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Dear Chief Executive, | Release Date: 8th February 2024

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

To access the original FCA document, click here.

Long Summary

The Financial Conduct Authority (FCA) outlines its priorities to the chief executives of all UK wholesale banks, under its new integrated regulatory framework. This letter is part of the FCA’s strategic agenda for the sector, taking into account the challenging external environment.

External Environment and Challenges

The FCA notes the significant market stresses faced by wholesale banks in 2022, including volatility in asset prices, weak global growth, rising interest rates, inflation, and geopolitical tensions. These factors have continuously tested business models and increased risks, highlighting the interconnectivity between operational, reputational, and broader firm risks.

Supervisory Work Programme

The FCA’s supervisory work programme for the next two years is shaped by insights from supervisory work, firm authorisations, external data, global regulatory interactions, and the FCA’s own strategy. This programme sets out the FCA’s areas of supervisory focus, which may be prioritised and adapted according to circumstances.

Risk Management Focus

Wholesale banks play a crucial role in global financial markets and the UK’s status as an international financial centre. However, poor control of activities can cause harm and transmit risks to the wider financial services economy, impacting consumers and market integrity. The FCA has observed instances of weak client relationship management, underestimation of market concentrations, and inadequate stress testing assumptions.

Operational Resilience

Operational resilience is critical to preserve the safety and soundness of markets. The FCA expects banks to consider services rather than just systems, ensuring resilience even when third-party services are disrupted. Prompt notification of cyber-attacks is crucial.

Maintaining High Standards of Control

Banks are exposed to conduct risks like financial crime, market abuse, and conflicts of interest. The FCA emphasises the importance of maintaining control frameworks to manage these risks effectively, even under external pressures.

Actions and Future Plans

Risk Management Remediation: Many firms have implemented remediation programmes to improve risk management and oversight. The FCA will test the embeddedness of these improvements in new product development and transactions.

Increased Regulatory Engagement: Firms can expect heightened regulatory engagement and information requests during stressed conditions. The FCA encourages firms to share their insights on emerging market risks.

Maintaining Control Amid External Pressures

The FCA warns against reducing conduct standards in challenging environments. For example, during the Covid pandemic, some banks reportedly pressured corporate clients for equity mandates. The FCA will closely monitor for signs of similar behaviour and expects Boards and senior management to reinforce good conduct standards.

Operational Resilience and Third-Party Reliance

Operational resilience remains a top priority, with banks expected to be resilient to disruptions, including those from third-party service providers. Cyber-attacks, especially those targeting third parties, can have wide-ranging implications. Banks are responsible for their operational resilience, regardless of third-party dependencies.

Ensuring Compliance with PS21/3

Banks must comply with the requirements in policy statement PS21/3, focusing on building operational resilience. This includes considering services provided, rather than just systems, and being prepared for disruptions, including those caused by third parties.

Organisational Changes and UK Booking

The FCA expects appropriate oversight for any business booked into the UK, regardless of a bank’s international operations. UK management should understand and manage their firm’s booking model and ensure a control framework that meets UK regulatory requirements. The FCA should be informed promptly of any significant organisational changes.

LIBOR Transition

The successful transition from LIBOR is noted, with an expectation that banks will continue transitioning contracts that reference USD LIBOR and not overly rely on synthetic LIBOR.

Implementation of the Consumer Duty

The FCA emphasises the importance of implementing the Consumer Duty, particularly for wholesale banks with direct relationships with retail clients or those manufacturing products sold to retail clients. The robustness of Consumer Duty assessments and compliance will be scrutinised.

Focus on ESG and AI

Wholesale banks are encouraged to align their financing activities with their transition plans and public ESG commitments. Engagement with the Transition Plan Taskforce’s (TPT) framework is encouraged. Additionally, the FCA will engage with banks on the deployment and plans for AI and machine learning technologies.

Diversity, Equity, and Inclusion

The FCA highlights the importance of diversity, equity, and inclusion in healthy corporate cultures and better decision-making. Upcoming consultations on policy interventions will focus on advancing these aspects within the sector.

Addressing Non-Financial Misconduct

The FCA stresses that non-financial misconduct can raise questions about a firm’s culture, decision-making, and risk management. Firms are expected to take allegations of misconduct seriously and have effective systems to identify and mitigate these risks.

Key Take-Aways and Actions for Banks

  1. Active Risk Management – Wholesale banks must actively manage operational and reputational risks, update stress testing assumptions, and maintain high standards of control.
  2. Operational Resilience and Third-Party Dependencies – Firms should ensure operational resilience and have contingency plans for third-party service disruptions.
  3. Compliance with Regulatory Requirements – Banks must comply with policy statements like PS21/3 and ensure effective implementation of the Consumer Duty.
  4. Engagement in ESG and AI Initiatives – Banks should engage with frameworks like TPT and explore AI opportunities while maintaining appropriate controls.
  5. Focus on Diversity and Handling Misconduct – Emphasising diversity, equity, and inclusion and addressing non-financial misconduct is critical.
  6. Proactive Communication with FCA – Banks should keep the FCA informed of any significant changes or challenges and engage in dialogue on emerging risks.

Conclusion

The FCA’s letter underscores the critical role of wholesale banks in maintaining market integrity and protecting consumer interests. The FCA expects compliance, adaptability, and proactive engagement from banks in a challenging financial environment.

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