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FCA sends hard-hitting ‘Dear CEO’ letter to wealth managers and retail stockbrokers

23 Nov 2023

By Harry Barnes, Senior Compliance Consultant

On 8 November 2023, the UK’s Financial Conduct Authority (FCA) wrote to wealth managers and retail-focused stockbrokers to set out its expectations and the key areas for supervision moving forward, as well as indicating a more proactive approach to enforcement. Here, we summarise the key areas raised.

Financial crime

Wealth management and retail stockbroking are inherently high-risk sectors for enabling or participating in financial crime. The FCA notes that consumers have lost significant sums due to scams and fraud, and some firms have enabled money laundering.

In relation to financial crime, the FCA expects firms to:

  • Not knowingly or unintentionally engage or facilitate frauds, scams or money laundering
  • Understand your firm’s financial crime risks by understanding and identifying your clients, including expected transaction patterns and corporate structures
  • Ensure that the firm is not carrying out tick-box compliance exercises or outsourcing responsibility to third parties
  • Ensure the firm has robust and effective systems and controls to counter financial crime and money laundering in a risk-based manner
  • Ensure that SMF16 and SMF17 role-holders have the necessary experience, skills and are sufficiently independent
  • Share and report wrongdoing to the FCA or law enforcement in a timely manner
  • Have read and fully implemented the FCA’s Financial Crime Guide and Financial Crime Thematic Reviews, which outline in detail the FCA’s practical expectations and steps that firms should take to combat financial crime

Consumer Duty

The FCA expects firms to have fully implemented Consumer Duty at this point. There is an expectation that implementation will have resulted in meaningful changes to the business and services. However, the FCA has identified failings relating to Consumer Duty in then following areas:

1. Products, services and consumer understanding

The FCA has identified that some firms are pushing products or services that are too high-risk or too complex for most consumers.

The regulator has, in particular, noted that some portfolio managers have taken advantage of their position to obscure the risks to customers arising from the fact that their portfolio is not aligned with their risk profile. Meanwhile, some execution-only stockbrokers have promoted products that are too complex for consumers to understand.

The FCA has highlighted the requirement for all communications to be fair, clear and not misleading and has said that firms are expected to test consumer understanding of products and services.

Regarding Consumer Duty, the FCA expects firms to:

  • Have a clear understanding of the needs and objectives of the target market for any given product or service
  • Ensure that products and services are aligned to each consumer’s needs, risk profile and circumstances
  • Reassess the vulnerability status of clients based on the FCA’s guidance, as the FCA has identified that only 51% of portfolio managers and 31% of stockbrokers have identified vulnerable consumers, despite half of all consumers being classified as vulnerable at some point
  • Ensure that consumers fully understand all the investment products and services that they use, and that the firm does not exploit consumers’ limited understanding of products/services
  • Not uprate consumers from retail to professional unless it is supported by a robust assessment and relevant systems and controls
  • Be able to fully justify any complex and/or unregulated investments offered by the firm, with a clear understanding of the suitability or appropriateness of the product for consumers
  • Ensure that consumers have sufficient understanding of any limitations as to Financial Ombudsman or FSCS protection status for products and investments

2. Price and value

The FCA has identified that firms are charging for services that are not being provided, overtrading on portfolios to generate transaction fees, and providing products or services that do not align with the needs of consumers.

The regulator is concerned that firms are not consistently providing clear disclosures on fees and charging structures and, as a result, consumers are unaware of high fees eroding investment returns.

Firms will be expected to justify high charges. Since the introduction of Consumer Duty, we have seen some wealth managers (such as St James’s Place) removing exit fees.

The FCA expects firms to consider the value of products and services. The regulator has also highlighted the fact that many firms are not passing on fair interest on client money balances, despite the current environment of high interest rates.

The FCA has also identified that consumers are not being fairly rewarded when they are exposed to risk, such as in instances of stock lending where firms are not providing a fair share of the revenue despite exposing consumers in order to achieve said revenue.

In relation to value, the FCA expects firms to:

  • Regularly assess the overall cost and value for money of products and services
  • Make changes where poor value is identified

Wider expectations

In addition to the primary areas of potential harm outlined above, the FCA has highlighted a number of other areas of concern:

  • Operational resilience
  • Client Asset Sourcebook (CASS) failings for firms holding or controlling client money and assets
  • Prevention of market abuse (an area in which the FCA has significantly stepped up enforcement action in the second half of 2023)
  • ESG issues, which are increasingly important with the introduction of the Task Force on Climate-Related Financial Disclosures (TCFD), anti-greenwashing rules and the upcoming UK Sustainability Disclosure Requirements (SDR)
  • Improving diversity, equity and inclusion (DE&I) as well as combatting non-financial misconduct within the industry, including the recent publication of a DE&I consultation paper to propose new rules and guidance for firms

FCA approach moving forward

The FCA is implementing a data-led approach to allow for the identification of outliers and problem firms. The regulator will then target those firms at risk of causing the greatest harm with the greatest oversight.

The FCA will be sending wealth managers and stockbrokers a further survey in December 2023, which will be tailored to the risks posed by these firms’ business models.

Supervision will become more targeted, intrusive, proactive and assertive. There is a new dedicated financial crime function for consumer investments whose sole focus is to identify firms’ key fraud, scams or money laundering indicators. There will also be increased engagement with firms on non-financial misconduct.

The FCA has started a major drive of short notice and unannounced visits, particularly in respect of financial crime. They’ve said that they plan to use the Consumer Duty to intervene quickly against potential or actual consumer harms, on an individual firm or multi-firm level. Where action is taken, the FCA will look to the firm’s leadership and governance to try to determine the root cause of the harm.

What needs to be done and how can IQ-EQ help?

From the ‘Dear CEO’ letter, there are four key actions for firms to take before the FCA sends its next firm survey in December:

1. Review your firm’s systems and controls around financial crime and ensure that the firm fully understands the risks and its client base

At IQ-EQ, our team is able to deliver financial crime reviews and audits to assess your firm’s systems and controls against the relevant requirements.

2. Review your firm’s implementation of the Consumer Duty, particularly relating to the suitability of products for consumers and especially where there are complex products or services offered

Our expert Consumer Duty team is able to advise on the applicability of the Duty to your firm, assist in its implementation and review existing implementation to ensure compliance.

3. Review the value assessments for products and services offered to ensure that all offerings represent good value to consumers

We have experience in conducting and reviewing value assessments on an array of regulated products, as well as creating suitability frameworks.

4. Review the FCA’s wider areas of concern and their expectations in each area

Our team is experienced in delivering broad-based compliance health checks and compliance monitoring programmes. We can also conduct in-depth reviews of systems and controls on specific risk topics for wealth managers and stockbrokers identified by the FCA, such as client onboarding or market abuse.

To have an initial discussion on what the FCA’s new supervisory approach means for your firm or to find out more about the support available from IQ-EQ’s expert compliance consulting and technical regulatory reporting teams, please do not hesitate to contact us today.

Working with IQ-EQ has been seamless – you and your team understand our business, advise us appropriately, and handle your side of our collective partnership so that we can focus on making good investment decisions. Evan Gibson SVP, Merchants Capital

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