Dear CEO | Release Date: 8th November 2023
To read a shorter summary of this Dear CEO letter, click here.
To access the original FCA document, click here.
Long Summary
The Financial Conduct Authority (FCA) has issued a comprehensive guidance letter to CEOs of wealth management and stockbroking firms, delineating the agency’s updated supervisory priorities and expectations. The letter underscores the dual focus on preventing financial crime and fulfilling Consumer Duty outcomes, and places accountability on the leadership of these firms to adhere strictly to FCA requirements.
Sector Analysis: Key Risks and Harms
Financial Crime
The wealth management and stockbroking sector is highlighted as inherently susceptible to financial crimes, such as money laundering and fraud. These crimes not only result in significant consumer financial losses but also cause broader economic, market, and social damage. The FCA emphasises that these activities often have links to severe criminal activities, including human trafficking and terrorism.
Consumer Protection Failures
The sector has faced criticism for exposing consumers to high-risk or overly complex investments that offer poor value. With 1.8 million portfolios and 14.3 million stockbroking accounts under management, the scale of potential consumer harm is considerable, marking the sector as high-risk within the financial services industry.
FCA’s Updated Supervisory Priorities
Preventing Financial Crime
The FCA’s expectations for preventing financial crime are stringent:
- Engagement in Criminal Activities: Firms must not engage in or facilitate frauds, scams, or money laundering.
- Risk Management: Firms are expected to understand their financial crime risks thoroughly, including client identities and transaction patterns.
- System Controls: Adequate and effective systems must be in place to counter financial crime and money laundering in a risk-based manner.
- Compliance and Reporting: Firms should avoid superficial compliance exercises and are required to report any wrongdoing to the FCA or relevant law enforcement immediately.
Ensuring Consumer Duty Outcomes
The Consumer Duty requires firms to prioritise consumer needs effectively, ensuring that:
- Product and Service Alignment: Products and services must align with the consumers’ needs, risk profiles, and circumstances.
- Consumer Understanding: Firms must ensure consumers understand all aspects of their investment products and services. Misleading or unclear communications are unacceptable.
- Vulnerability Assessments: Firms need to reassess the vulnerability status of their consumers regularly, aligning with FCA guidance.
Pricing and Value Standards
The FCA criticises the practice of charging for undelivered services and highlights the necessity for firms to:
- Fair Value: Ensure that the pricing of products and services provides fair value relative to the benefits that consumers can reasonably expect.
- Transparency: Firms must provide clear disclosures about their fees and charging structures to prevent consumers from being unaware of costs that may significantly reduce their investment returns.
Strengthened Supervisory Measures
The FCA is enhancing its supervisory approach to be more assertive and data-driven:
- Surveillance Enhancements: This includes conducting more short notice and unannounced visits to ensure compliance.
- Intervention Powers: The FCA will increase the use of formal intervention powers, particularly for the most egregious cases.
- Targeted Supervision: The supervision will focus on identifying and addressing firms with significant indicators of financial crime or poor consumer outcomes.
Comprehensive Regulatory Obligations
In addition to the specific harms addressed, firms must remember their broader regulatory obligations such as:
- Operational Resilience: Following the rules set out in the Clients Asset Sourcebook when handling or controlling client money.
- Non-Financial Misconduct: Upholding standards in diversity, equity, inclusion, and ensuring that there is no place for discrimination, bullying, or sexual harassment.
Engagement and Communication with the FCA
Firms are urged to maintain proactive communication with the FCA, especially regarding any remedial actions or identified harms. This includes:
- Immediate Notification: Under Principle 11, firms must notify the regulator immediately of any significant issues.
- Strategic Importance: For urgent issues, firms are directed to contact designated FCA representatives.
Conclusion
The FCA’s letter is a clear mandate for wealth management and stockbroking firms to elevate their operational standards and compliance measures. By adhering to these guidelines, firms can mitigate risks, enhance their reputations, and contribute positively to the overall stability and integrity of the financial services industry. This collaborative effort is aimed not only at compliance but also at fostering an environment where consumer trust is maintained and financial crimes are vigorously combated.