FCA shows ‘assertive and intrusive’ supervision in letter to wealth managers and stockbrokers

In a recent ‘Dear CEO’ letter (5-page PDF/241KB) to the heads of these firms, the FCA reminded wealth managers and stockbrokers to meet its requirements and expectations in full and at all times, with a strong focus on preventing financial crime and meeting the requirements of the new consumer duty.

In the letter, the FCA highlighted the “higher risk” potentially posed by firms in the sector to consumers. It said that some firms in the sector have lost consumers significant sums to scams and fraud and have enabled money laundering, causing significant negative economic, market and social damage. It also said that some firms have 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,” said the regulator in the letter.

The list of seven FCA expectations to prevent financial crime include requirements to not carry out ‘tick box’ compliance exercises or outsource responsibility to third parties, and to ensure that the firm establishes robust and effective systems and controls to counter financial crime and money laundering in a proportionate and risk-based way.

On consumer duty requirements, the FCA singled out several key areas of failure, such as pushing products or services that are too high-risk or too complex for most consumers, charging for services which are not delivered, overtrading on portfolios to generate high transaction fees and providing a product or service which does not align with the needs of consumers, and not providing clear disclosures on fees or charging structures.

Among other things, the FCA has asked firms to reassess the vulnerability status of their consumers based on the FCA’s guidance, ensure consumers fully understand all aspects of their investment products and services to prevent exploiting limited understanding, and regularly assess the overall cost and value for money of their products and services so changes can be made when poor value is identified.

Financial enforcement expert Jonathan Cavill of Pinsent Masons said: ”The FCA continues to remind the financial services industry that it intends to seek to protect consumers who may be harmed by a variety of causes, but the primary focus for now is on the prevention of financial crime and ensuring compliance with the consumer duty. We are aware that the FCA has made structural changes to help meet that objective and has invested heavily in becoming a data-driven regulator. This sits alongside the FCA’s recent movements regarding non-financial misconduct.” 

As an example of its continued push for a data-driven approach, the FCA indicated that it will send out a further survey in December asking about risks posed by firms’ business models. data similar survey last year achieved a 99% response rate and resulted in a number of interventions, ‘skilled person’ reviews and improvements to systems and controls, governance, leadership and products and services.

Also in the letter, the financial regulator confirmed that its supervision “is shifting to become more assertive, intrusive, proactive and data drive”. It said that it is conducting more short notice and unannounced visits, as well as significantly increasing the use of its formal intervention powers in the worst cases.

Financial services expert Elizabeth Budd of Pinsent Masons said that the message is “crystal clear” and confirms what a number of firms are already experiencing in their interactions with the regulator. “Although the letter focusses on financial crime requirements and consumer duty requirements, wealth managers and stockbrokers should understand that the FCA is expecting to see a sea-change in approach. With the warning of no notice or short notice visits, firms should be considering a root and branch review of their approach and culture, questioning whether ‘business as usual’ is good enough – the regulator would appear to think not,” she said.

The FCA warned in its letter that it will consider in future engagement whether firms have taken appropriate action to rectify the root cause of any issues, which is often poor and ineffective leadership, governance, systems and controls and conflicts of interest management. It said that it would take action if firms have not done so.