Dear CEO | Release Date: 23rd July 2019
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 outlined its supervision strategy for Wealth Management and Stockbroking firms for the 2019/20 period. This strategy seeks to mitigate potential risks and ensure the protection of consumer interests and market integrity.
Overview of Industry Risks
The FCA has identified four principal risks that these firms may pose to their customers and the broader markets:
- Fraud and Investment Scams: Consumers risk losing savings through fraudulent schemes or poorly managed investments that lead to substantial financial loss.
- Mismanagement of Conflicts of Interest: Poor handling of conflicts of interest may erode consumer confidence and trust in the financial system’s capability to secure their financial objectives.
- Inadequate Order Handling and Execution Processes: There is a risk that consumers could receive suboptimal outcomes due to ineffective trading processes, leading to reduced investment returns.
- Opaque Cost Structures: Consumers may be unable to understand or evaluate the costs associated with services due to inadequate disclosure, impacting their investment decisions.
Strategic Focus Areas
The FCA’s supervision for the period will concentrate on key areas including:
- Fraud, Investment Scams, and Market Abuse: Enhanced scrutiny and action against firms involved in these activities will continue. The FCA aims to use data intelligently to identify and address firms contributing disproportionately to market distrust.
- Best Execution Practices: The FCA expects firms to adhere to stringent execution standards to ensure the best possible outcomes for clients, especially in light of findings from the Investment Platforms Market Study.
- Transparency in Costs and Charges: Following MiFID II requirements, firms must ensure clear, comprehensive disclosures about costs and charges associated with their services.
- Management of Conflicts of Interest: Firms are expected to manage conflicts of interest diligently to prevent any adverse impact on client outcomes.
Actions for Firms
- Enhance Internal Controls: Firms should strengthen their internal controls and review their procedures to ensure they align with FCA expectations regarding fraud prevention, best execution, and transparent pricing.
- Reporting and Whistleblowing: Firms should report suspicious activities and cooperate with the FCA to aid in the identification and penalisation of malpractices.
- Diversity and Inclusion: Firms should focus on improving diversity and inclusion within their operations, recognising its importance in fostering a balanced and insightful business environment.
Remuneration and Incentive Structures
The FCA underscores the importance of remuneration structures that promote a healthy corporate culture and align with consumer interests. The Remuneration Policy Statement (RPS) should reflect a firm’s commitment to these principles, and firms are required to submit detailed RPS documentation annually.
Compliance with SM&CR
The Senior Managers and Certification Regime (SM&CR) extends to all FCA solo-regulated firms from December 2019. Firms must ensure compliance with the new standards of conduct and responsibility set out in the regime, reflecting the FCA’s commitment to raising industry standards.
EU Withdrawal Considerations
Post-Brexit, firms must consider the implications of EU withdrawal on their operations, especially those with clients in the EEA. Firms are encouraged to maintain transparent communications and manage their contractual obligations prudently under local and international regulatory expectations.
Conclusion and Next Steps
The FCA expects firms to engage with the outlined strategic priorities actively and adjust their operational and compliance frameworks accordingly. Regular updates and further guidelines will be provided to ensure firms are on track with the implementation of the necessary measures.
Key Takeaways and Actions
- Adherence to Regulatory Changes: Firms must stay updated and compliant with all FCA regulations, especially those concerning market conduct and consumer protection.
- Engagement in Industry Initiatives: Participation in industry-wide initiatives like the STAR initiative to enhance the efficiency of investment and pension transfer processes is encouraged.
- Continuous Improvement and Reporting: Firms should continuously assess and improve their operational practices to meet regulatory standards and should regularly report their progress to the FCA.
- Preparation for Future Assessments: Firms should prepare for future FCA assessments and reviews by ensuring all practices, especially those related to remuneration and conflict management, are in line with FCA expectations.
This comprehensive summary aims to assist CEOs and board members of Wealth Management and Stockbroking firms in navigating the regulatory landscape, ensuring that their firms not only comply with current regulations but are also well-prepared for future challenges.