On the 8th November, the FCA issued a Dear CEO Letter: FCA Expectations for Wealth Management & Stockbroking Firms. The letter sets out their assessment of the sector’s key harms and an update on their supervisory priorities of:
- Preventing financial crime; and
- Meeting Consumer Duty outcomes
The FCA calls out that although the sector can provide real value to consumers, and plays a pivotal role in supporting consumers in managing their assets, some firms 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
Financial Crime Expectations
The FCA cited that the sector is much stronger when working together to combat financial crime activities. The wealth management and stockbroking sectors are particularly high risk for enabling financial crime, which have damaging impacts on consumers, markets, wider society and the industry as a whole. The FCA expects firms to:
- Not knowingly facilitate frauds, scams or money laundering
- Understanding your financial crime risk by better understanding your clients
- Do not undertake ‘tick box’ compliance or outsource responsibility to third parties
- Ensure your systems and controls are effective and robust
- Ensure SMF 16/17 holders have the required skill and independence
- Share and report information of wrong doing with the regulator immediately
- Read and implement their Financial Crime Guide: A firm’s guide to countering financial crime risks (FCG) and Financial Crime Thematic Reviews (FCTR)
Consumer Duty Expectations
The FCA stresses that the Consumer Duty should be implemented in full, and therefore consumer needs must be put first. Implementation of the Duty should have resulted in meaningful change, which should be easily demonstrable if asked. Unfortunately the FCA have seen too many firms not meeting their Consumer Duty obligations. The most common fail areas seen are:
Products and Services and Customer Understanding
The FCA cites the concern that products which are too high risk or complex are being pushed on to clients, and some firms have used their established and close relationships with clients to obscure the risks of unsuitable portfolios. Communications are not always clear, fair and not mis-leading and consumer understanding cannot be demonstrated. The FCA expects firms to:
- Have a clear focus on the needs and objectives of your target market
- Ensure your products and services are, and remain, aligned to your customer’s needs, risk profile, and circumstances
- Reassess the vulnerability status of your consumers based on their guidance – 49% of portfolio managers and 69% of stock brokers claimed they did not have any vulnerable customers
- Ensure consumers fully understand the products and services offered
- No to uprate customers from retail to professional without adequate supporting evidence and reason
- Fully justify the suitability of any complex or unregulated investments
- Ensure clients understand the FOS and FSCS limitations
Price and Value
The FCA cites that irrespective of the Price and Value Consumer Duty rules, firms continue to charge for services not delivered, (e.g. ongoing portfolio management and advice services) and provide these services when they do not meet the clients needs. Fees and charging structures continue to be overly complex, opaque and unjustified. Disclosure and the impact on investment returns is also inadequate. Firms also need to consider passing on a fair share of interest collected on client money balances held, as well as a fair share in revenue streams created from securities lending where consumers are exposed to risk. The FCA expects firms to challenge themselves on these areas and:
- Regularly assess the overall cost and value for money of your products and services
- Make changes when poor value is identified
In addition, the FCA stresses that embedding all elements of the Consumer Duty into your day-to-day culture must remain a key focus.
Wider expectations
While this Dear CEO letter is focused on the areas outlined above, the FCA listed other areas where it wants to see continued improvement, namely:
- CASS practices and controls
- Prevention of market abuse
- ESG approach and practices
- Diversity, equality and inclusion
- Exclusion of non-financial misconduct
FCA Supervision
The FCA also took the opportunity to outline how they expect to supervise going forward. Supervision will become more assertive, intrusive, proactive and data driven. Anecdotal public information and press releases will be used to trigger engagement with firms. They have already started a major drive with short notice and unannounced visits, particularly for financial crime. They will use Consumer Duty to intervene quickly against potential or actual consumers harms, on an individual or multi firm level.
How Square 4 Can Help
At Square 4 we specialise in regulatory compliance across the FCA agenda throughout the wealth management distribute chain. Our specialist consultants have been supporting our clients successfully implement Consumer Duty and other conduct related issues listed in this Dear CEO letter. Should you which to discuss the contents of this letter or how Square 4 can help in more detail, please contact me at sgoryl@square4.com, or Elliot Cooper at ecooper@square4.com.
