Dear Chief Executive | Release Date: 8th September 2023
To read a shorter summary of this Dear Chief Executive letter, click here.
To access the original FCA document, click here.
Long Summary
This letter marks the first address to the chief executives of UK’s wholesale banks following the launch of the FCA’s new integrated regulatory framework, encompassing Supervision, Policy, and Competition. The introduction of the Sell-Side Directorate, incorporating the Wholesale Banks Department, signifies a structured approach towards managing market intermediaries and analysing market interactions.
Current Market Challenges
Wholesale banks faced numerous market stresses in 2022, a trend that persists in 2023. Factors such as volatile asset prices, global economic slowdown, rising interest rates, inflation, and geopolitical tensions have continually tested business models. The interconnected nature of these risks means that operational or reputational issues could rapidly escalate to broader concerns about a firm’s stability. This environment significantly influences the FCA’s consumer protection and market integrity goals.
Supervisory Focus for 2023-2025
The FCA’s supervisory strategy is designed to be dynamic, allowing adjustments based on emerging market conditions while maintaining a focus on key risk areas identified through comprehensive data analysis and global regulatory interactions. Wholesale banks are expected to contribute to the integrity of the UK financial market, upholding high standards of market conduct.
Key Supervisory Areas:
Risk Management:
Recent market shocks, like those involving Archegos, highlighted significant risk management failings within wholesale banking. The FCA stresses the importance of enhanced risk controls and accurate client risk assessments. Banks are urged to update their stress testing scenarios to reflect potential market conditions more accurately.
Operational Resilience:
In line with the FCA’s policy statement PS21/3, banks are expected to ensure operational resilience, focusing on essential business services and third-party dependencies. This includes robust handling of cyber risks and immediate reporting of security breaches, ensuring minimal impact on market operations.
Market Conduct and Financial Crime:
The FCA plans to increase scrutiny of how banks manage potential conduct risks, such as market abuse and conflicts of interest, especially during periods of external pressure. This includes a more hands-on assessment approach to ensure that policy implementations are effective in mitigating risks.
Consumer Duty and LIBOR Transition:
Banks are reminded of their obligations under the Consumer Duty to ensure fair treatment of customers and are expected to continue the transition from LIBOR, focusing on eliminating dependencies on synthetic rates.
Environmental, Social, and Governance (ESG) Compliance:
Banks must align their financing activities with their ESG commitments and adhere to emerging frameworks like the Transition Plan Taskforce’s guidelines.
Diversity, Equity, and Inclusion (DEI):
The FCA emphasises the importance of DEI in fostering a healthy corporate culture that enhances decision-making and risk management.
Non-Financial Misconduct:
Firms must have effective systems to identify and mitigate risks of non-financial misconduct, ensuring that internal culture does not tolerate harmful behaviours.
Next Steps and Actions for Wholesale Banks
Board-Level Review and Response:
CEOs are expected to discuss the contents of this letter with their boards and strategize necessary actions to align with FCA’s expectations.
Regulatory Compliance and Engagement:
Wholesale banks must remain proactive in their engagement with the FCA, reporting any significant issues promptly and participating actively in discussions regarding market risks and regulatory updates.
Continued Improvement and Oversight:
Banks should continually refine their risk management practices and operational resilience to adapt to the evolving market conditions and regulatory landscape.
Conclusion
The FCA is committed to working collaboratively with the wholesale banking sector to elevate standards and ensure effective market functioning. Banks are encouraged to closely align with regulatory expectations and contribute positively to the stability and integrity of the financial system.