Odder still is H2O’s belief that it can truly move on and rebuild the trust of stakeholders when personnel directly connected to the affair remain in senior roles.