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The FCA’s latest letter to wealth management and stockbroking firms reminds CEOs that they are accountable for fostering a healthy culture and points to areas of potential harm that it expects firms to review.
The “Dear CEO” letter: Wealth Management and Stockbroking Supervision Strategy, sent in September, reminds firms of the FCA’s concerns and expectations in this sector. These include the prevention of fraud, scams and market abuse, and the protection of client assets and orderly wind down planning in the event of failure. The letter goes on to highlight continuing challenges around transparency of costs and charges where it warns that thematic work is being considered.
The FCA’s plans to introduce new ‘Consumer Duty’ rules are also referenced in the context of a greater focus on culture and consumer care. The proposals for Consumer Duty include changes to PRIN with the introduction of a new Consumer Principle and new cross-cutting rules requiring firms to take all reasonable steps to “avoid foreseeable harm” and “enable customers to pursue their financial objectives”. As the regulator points out, for many firms, this will require a significant shift in culture and behaviour.
The letter concludes with a clear statement that the FCA considers the recipient – the CEO – responsible for meeting the firm’s FCA requirements in these areas. You will need evidence you have considered and acted on each element of the letter should the regulator call.
What actions should you take?
Cost and charges
Despite new rules coming into force with the introduction of MiFID II in January 2018, the FCA does not consider that consumers are fully aware of the overall cost they pay for their investment. The FCA expects firms to:
- have clear systems and processes for collecting and aggregating all the data that is relevant to both ex-ante and ex-post costs and charges disclosures
- monitor how these disclosures are provided to consumers, both in terms of timing and content
- have undertaken second and/or third line reviews of how these disclosures are being made
- use the outputs from the ex-post costs and charges disclosures when considering value-for-money, TCF and product governance reviews.
Fraud, investments scams and market abuse
The FCA lists examples of consumer loss and bad practice in the letter and points to increasing compensation costs and a loss of trust in the sector. The regulator makes it clear they will weed out bad apples, but also lists its expectations of all firms in the sector to:
- ensure client portfolios are managed in line with individual client risk profiles and are suitable
- ensure high-risk portfolios and/or unregulated investments are fully justified both by the client’s risk profile and by the firm’s own diligence on the investment
- ensure that your customers understand the FSCS consumer protection status and associated risks of those investments
- have robust systems and controls to mitigate the risks of harm arising from financial crime, market abuse, fraud and scams
- report where a firm or individual is identified who could be involved in any wrongdoing.
It’s also worth noting the FCA’s belief that incorrect permissions increase the risk of harm, and expectation that firms cancel or vary permissions for regulated activity which they do not use. This was highlighted in their recent press release: FCA clamps down on consumer investment harm
Financial resilience and disorderly firm failure
The FCA are concerned about the disorderly failure of firms, which could result in harm to consumers – particularly due to Covid-19 and Brexit.
The FCA states it expects firms to:
- have a good understanding of its regulatory capital and reporting requirements
- undertake regular reviews of the adequacy of its capital and liquidity to ensure that it maintains adequate resources for its future needs
- ensure they understand the impact of Investment Firm Prudential Regime (IFPR) and can comply with the new rules from January 2022
- have credible wind down plans
- undertake regularly reviews its client asset arrangements to ensure consumer’s money and custody assets are protected.
In respect to client assets the letter makes it clear that the FCA will engage with the responsible senior managers to understand the risk of harm from firm’s business model.
How we can help
Bovill Newgate are on the FCA Skilled Persons panels for Conduct of Business, Financial Crime, Prudential, Client assets and Governance and individual accountability. We have a wide variety of clients in this sector and understand the expectations of the regulator.
Bovill Newgate has dedicated Wealth Management, Financial Crime and Prudential Practices which can assist you to or provide assurance that you are meeting the FCAs expectations. If you need and independent expertise, please get in touch.
