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Dear CEO: Understanding the FCA's expectations for wealth management and stockbroking firms

21 December 2023

The Financial Conduct Authority recently issued a Dear CEO letter to firms in the wealth management and stockbroking sector setting out its concerns and expectations. It is crucial to understand the expectations set by the FCA to reduce harm, increase standards, and improve the sector's reputation. 

Key harms identified by the FCA

The FCA has identified several key harms in the Wealth Management & Stockbroking sector, including significant losses as a result of scams and fraud, money laundering, high-risk or complex investments, and poor value products and services. The FCA is concerned that these harms have caused negative economic, market, and social damage, and have exposed consumers to unnecessary risks. Whilst none of these will come as a surprise, the FCA's strong tone throughout this publication should be duly noted.

Financial crime expectations

Financial crime is a significant concern in the wealth management (investment management) and stockbroking sector. The sometimes inherently high risk nature of the transactions associated with the sector drives this regulatory view. 

However, the FCA also underlines the wider social and economic consequences of facilitating financial crime. 

While most of the below is assumed knowledge, and is likely common sense, it also serves as a useful checklist to consider the robustness of your firm's Financial Crime Systems & Controls. The FCA expects firms to take the following steps to counter Financial Crime:

  • Preventing fraud and money laundering: Firms should not knowingly engage or facilitate frauds, scams, or money laundering activities. As well as a breach of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 ("MLRs"), failure to be aware of your responsibilities will breach multiples areas of the FCA's Senior Management Arrangements, Systems and Controls ("SYSC") part of the FCA Handbook. 
  • Understanding financial crime risks: Firms need to identify their clients, understand their transaction patterns, and have a clear view of their corporate structure to assess Financial Crime risks. Many firms still do not undertake an annual Business Wide Risk Assessment ("BWRA") in line with the Joint Money Laundering Steering Group ("JMLSG") Guidance Notes or MLRs.  
  • Robust systems and controls: Firms must have effective systems and controls in place to counter Financial Crime and money laundering, tailored to the level of risk. Customer risk assessments and ongoing screening must be appropriately tailored to your business.
  • Experienced and independent SMF 16/17 holders: Firms should ensure that the individuals responsible for the Senior Management Functions 16 and 17 possess the necessary experience, skills, and independence to effectively tackle Financial Crime. Experience is often relied upon, when additional training or support may be needed.  These roles should be subject to routine skills/knowledge gap assessments accompanied by development plans where necessary, or relevant annual CPD as a minimum. 
  • Information sharing and reporting: Firms should promptly share and report any wrongdoing to the FCA or relevant law enforcement agencies – it's key that STORs/SARs registered are active documents and appropriate concerns are flagged for the Designated/Nominated Officer to file reports as necessary to the FCA / National Crime Agency ("NCA") accordingly. 
  • Implementing the FCA's Financial Crime Guide ("FCG"): Firms must read and fully implement the FCA's Financial Crime Guide, which provides guidance on countering Financial Crime risks. Many refer to the JMLSG Guidance Notes, but not always the FCG.

Consumer Duty expectations

Firms are expected to have implemented the Consumer Duty ("the Duty") fully, resulting in meaningful changes to their business, services, and propositions. The longer-term hope is that the Consumer Duty will also drive cultural change in all businesses within the scope of the Duty.  

The FCA highlights several areas where firms have failed to meet their obligations:

  • Products and services: The FCA's view is that firms often push high-risk or complex products and services that are unsuitable for most consumers. Portfolio Managers may obscure the risks associated with unsuitable portfolios, while stockbrokers promote products that are difficult to understand. 
  • Consumer understanding: Firms should ensure that consumers fully understand the investment products and services they are offered, and not exploit limited understanding. This should be demonstrable. 
  • Vulnerability: Firms need to reassess the vulnerability status of their clients based on FCA guidance, ensuring that they are adequately protected. The FCA's guide, FG21/1 Guidance for firms on the fair treatment of vulnerable customers sets out a useful view of expectations for firms 
  • Transparency and fairness: Firms should provide clear, fair, and non-misleading communications to consumers. They should also justify any complex or unregulated investments and ensure that consumers fully understand the associated risks and limitations. This straddles the Consumer Understanding and Consumer Support outcomes. 
  • Price and value: Firms must regularly assess the overall cost and value for money of their products and services. They should make changes when poor value is identified and ensure that consumers are being rewarded fairly when exposed to risks.

It is commented in the Dear CEO letter that, somewhat disappointingly from the regulator's perspective, none of these issues are new.  The difference this time however, is that the FCA has a means with which to act and on this front the FCA have been quick to show that the Consumer Duty has teeth, if the Outcomes are not demonstrable, or the Cross-cutting expectations cannot be evidenced through the inputs of firms. 

For example, bringing an end to "double dipping" and forcing platforms and SIPP operators to make a decision on retaining interest on customers' cash balances (see our article) in their most recent Dear CEO letter took a very direct approach to an issue that firms had been debating in boardrooms for some time, given the unusually high interest-rate environment and the existing rules that permitted this practice. This shows us that the Consumer Duty is very much real, very much in-play and if you aren't willing to be critical of your products and services and make the necessary changes to align to the Duty, ensuring transparency, fairness and fair value for customers – the FCA have indicated that they will intervene and set-out how they expect your firm to operate. 

Embedding the Consumer Duty into the day-to-day culture and operations of the firm is crucial, and firms should be prepared to demonstrate the changes they have made to drive good consumer outcomes. All elements of the Duty should be constantly evolving for firms. As the FCA have been keen to emphasize during their recent webinars, events and speeches, "this is not a once and done exercise".  Firms should be looking to review fair value assessments, target market analysis, pricing models and client disclosures and documentation on an ongoing basis to ensure it meets, and then continues to meet, the regulator's expectations. It's iterative to achieve alignment with the spirit of the Duty, not just compliance with its rules. 

Other regulatory obligations

In addition to the expectations related to Financial Crime and the Consumer Duty, firms were reminded of their broader regulatory obligations. These include:

  • Operational resilience: Firms need to ensure they have robust systems and controls in place to withstand operational disruptions and protect consumer interests.
  • Client Assets sourcebook (CASS) compliance: Firms that hold or control client money should follow the rules and guidance set out in CASS to safeguard client assets.
  • Environmental, Social, and Governance (ESG): Firms should have regard to ESG factors in their decision-making processes.
  • Diversity, Equity, and Inclusion (DEI): Referencing their recent consultation paper, the FCA is taking action to address discrimination, bullying, and sexual harassment in the industry. Firms should ensure they have appropriate policies and procedures in place to promote DEI.
  • Market Abuse: Firms must prevent market abuse and ensure they are compliant with relevant regulations.

Meeting these obligations is essential for firms to maintain their regulatory compliance and protect the interests of consumers – failure to do so will call into question how well the firm is meeting its Threshold Conditions, which is often the default view of the FCA.

Supervisory changes and expectations

The FCA emphasises that its supervision is becoming more assertive, intrusive, proactive, and data-driven. It is increasing the use of short-notice and unannounced visits, particularly in relation to Financial Crime, with the FCA's Financial Crime function for consumer investments focusing solely on identifying firms involved in fraud, scams, or money laundering. Data driven supervision is now common-place, making regulatory returns and responses to information requests important in terms of accuracy. KPI's are frequently used to determine the nature of supervisory engagement. 

To ensure firms take appropriate action, the FCA will consider whether they have resolved the root causes of any issues, which often stem from ineffective leadership, governance, systems, controls, and conflicts of interest. 

The FCA will use its supervisory tools and powers to intervene quickly against potential or actual consumer harms, both on an individual and multi-firm level.

Communicating with the FCA

Other reminders were issued in the Dear CEO letter:

Firms are expected to proactively inform the FCA if they take remedial action or identify any harm resulting from the issues raised in the letter. Firms have an ongoing obligation to notify the regulator of any issues that should be shared under Principle 11 immediately.

For communication with the FCA, firms can contact their usual FCA supervisor or use the channels provided on the FCA's contact page. Urgent issues of strategic importance can be directed to the Head of Advisers, Wealth and Pensions.

Firms that are no longer using their regulatory permissions should consult the FCA's "use it or lose it" pages.

This Dear CEO letter outlines the key expectations and priorities that wealth management and stockbroking firms need to address. By understanding and meeting these expectations, firms can enhance their ability to prevent Financial Crime, embed the Consumer Duty, and provide better value and services to their investors/consumers. It is crucial for firms to take proactive measures to address the identified harms and ensure regulatory compliance across all areas of their operations.

DWF Regulatory Consulting is well-positioned to assist firms in their ongoing regulatory compliance efforts. We offer comprehensive support to ensure that firms not only meet but also consistently adhere to regulatory expectations. Through thorough reviews and strategic guidance, we enable organisations to stay ahead of regulatory changes, mitigate risks, and uphold the highest standards expected of them by their customers and the regulator.

Our expertise in navigating the often-complex regulatory landscape equips our clients with the necessary tools to maintain regulatory compliance seamlessly.

Further Reading