FCA outlines expectations in UK for wealth management and stockbroking firms
Published on 15th Nov 2023
What steps may firms need to take in areas such as preventing financial crime and meeting Consumer Duty outcomes?
The UK Financial Conduct Authority (FCA) has published a portfolio letter to CEOs of wealth management and stockbroking firms, setting out its assessment of the sector’s key harms and the FCA's updated supervisory priorities.
The FCA's main areas of focus include preventing financial crime and meeting Consumer Duty outcomes.
The FCA states in its portfolio letter that the wealth management and stockbroking sector is "inherently high-risk…for enabling and/or participating in financial crime". As such, the FCA sets out its expectations in this area. These include that firms:
- understand their financial crime risks by identifying who their clients are, including their expected transaction patterns and corporate structure;
- do not carry out "tick box" compliance exercises or outsource responsibility to third parties;
- ensure that 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 (that is, money laundering reporting officers and compliance officers) have the required experience, skills, and independence (the FCA has some helpful guidance relating to this, available here);
- share and report information about wrongdoing with the FCA or relevant law enforcement agencies immediately; and
- read and fully implement the FCA's "Financial Crime Guide: A firm’s guide to countering financial crime risks" and Financial Crime Thematic Reviews.
Unsurprisingly, the FCA expects firms to have implemented the Consumer Duty (which came into force on 31 July 2023 for all products and services that were open for sale or renewal). The FCA has, however, "seen many wealth managers and stockbrokers failing to meet their obligations to provide a service that delivers good consumer outcomes".
In its portfolio letter, the FCA flags two key areas in which it has identified failings: (i) products and services and customer understanding; and (ii) price and value.
Products and services and customer understanding
The FCA notes in particular that it has encountered situations where portfolio managers have taken advantage of established relationships with clients to obscure risks of unsuitable portfolios which are not aligned to client’s risk profile.
The FCA expects firms to, for instance:
- have a clear focus of the needs and objectives of their target market;
- ensure products and services remain aligned to consumer’s needs, risk profile and circumstances;
- reassess the vulnerability status of consumers based on FCA guidance; and
- not "uprate" consumers from retail to professional unless this is supported by robust systems and controls. This is, of itself, an area of focus more generally for the FCA – it noted the same issue in its portfolio letter to CEOs of corporate finance firms this September (see our Insight for further information).
Price and value
The FCA states that it sees firms charging for services which are not delivered (such as ongoing advice), overtrading on portfolios to generate high transaction fees and providing a product or service which does not align with needs of consumers. Also, it is concerned that firms are not consistently providing clear disclosures on their fees or charging structures.
Consequently, the FCA expects firms to address such issues, including by:
- regularly assessing the overall cost and value for money of products and services; and
- making changes when poor value is identified.
The FCA expects firms to consider the contents of the portfolio letter and take any remedial action or make any relevant enhancements, as necessary.
The FCA also notes that it "expects [firms] to proactively tell [the FCA] if work done on the above points results in remedial action or identifies harm". It reminds firms of their ongoing obligations to notify the regulator of any issue that should be shared with it under Principle 11.
Osborne Clarke comment
It is clear from the tone of the portfolio letter that the FCA intends to be very robust in its supervision of firms in this area (and enforcement against such firms, where it considers this action appropriate).
Some of the language in this letter is more forthright than that which we are typically used to seeing from the FCA. This can be explained by the FCA's own declaration that its "supervision is shifting to become more assertive, intrusive, proactive and data driven. [It is] conducting more short notice and unannounced visits where [the FCA] deem[s] it appropriate. And [the FCA is] significantly increasing the use of [its] formal intervention powers for the worst cases". Some of this may, indeed, be borne out of a certain degree of frustration from the FCA that not all firms have learned the necessary lessons from its previous portfolio letter to this sector in September 2021, which also raised concerns that are not entirely unrelated to those set out in this portfolio letter (relating to financial crime and costs disclosures, among other things).
Firms should, therefore, carefully review the letter and ensure that they properly "kick the tyres" on their financial crime policies, procedures, systems and controls and Consumer Duty implementation, and remedy any defects (noting also their Principle 11 obligation, where necessary).
Firms other than those in the wealth management and stockbroking sector should also take heed of the key messages in this letter, with many being at least analogously relevant to them.
It is also interesting that the FCA has identified other areas, outside of the two priority harms referred to above, on which it is currently focused. Two areas, in particular, are those in which the FCA has invested significant resource in recent months and are of great interest to the wider financial services sector – ESG (on which a policy statement on the FCA's Sustainability Disclosure Requirements is shortly expected) and diversity, equality and inclusion (in respect of which the FCA has recently consulted).
If you would like help around any of the issues raised in the portfolio letter and their impact on your business, please contact us.