FCA Dear CEO letter – Wealth Management and Stockbroking Supervision Strategy

The FCA has recently published a Dear CEO letter providing an update of its view of the key harms faced by the financial services industry, their expectations from firms and an overview of the work they are planning to do. Whilst the letter was aimed at the wealth management and stockbroking sectors, it does contain themes that apply to many other sectors.

The Dear CEO letter covers, among others, the following areas:

  • Culture in the financial services industry – Diversity & Inclusion matters
  • Managing fraud, investment scams, or market abuse
  • The use of high-quality data
  • Financial resilience and disorderly firm failure
  • Costs and charges

In terms of culture, the regulator believes that the culture of financial services firms is a key issue causing major conduct weaknesses. Firms are expected to promote a healthy and inclusive culture that would prevent harm to consumers and markets.  The FCA also published a Consultation Paper (CP21/13) on a new consumer duty that aims to increase the level of protection of customers in retail financial markets. The FCA anticipates that the implementation of the proposed ‘Consumer Duty’ would create a ‘paradigm shift’ in the expectations of firms in retail markets. Firms would have to consider the new ‘Consumer Duty’ at every stage of their processes and focus more on customers’ interests and outcomes.

Moreover, the FCA together with the Prudential Regulation Authority (PRA) and Bank of England (BOE) (the regulators) have published a Discussion Paper (DP21/2) seeking views on regulatory plans to improve diversity and inclusion (D&I) in the financial services sector. Therefore, the regulators’ goals are to eliminate unlawful discrimination, harassment and victimisation; advance equality of opportunity between people who share a protected characteristic and those who do not share it; and foster good relations between people who share a protected characteristic and those who do not share it.

Additionally, the FCA wants to ensure that consumers will not experience any losses due to investment fraud, scams, and market abuse. The FCA expect firms to diligently manage their client portfolios by ensuring that they are in line with individual client risk profiles and assessing the overall suitability. Firms need to have effective systems and controls to manage risks that arise from fraud, scams, financial crime, and market abuse. The Dear CEO letter reminds firms and individuals to report any wrongdoing by contacting the FCA’s whistleblowing team by emailing whistle@fca.org.uk; or Contact the Supervision Hub by emailing firm.queries@fca.org.uk.

In terms of financial resilience, Brexit and the coronavirus pandemic have caused significant financial disruption for firms. For this reason, the FCA published guidance on assessing adequate financial resources (regulatory capital) and understanding the reporting requirements. As mentioned in a previous publication, the FCA is set to implement the Investment Firm Prudential Regime (IFPR) for UK firms authorised under the Markets in Financial Instruments Directive (MiFID). Such firms will be expected to notify the FCA of any emerging liquidity or capital risks in their business so that the regulator can minimise the potential harm to consumers. Under the new regime, firms will be also required to produce a wind-down plan, which will include appropriate and timely triggers for implementation, together with a realistic timeframe and cost estimate for achieving the wind-down.

 

The FCA also reminded firms’ chief executives that they and other senior management function holders will be held accountable for their firm’s actions or inactions if they fail to meet regulatory expectations.

Lastly, following the end of the EU withdrawal period on 31 December 2020, the FCA suggests that firms should have already considered how this impacts them and their customers and have taken appropriate actions. The FCA expects firms to have considered the changes made to the Handbook to reflect the UK’s withdrawal from the EU, and the approach to using the temporary transitional power (TTP). The TTP came into effect at the end of the transition period and ends on 31 March 2022. Further details can be found on the FCA’s Brexit website and insurer specific website.

What should you be doing now?

  • Implement diversity and inclusion practices into the senior managers’ regimes which applies to many firms;
  • At board level, senior leaders should be responsible for setting the firm’s strategy and culture framework;
  • Set up or review your D&I policies that would promote the diversity of the board, clear objectives and goals as well as having an effective plan for meeting those goals;
  • Develop metrics that enable monitoring of diversity and inclusion practices. The regulators will be seeking to understand the levels of diversity within firms, the type of data firms currently collect on D&I, and the firms’ strategy in collecting D&I data in the future;
  • Pay close attention to having sufficient capital within the firm based on the provision of the IFPR and ensuring that you have a fully considered and costed Wind Down plan; and,
  • Notify the FCA of any developing liquidity or capital risks in your business at an early stage so that it can work with the firms to reduce consumer harm.