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Dear Chief Executive | Release Date: 11th January 2023

To read a longer summary of this Dear Chief Executive, click here.

To access the original FCA document, click here.

Short Summary

The FCA’s “Dear Chief Executive” letter to wholesale brokers outlines the supervisory strategy for the next two years, emphasising the significant risks and expectations within the sector. Wholesale brokers, vital in financial markets for sourcing liquidity and facilitating transactions, face unique challenges and risks, particularly in volatile markets. The letter highlights recent issues in liquidity risk management and stress testing which were found inadequate in current market conditions.

The FCA identifies key risks related to financial, credit, and operational realms, exacerbated by market volatility. It notes some improvements in governance and compliance controls, especially in larger firms, but overall, finds that many firms continue to struggle with poor conduct and ineffective cultural adjustments. Specific concerns include inadequate responses to financial crime and insufficient scrutiny during broker hiring processes.

Focusing on the upcoming two years, the FCA will concentrate on financial resilience, particularly liquidity risk management in clearing brokers. It urges firms to adopt more robust stress testing and preparedness for extreme market conditions. Additionally, the letter calls for improvements in remuneration structures to better align with client interests and regulatory standards, enhancing governance to support effective risk management and decision-making.

Firms are expected to engage with these issues actively, ensuring compliance with the new guidelines and preparing for increased scrutiny from the FCA.

The key take-aways for firms are to reinforce their liquidity management, refine remuneration practices, bolster governance frameworks, and enhance their control functions to effectively manage and mitigate inherent risks.

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