On the 8th November, the FCA published a Dear CEO letter sent to wealth management and stockbroking firms. The letter is intended for firms that typically manage portfolios or provide retail focused stockbroking services or operate as a private bank or provide outsourced services to wealth managers.
The letter sets out the Regulator's assessment of this sector’s key harms and its updated supervisory priorities, and the tone and content make for uncomfortable reading. In the introductory section the FCA reminds firms that “Our supervision is shifting to become more assertive, intrusive, proactive and data driven. We are conducting more short notice and unannounced visits where we deem it appropriate. And we are significantly increasing the use of our formal intervention powers for the worst cases.”
The focus is very much on fighting financial crime and embedding the Consumer Duty. By way of context, the FCA states:
“We recognise the role that wealth managers and stockbrokers often play in helping consumers manage, buy and safeguard their assets to meet their financial goals. This sector can provide real value, particularly in navigating clients through uncertain economic and geopolitical times. However, firms in your sector have also:
- lost consumers significant sums to scams and fraud, and have enabled money laundering, causing significant negative economic, market and social damage
- exposed consumers to inappropriately high-risk or complex investments and provided consumers with poor value products and services
The scale of consumers in the sector is significant, with 1.8m portfolios and 14.3m stockbroking accounts. The level of assets under management, combined with the seriousness of these key harms, make this one of the higher risk sectors of financial service firms in our jurisdiction.”
The FCA's financial crime expectations
The FCA notes that this is an inherently high-risk sector for enabling and/or participating in financial crime, but further that it has seen firms “launder the assets of illegitimate clients through greed or incompetence and others squander or even steal the assets of legitimate clients through frauds and scams.”
The FCA states that it expects firms to:
- not knowingly or otherwise engage or facilitate frauds, scams, or money laundering;
- understand financial crime risks by identifying who their clients are, including their expected transaction patterns and corporate structure;
- not carry out tick box compliance exercises or outsource responsibility to third parties;
- ensure they have robust and effective systems and controls to counter financial crime and money laundering in a proportionate and risk-based way;
- ensure their SMF 16/17 holders have the required experience, skills, and independence (see here);
- share and report information about wrongdoing with the FCA or relevant law enforcement agencies immediately;
- read and fully implement the Financial Crime Guide and thematic reviews.
The FCA's Consumer Duty expectations
Of course, the FCA expects firms to have implemented the Consumer Duty in full, thereby putting the needs of consumers first. They expect firms to be able to demonstrate meaningful changes to their business as a result.
Unfortunately, the FCA states it has seen many wealth managers and stockbrokers failing to meet their obligations to provide a service that delivers good consumer outcomes, and these failings have driven the expectations below:
Products & Services and Consumer Understanding
The FCA expects firms to:
- have a clear focus of the needs and objectives of their target market;
- ensure products and services remain aligned to consumer needs, risk profile and circumstances;
- reassess the vulnerability status of consumers (NB: the FCA has clear concerns where firms say they do not have any);
- ensure consumers fully understand all aspects of their investment products and services, and not exploit limited understanding;
- not uprate consumers from retail to professional unless this is supported by robust systems and controls, given the loss of protections;
- fully justify any complex and/or unregulated investments offered, with a clear view of the suitability or appropriateness for the consumer; and
- ensure consumers understand any limitations to the FOS / FSCS consumer protection status and associated risks of investments
Price and Value
The FCA expects firms to:
- change poor pricing practices where they exist (the letter gives examples of ongoing poor practice the FCA has seen);
- regularly assess the overall cost and value for money of products and services; and
- make changes when poor value is identified.
As well as the issues identified above, the FCA reminds firms of the other aspects of the Consumer Duty, including for consumer support. Embedding the Consumer Duty into the day-to-day culture and running of firms must remain a key focus.
The FCA's wider expectations
The FCA makes clear that, while it focuses on the two key priority harms above, that is by no means a complete list. It asks firms to remind themselves of all regulatory obligations, including operational resilience, CASS, preventing market abuse, ESG, D&I and making sure there is no place for non-financial misconduct.
The FCA concludes by confirming that its supervision will become more targeted, intrusive and assertive, so it seems clear that firms can expect the FCA to intervene and take action where they are not demonstrably meeting expectations.
By working jointly on these issues, we hope to reduce harm, increase standards and improve the sector’s reputation, which is in all our interests. We know that we are always stronger when working together and will use our successful public and private partnerships, particularly when it comes to fighting financial crime.