a case study in not moving on from a scandal

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Loïc Guilloux is desperate to draw a line under the past. The head of French asset manager H2O this month oversaw a final notification agreement with Britain’s Financial Conduct Authority, ending a years-long investigation into the group’s dealings with controversial German financier Lars Windhorst.

The FCA has not imposed any regulatory fines on H2O (unlike France’s Autorité des Marchés Financiers, which last year levied a €93m penalty for related issues). She believed that a fine would deprive investors of funds that could be used to repay them, and therefore brokered the creation of a €250 million compensation pot (which investors can use fast only if they agree not to sue). ). The FCA also allowed H2O to “voluntarily apply for the cancellation” of its UK regulatory license rather than having it forcibly cancelled.

This is the same H2O that was once a star European investment manager overseeing more than €30 billion. And the same H2O that then lost more than €1 billion of investors’ money (the exact amount is disputed) after the group, under former chief executive Bruno Crastes, broke investment rules, short-circuited due diligence rules and established a extraordinarily close relationship with Windhorst, detailed in a series of FT articles.

Despite the FCA’s ultimate leniency, it says H2O “failed to perform due diligence” and failed to declare hospitality related to the close family friendship between Crastes and Windhorst. H2O provided the regulator with “false and misleading statements and documents”, including “recordings and elaborate minutes of meetings”.

But Guilloux, who is understood to have proposed the voluntary compensation pot, has clearly charmed the regulator. The final notice commends H2O’s “measures to significantly improve its governance, systems and controls to ensure that similar misconduct does not occur in the future.” The rationale is logical enough: a cleanup CEO (Guilloux replaced Crastes early last year) should be given a fair chance to move on.

It’s just that there are some glaring reasons why H2O can’t credibly be seen moving forward.

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 appears to be a desire for him to return to active fund management once the AMF’s five-year money management ban has expired. Such a scenario would be unthinkable in many jurisdictions.

Vincent Chailley, who was H2O’s chief investment officer at the time of the scandal, remains in that role. He may have repeatedly expressed his discomfort with Windhorst’s investments, but he was ineffective in preventing them. (Only one senior executive left, due to risks and compliance failures.)

Guilloux himself isn’t exactly a brand new broom either. He was co-CEO with Crastes for a period before the AMF action and has been a senior executive at H2O since Crastes hired him in 2016.

And then there’s the role of Natixis, the big French bank that was the majority owner of the asset manager when the scandal happened. Following the FT’s reporting, Natixis said Windhorst-related investments were “quite diversified” and dismissed claims of conflict of interest as “unfounded”. He still owns a quarter of the business and has suffered few obvious consequences.

There’s also a big financial question mark hanging over H2O. A group of 9,000 aggrieved investors is filing a class action, demanding more than 800 million euros. The extent of H2O’s financial reserves or its ability to fund additional investor compensation is unclear. It is understood to have described the €250 million settlement pot as the maximum it could afford if it had maintained its going concern status with its auditors.

Of the nearly €10 billion of funds frozen in 2020 when the AMF intervened, more than 90% would have been returned to investors after taking into account the new compensation scheme, according to people close to H2O – a calculation contested by investors who I’m suing the group.

Meanwhile, the group’s assets under management are believed to have shrunk to just over €6bn. Guilloux’s hopes of reviving the franchise rest on his investment record, particularly his €1.4 billion macro-bond fund, which has performed well since the Windhorst-related losses, averaging of almost 20% per year.

There are financial scandals. Regulators sometimes need to be pragmatic and tough. But for the FCA to play legal mediator rather than policeman in this case seems odd and risks undermining the all-important regulatory deterrent. Even stranger is H2O’s belief that it can truly move forward and rebuild stakeholder trust when staff directly connected to the business remain in leadership roles.

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