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Dear CEO | Release Date: 30th September 2021

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 recently updated its strategic approach to supervision within the wealth management and stockbroking sector. This communication serves as a directive and reminder to firms about the essential standards expected by the regulator. The FCA’s ongoing commitment is to safeguard the market’s integrity, ensure the protection of consumer interests, and maintain the orderly function of financial markets. The letter outlines key areas of risk, sets forth detailed expectations for firm conduct, and delineates the FCA’s planned activities to ensure compliance and promote healthy market practices.

Strategic Objectives and Regulatory Expectations

The primary objectives of the FCA’s supervision in this sector focus on preventing firms from being avenues for financial malpractices such as scams, fraud, or market abuse. Additionally, it is crucial that firms can manage an orderly wind-down process in the event of failure, ensuring minimal impact on consumers and the market. Another critical area is the transparency of costs and charges, ensuring that consumers are fully informed about the fees associated with their investments.

The FCA expects firms to adopt and maintain a culture that prioritises customer welfare and embodies the principles of fair and transparent market practices. The impending introduction of a ‘Consumer Duty’ standard will elevate the care firms must exhibit towards consumers, mandating a significant cultural and operational shift to focus on achieving positive consumer outcomes.

Culture and the Introduction of Consumer Duty

A firm’s culture significantly influences its conduct and the potential risks it may pose to its clients and the broader market. The FCA highlights the need for a culture that inherently deters harmful behaviours and practices that could lead to consumer detriment. The proposed ‘Consumer Duty’ will establish higher expectations for the standard of care provided to consumers, necessitating a substantial shift in operational focus towards outcomes that genuinely benefit consumers.

Key Risks Identified by the FCA

Fraud, Investment Scams, and Market Abuse

Risk Overview: There is an ongoing risk that consumers may suffer financial losses from investment scams or fraudulent activities facilitated by firms within the sector. Such activities not only harm consumers directly but also damage the sector’s reputation and trustworthiness.

Regulatory Expectations: Firms must rigorously manage client portfolios to ensure they align with individual client risk profiles and investment suitability. High-risk investments, particularly those that are unregulated, must be judiciously justified. Robust systems and controls should be in place to mitigate the risks of facilitating financial crime.

Financial Resilience and Disorderly Firm Failure

Risk Overview: Economic challenges, such as those posed by Brexit and the COVID-19 pandemic, have heightened market volatility, impacting firms’ financial stability. The potential disorderly failure of firms poses significant risks to consumer assets and the orderly function of the market.

Regulatory Expectations: Firms must comprehensively understand and manage their financial resilience, maintaining adequate capital and liquidity to support ongoing operations and orderly wind-down processes if necessary.

Costs and Charges Transparency

Risk Overview: Despite regulatory measures like MiFID II enhancing transparency, there remains a concern that consumers do not fully comprehend the total cost of their investments.

Regulatory Expectations: Firms are expected to maintain transparent, easily understandable systems for reporting all costs and charges associated with investments. These systems should ensure that consumers are well-informed about what they are paying for and the value they receive.

Supervisory Strategy and Programme of Work

The FCA’s supervisory strategy involves a proactive approach to monitoring and intervening where firms show heightened risks of harm to consumers or the market. This strategy includes a combination of data-driven oversight and direct engagements with firms to assess and rectify any areas of concern promptly.

Enhancements in Diversity and Inclusion

The sector’s progress on diversity and inclusion is acknowledged, though more substantial efforts are required. The FCA encourages firms to foster environments that reflect and serve the diverse needs of society, enhancing decision-making and risk management through varied perspectives.

Conclusion and Next Steps

Firms are urged to continually assess and align their operational practices with the FCA’s expectations. Proactive engagement with regulatory updates and preparation for compliance with new standards such as the Consumer Duty are essential. Firms must ensure they are equipped to address these challenges head-on, maintaining the integrity of their operations and the trust of their clients.

Key Takeaways and Actions

Firms should engage with the FCA’s resources and updates actively and prepare for detailed supervisory engagements aimed at enhancing the sector’s standards and protecting consumer interests.

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