By Steffen Burgess, Compliance Consultant
The UK Financial Conduct Authority (FCA)’s most recent Dear CEO letter has outlined some areas of continuing concern from the previous two years of supervision of the wholesale brokerage sector, in addition to the new supervisory strategy aimed at wholesale brokers and their key areas for concern.
Findings from the FCA’s previous supervisory cycle
Prudential risk management
The FCA has noted significant progress in clearing firms’ liquidity risk management frameworks (LRMFs) and financial resilience following previous observations of deficiency in liquidity risk management and stress testing.
Despite improvements, deficiencies remain, and cases of weak risk management leading to liquidity risks were noted.
In a bid promote effective prudential risk management, the FCA plans to publish an observation paper outlining best and worst practices identified during its review, which firms are expected to analyse and apply in their own contexts to enhance their LRMFs.
The FCA has pledged to continue its proactive oversight of prudential risk management, ensuring firms effectively manage their financial stability to prevent future market disruptions.
Financial crime
The inherent risk of wholesale brokers being used facilitate financial crime continues to be a focal point of concern at the FCA.
The FCA’s Money Laundering Through the Market (MLTM) multi-firm assessment was said to reveal mixed results—while improvements were noted in risk assessment processes including governance, oversight frameworks and trade surveillance and monitoring collaboration, so too were deficiencies in business-wide risk assessments, failures in client risk-rating methodologies, and inappropriate reliance on third-party due diligence in the transaction chain.
Firms are expected to read the publication in full and ensure its recommendations are implemented.
Additionally, the FCA has highlighted the link between weak anti-money laundering (AML) controls and market abuse, urging firms to review recent FCA Market Watch publications that stressed concerns around personal account dealing and market abuse surveillance.
Remuneration and broker misconduct
The FCA raised concerns over the inconsistent application of the MIFIDPRU Remuneration Code across wholesale brokers and stressed the importance of remuneration as a tool to prevent broker misconduct.
They have demanded immediate remediation from non-compliant firms and outlined their intent to utilise regulatory reporting data such as the MIF008 returns to flag instances of poor or non-compliant remuneration practices.
The FCA has signalled plans to assess whether firms use remuneration as a disciplinary tool to address broker misconduct, including non-financial misconduct.
FCA’s two-year strategy
The FCA has detailed four key areas they’ve determined as strategically important over the next two years to ensure the effective regulation and risk management of the sector:
1. Broker conduct
2. Culture
3. Business oversight
4. Financial resilience
Actions for CEOs and governing bodies
CEOs and governing bodies of wholesale brokers will need to ensure they have discussed the letter and agreed next steps before the end of March 2025. It is recommended that firms record board minutes of this meeting and produce a resolution pack approving the action plan.
It’s important to consider these issues now as, typically, following a letter like this, the FCA will follow up with a Section 165 information request to relevant firms in the form of a survey. The FCA will then typically liaise further with some firms on an individual basis, requesting further information or visits where appropriate.
