The Financial Conduct Authority (FCA) has published its latest “Dear CEO” letter to wealth managers and stockbrokers setting out the key risks it considers for this industry together with its supervisory priorities.
As expected, the FCA is focused on firms’ implementation of the Consumer Duty and tackling of financial crime. On the Consumer Duty, the FCA has singled out particular failings in respect of certain of the four outcomes:
- the promotion or selling of products or services that are too high risk and/or too complex for most consumers;
- inadequate assessments of vulnerability;
- the charging of services which are not delivered (such as ongoing advice);
- the overtrading of portfolios to generate high transaction fees;
- the provision of services which do not align with the needs of consumers (such as an expensive discretionary offering for a low risk consumer);
- unclear disclosures on fees and charging structures; and
- lack of consideration of all revenue streams.
Firms holding client money should also note the FCA’s concerns that they may not be assessing all aspects of the value chain. The FCA has called out practices of not passing on fair interest on client money balances and charging fees for holding funds which can further erode value and returns.
In light of these failings, the FCA reminds firms of their ongoing obligations to embed the Consumer Duty and notes numerous specific expected actions, such as (amongst others), ensuring that firms can fully justify any complex investments offered and that firms regularly assess the overall cost and value for money of their products and services. The FCA also warns firms against opting up customers from retail to professional without robust controls on this process given the loss of protections.
On financial crime, unsurprisingly, the FCA has emphasised the need for firms to understand their financial crime risks; not carry out tick box compliance exercises or outsource responsibility to third parties; and to ensure that firms’ SMF16/17 holders have the requisite experience, skills and independence to perform the role. The FCA also reminds firms to read and implement the practices in the Financial Crime Guide and Financial Crime Thematic Reviews.
Although the letter focuses on the above two priorities, the FCA makes clear that firms must meet all their regulatory obligations and particularly calls out the following additional areas: operational resilience; client assets; market abuse; ESG; diversity and inclusion; and non-financial misconduct.
The FCA has also reiterated its data led approach to supervision in order to identify outliers and apply a more targeted and intrusive supervisory strategy. It warns firms that it has already started a major drive with short notice and unannounced visits.
We recommend firms’ CEOs take action now to ensure that their relevant committees are responsible for reviewing each of the areas highlighted in the letter, ensuring that there are no gaps between the firm’s practices and the FCA’s expectations. CEOs will need to follow up on each item to ensure that they are satisfied in respect of any assurances provided and that where gaps are identified, there is a clear plan in place to address these. In the event that firms identify customer harm during this review process, they will also need to consider their obligations under Principle 11 to notify the FCA.